Master of Business Administration-MBA Semester 4 MB0053 – International Business Management Assignment Set- 1 Q.1 What is globalization? What are its benefits? How does globalization help in international business? Give some instances. Solution: Globalization: Globlization is a process where businesses are dealt in markets around the world, apart from the local and national markets. According to business terminologies, globalization defined as, “the worldwide trend of businesses expanding beyond their domestic boundaries’. It is advantageous for the economy of the countries because it promotes prosperity in the countries that embrace globalization. International Vs. Global Business: Most of us assume that international and global business are the same and that any company that deals with another country for its business is an international or global company. In fact there is a considerable difference between the two terms. International Companies: Companies that deal with foreign companies for their business are considered as international companies. They can be exporters or importers who may not have any investments in any other country, apart from their home country. Global Companies: Companies, which invest in other countries for business and also operates from other countries, are considered as global companies. They have multiple manufacturing plants across the globe, catering to multiple markets. The transformation of a company from domestic to international is by entering just one market or a few selected foreign markets as an exporter or importer. Competing on a truly global scale comes later, after the company has established operations in several countries across continents and is racing against rivals for global market leadership. Thus, there is a meaningful distinction between a company that operates in a few selected foreign countries and a company that operates and market its products across several countries and continents with manufacturing capabilities in several of these countries. Companies can also be differentiated by the kind of competitive strategy they adopt while dealing internationally. Multinational strategy and global competitive strategy are the two types of competitive strategy. 1
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Master of Business Administration-MBA Semester 4MB0053 – International Business Management
Assignment Set- 1
Q.1 What is globalization? What are its benefits? How does globalization help in international business? Give some instances.
Solution:
Globalization: Globlization is a process where businesses are dealt in markets around the world, apart from the local and national markets. According to business terminologies, globalization defined as, “the worldwide trend of businesses expanding beyond their domestic boundaries’. It is advantageous for the economy of the countries because it promotes prosperity in the countries that embrace globalization.
International Vs. Global Business:
Most of us assume that international and global business are the same and that any company that deals with another country for its business is an international or global company. In fact there is a considerable difference between the two terms.
International Companies: Companies that deal with foreign companies for their business are considered as international companies. They can be exporters or importers who may not have any investments in any other country, apart from their home country.
Global Companies: Companies, which invest in other countries for business and also operates from other countries, are considered as global companies. They have multiple manufacturing plants across the globe, catering to multiple markets.
The transformation of a company from domestic to international is by entering just one market or a few selected foreign markets as an exporter or importer. Competing on a truly global scale comes later, after the company has established operations in several countries across continents and is racing against rivals for global market leadership. Thus, there is a meaningful distinction between a company that operates in a few selected foreign countries and a company that operates and market its products across several countries and continents with manufacturing capabilities in several of these countries.
Companies can also be differentiated by the kind of competitive strategy they adopt while dealing internationally. Multinational strategy and global competitive strategy are the two types of competitive strategy.
a. Multinational Strategy: Companies adopt this strategy when each countries market needs to be treated as self contained. It can be for the following reasons:
Customers from different countries have different preferences and expectations about a product or service.
Competition in each national market is essentially independent of competition in other national markets and the set of competitors also differ from country to country.
A company’s reputation, customer base, and competitive position in one nation have little or no bearing on its ability to successfully compete in another market.
Some of the industry example for multinational competition includes beer, life insurance and food products.
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b. Global Competitive Strategy: Companies adopt this strategy when prices and competitive conditions across the different countries are strongly linked together and have common synergies. In a globally competitive industry, a company’s business gets affected by the changing environment in different countries. The same set of competitors may compete against each other in several countries. In a global scenario, a company’s overall competitive advantage is gauged by the cumulative efforts of its domestic operations and the international operations worldwide.
A good example to illustrate is Sony Ericssson, which has its headquarters in Sweden, Research and Development setup in USA and India, manufacturing and Assembly plants in low wage countries like China and sales and marketing worldwide. This is made possible because of the ease in transferring technology and expertise from country to country.
Industries that have a global competition are automobiles, consumer electronics, watches and commercial aircraft and so on.
Benefits of Globalization:
The merits and demerits of globalization are highly debatable. While globalization creates employment opportunities in the host countries, it also exploits labour at a very low cost compared to home country. Some of the benefits of globalization are as follows:
Promotes foreign trade and liberalization of economies.
Increases the living standards of people in several developing countries through the capital investments in developing countries by developed countries.
Benefits customers as companies outsource to low wage countries. Outsourcing helps the companies to be competitive by keeping the cost low with increased productivity.
Promotes better education and jobs.
Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best practices and culture.
Provides better quality of products, customer services and standardised delivery model across countries.
Give better access to finance for corporate and sovereign borrowers.
Increase business travel, which in turn leads to flourishing travel and hospitality industry across the world.
