International Business

th
BBM VI Semester T.U

Unit 1.
Globalization and International
Business

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 Concept of Globalization
• Globalization is the process of integration of
different national/ local economies into a single
global economy. It is a process that results in
stronger relationship and broadened
interdependence among people from different
parts of the world.
• Globalization involves technological, economic,
political and socio-cultural exchanges made possible
largely by the advancements in information
technology, transportation and infrastructure.
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• The meaning of globalization is different to different
people. The three perspectives on globalization are:
• To a business executive: It refers to a strategy of crossing
national boundaries through globalized production and
marketing networks.
• To an economist: It refers to an economic interdependence
between countries covering increased trade, technology,
labour and capital flow.
• To a political scientist: It refers to an integration of a global
community in terms of ideas, norms, values and
contemporary world scenario.
• Hence, globalization can be defined as a process that
manifests in free movement of goods, services, people,
capital and information across borders resulting from
integration of different national economies.
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 Forms of Globalization
• Economic Globalization
• Economic globalization refers to the global inter- linkages
between different market economies of the world. Economic
integration of national economies result form following policy
reforms – deregulation: reducing the role of state in