Incease sales as the availability of cutting edge technologies and production techniques decrease the cost of production.
Provide several platforms for international dispute resolutions in business, which facilitates international trade.
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Q.2 What is culture and in the context of international business environment how does it impact international business decisions?
Solution:
Culture is defined as the art and other signs or demonstrations of human customs, civilisation, and the
way of life of a specific society or group. Culture determines every aspect that is from birth to death
and everything in between it. It is the duty of people to respect other cultures, other than their culture.
Research shows that national cultures generally characterise the dominant groups values and
practices in society, and not of the marginalised groups, even though the marginalised groups
represent a majority or a minority in the society.
Culture is very important to understand international business. Culture is the part of environment,
which human has created, it is the total sum of knowledge, arts, beliefs, laws, morals, customs, and
other abilities and habits gained by people as part of society.
The following are the four factors that question assumptions regarding the impact of global business
in culture:
National cultures are not homogeneous and the impact of globalisation on heterogeneous
cultures is not easily predicted.
Culture is not similar to cultural practice.
Globalisation does not characterise a rupture with the past but is a continuation of prior
trends.
Globalisation is only one of many processes involved in cultural change.
Culture in an International Business Organisation
Cross cultural management:Cross cultural management is defined as the development and
application of knowledge about cultures in the practice of international management, when people
involved have diverse cultural identities.
International managers in senior positions do not have direct interaction that is face-to-face with other
culture workforce, but several home based managers handle immigrant groups adjusted into a
workforce that offers domestic markets.
The factors to be considered in cross cultural management are:
Cross cultural management skills.
Handling cultural diversity.
Factors controlling group creativity.
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Ignoring diversity.
Cross cultural management skills
The ability to demonstrate a series of behaviour is called skill. It is functionally linked to achieving a
performance goal.
The most important aspect to qualify as a manager for positions of international responsibility is
communication skills. The managers must adapt to other culture and have the ability to lead its
members.
The managers cannot expect to force members of other culture to fit into their cultural customs, which
is the main assumption of cross cultural skills learning. Any organisation that tries to enforce its
behavioural customs on unwilling workers from another culture faces conflict. The manager has to
possess the skills linked with the following:
Providing inspiration and appraisal systems.
Establishing and applying formal structures.
Identifying the importance of informal structures.
Formulating and applying plans for modification.
Identifying and solving disagreements.
Handling cultural diversity
Cultural diversity in a work group offers opportunities and difficulties. Economy is benefited when the
work groups are managed successfully. The organisations capability to draw, save, and inspire
people from diverse cultures can give the organisation spirited advantages in structures of cost,
creativity, problem solving, and adjusting to change.
Cultural diversity offers key chances for joint work and co-operative action. Group work is a joint
venture where, the production of two or more individuals or groups working in cooperation is larger
than the combined production of their individual work.
Factors controlling group creativity
On complicated problem solving jobs diverse groups do better than identical groups. Diverse groups
require time to solve issues of working together. In diverse groups, over time, the work experience
helps to overcome gender, racial, and organisational and functional discriminations. But the impact
cannot be evaluated and there is always risk in creating a diverse group. A successful group is
profitable with respect to quick results and the creation of concern for the future. Negative stereotypes
are emphasised if it fails.
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Factors related with the industry and company culture are also important. Diverse groups do well
when the members:
Assist to make group decisions.
Value the exchange of different points of view.
Respect each others skills and share their own.
Value the chance for cross-cultural learning.
Tolerate uncertainty and try to triumph over the inefficiencies that occur when members of diverse
cultures work together.
A diverse group is known to be more creative, where the members are tolerant of differences. The top
management level provides its moral and administrative support, and gives time for the group to
overcome the usual process difficulties. They also provide diversity training, and the group members
are rewarded for their commitment.
Ignore diversity
It may be difficult to manage diversity. It is better to ignore, which is an alternative. The management
must:
Ignore cultural diversity within the employees.
Down-play the importance of cultural diversity.
This rejection to identify diversity happens when management:
Fails to have sufficient awareness and skills to identify diversity.
Identifies diversity but does not have the skill to manage the diversity.
Recognises the negative consequences of identifying diversity probably cause greater issues
than ignoring it.
Thinks the likely benefits of identifying and managing diversity do not validate the expected
expenses.
Identifies that the job provides no chances for drawing advantages from diversity.
Strategies to ignore diversity may be possible when culture groups are given various jobs, and
sharing required resources are independent in the workplace. Groups and group members are equally
incorporated and work together. In such cases, confusion occurs when the diverse value systems are
not identified that are held by different staff groups.
Q.3 Cosmos Limited wants to enter international markets. Will country risk analysis help Cosmos Limited to take correct decisions? Substantiate your answer.
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Solution:
Overview of Country Risk Analysis
Country Risk Analysis (CRA) identifies imbalances that increase the risks in a cross-border
investment. CRA represents the potentially adverse impact of a country's environment on the
multinational corporation's cash flows and is the probability of loss due to exposure to the political,
economic, and social upheavals in a foreign country. All business dealings involve risks. An
increasing number of companies involving in external trade indicate huge business opportunities and
promising markets. Since the 1980s, the financial markets are being refined with the introduction of
new products.
When business transactions occur across international borders, they bring additional risks compared
to those in domestic transactions. These additional risks are called country risks which include risks
arising from national differences in socio-political institutions, economic structures, policies,
currencies, and geography. The CRA monitors the potential for these risks to decrease the expected
return of a cross-border investment. For example, a multinational enterprise (MNE) that sets up a
plant in a foreign country faces different risks compared to bank lending to a foreign government. The
MNE must consider the risks from a broader spectrum of country characteristics. Some categories
relevant to a plant investment contain a much higher degree of risk because the MNE remains
exposed to risk for a longer period of time.
Analysts have categorised country risk into following groups:
Economic risk: This type of risk is the important change in the economic structure that produces a
change in the expected return of an investment. Risk arises from the negative changes in
fundamental economic policy goals (fiscal, monetary, international, or wealth distribution or creation).
Transfer risk: Transfer risk arises from a decision by a foreign government to restrict capital
movements. It is analysed as a function of a country's ability to earn foreign currency. Therefore, it
implies that effort in earning foreign currency increases the possibility of capital controls.
Exchange risk: This risk occurs due to an unfavourable movement in the exchange rate. Exchange
risk can be defined as a form of risk that arises from the change in price of one currency against
another. Whenever investors or companies have assets or business operations across national
borders, they face currency risk if their positions are not hedged.
Location risk: This type of risk is also referred to as neighborhood risk. It includes effects caused by
problems in a region or in countries with similar characteristics. Location risk includes effects caused
by troubles in a region, in trading partner of a country, or in countries with similar perceived
characteristics.
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Sovereign risk: This risk is based on a governments inability to meet its loan obligations. Sovereign
risk is closely linked to transfer risk in which a government may run out of foreign exchange due to
adverse developments in its balance of payments. It also relates to political risk in which a
government may decide not to honor its commitments for political reasons.
Political risk: This is the risk of loss that is caused due to change in the political structure or in the
politics of country where the investment is made. For example, tax laws, expropriation of assets,
tariffs, or restriction in repatriation of profits, war, corruption and bureaucracy also contribute to the
element of political risk.
Risk assessment requires analysis of many factors, including the decision-making process in the
government, relationships of various groups in a country and the history of the country. Country risk is
due to unpredicted events in a foreign country affecting the value of international assets, investment
projects and their cash flows. The analysis of country risks distinguishes between the ability to pay
and the willingness to pay. It is essential to analyse the sustainable amount of funds a country can
borrow. Country risk is determined by the costs and benefits of a countrys repayment and default
strategies. The ways of evaluating country risks by different firms and financial institutions differ from
each other. The international trade growth and the financial programs development demand periodical
improvement of risk methodology and analysis of country risks.
History
Earlier, the cross-border business risk was an issue that affected those who had transactions or
assets to receive from foreign customers. In the 1970s, the financial institutions were not well
equipped to deal with country risk. However, to improve the business; they enhanced their exposure
in foreign markets which required capital. In many cases, the loans were contracted without regular
notice to credit dealings of both the borrower and the country.
Since the 1980s, problems concerning the payback of those credits started affecting countries such
as Mexico, Poland, and Brazil, whose defaults caused heavy losses for the international banks. As a
result, this caused huge loss for investors and shareholders. So, the financial institutions started
adopting new analytical ways, maximum risk policies and strong credit procedures, all those
supported by reliable data.
Rating agencies
The rating agencies use country credit risk ratings and provide a periodical and organised skill of data.
It deals with a cross-border analysis. There are several agencies like Standard and Poors, Moodys,
Economist Intelligence Unit, Euro money, Institutional Investor, Political Risk Services, Business
Control Risks Information Services, Environmental Risk Intelligence, international banks in general
and others institutions. The rating agencies provide information and analysis of economic sectors,
companies, and operations assigning its related ratings.
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The credit rating agencies issue credit ratings based in the European Union and are used by
investors, borrowers, issuers, and public administrations to help them make investment and financial
decisions. These ratings are used as a reference for calculating their capital requirements for
calculating risks in their investment activity.
The Standard and Poors, and Moodys rating approach divide countries in categories and the four first
levels of each one are considered as investment grades (better quality of the asset in risk terms).
Based on their assessment of a bond issue, the agencies give their view in the form of letter grades,
which are published for use by investors. For the typical investor, risk is judged not by an instinctively
formulated probability distribution of possible returns but by the credit rating assigned to the bond by
investment agencies. In their ratings, the agencies rank issues according to the probability of default.
Both agencies have a Credit Watch list that makes aware the investors when the agency considers a
change in rating for a particular borrower.
Investing agencies credit rating
Let us now study credit rating by various investing agencies.
Moodys
The table represents Moodys credit rating.
Table: Moodys Credit Rating
Rating Description
Aaa Best quality
Aa High quality
A Upper medium grade
Baa Medium grade
Ba Acquire speculative elements
B Normally lack characteristics of a desirable investment
Caa Poor standing: may be in default
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Ca Speculative in a high degree; often in a default
C Lowest grade; extremely poor prospects
Standard and Poors
The given table represents Standard and Poors credit rating.
Table: Standard and Poors Credit Rating
Rating Description
AAA Highest rating - extreme capacity to pay interest or principal
AA Very strong capacity to pay
A Strong capacity to pay
BBB Adequate capacity to pay
BB Uncertainties that lead to inadequate capacity to pay
B Greater vulnerability to default, but currently has capacity to pay
CCC Vulnerable to default
CC For debt subordinated to that with CCC rating
C For debt subordinated to that with CCC - rating or bankruptcy petition has
been filed
D In payment default
Purpose of Country Risk Analysis
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Risk arises because of uncertainty and uncertainty occurs due to the lack of reliable information.
Country risk is composed of all the uncertainty that defines the risk of country exposure. The
assessment of country risk is used to incorporate country risk in capital budgeting and modify the
discount rate.
CRA regulates the estimated cash flows and explores the main techniques used to measure a
countrys overall riskiness. It is mainly used by MNCs, in order to avoid countries with excessive risk. It
can be used to monitor countries where the MNC is engaged in international business. Analysing the
country risk helps in evaluating the risk for a planned project considered for a foreign country and
assesses gain and loss possibility outcomes of cross-border investment or export strategy.
Q.4 How can managers in international companies adjust to the ethical factors influencing countries? Is it possible to establish international ethical codes? Briefly explain.
Solution:
Ethics can be defined as the evaluation of moral values, principles, and standards of human conduct and its application in daily life to determine acceptable human behaviour.
Business ethics pertains to the application of ethics to business, and is a matter of concern in the corporate world. Business ethics is almost similar to the generally accepted norms and principles. Behaviour that is considered unethical and immoral in society, for example dishonesty, applies to business as well.
International Business and Ethics
Most countries have similar ethical values, but are practiced differently. This section deals with the
way individuals in different countries approach ethical issues, and their ethically acceptable behaviour.
With the rise in global firms, issues related to ethical values and traditions become more common.
These ethical issues create complications to Multi-National Companies (MNCs) while dealing with
other countries for business. Hence, many companies have formulated well-designed codes of
conduct to help their employees.
Two of the most prominent issues that managers in MNCs operating in foreign countries face are
bribery and corruption and worker compensation.
Bribery and corruption: Bribery can be defined as the act of offering, accepting, or soliciting
something of value for the purpose of influencing the action of officials in the discharge of their duties.
Corruption is the abuse of public office for personal gain. The issue arises when there are differences
in perception in different countries. For example, in the Middle East, it is perfectly acceptable to offer
an official a gift. In Britain it is considered as an attempt to bribe the official, and hence, considered
unlawful.
Worker compensation: Businesses invest in production facilities abroad because of the availability
of low-cost labour, which enables them to offer goods and services at a lower price than their
competitors. The issue arises when workers are exploited and are underpaid compared to the workers
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in the parent country who are paid more for the same job. The disparity arises due to the differences
in the regulatory standards in the two countries.
Managing ethics
Earlier, we believed that ethics is a prerogative of individuals, but now this perception has immensely
changed. Many companies use management techniques to encourage ethical behaviour at an
organisational level. Various techniques of managing ethics like practicing ethics at the top level
management, special training on ethics, forming committees to oversee ethical issues, and defining
and implementing code of ethics are illustrated in figure.
Figure: Techniques of Managing Ethics
Let us discuss each technique in detail.
Top management:The senior management of a company must be committed to ensure that ethical
standards are met. The chief executive of the company must not engage in business practices
harmful to employees, or the society. The top management must focus on ethical practices while
informing employees of their intention.
Code of ethics: One of the best practices for ethics is creating a corporate ethical statement and
communicating it within the company. Such practices enhance the companys public image. Almost all
Fortune 500 companies have such codes.
Ethics committee: There are ethics committees in many firms to help them deal with and advise on
work related ethical issues. The Chief Executive Officer can head the committee that includes the
Board of Directors. Such a committee answers employee queries, helps the company to establish
policies in uncertain areas, advises the Board on ethical issues, and oversees the enforcement of the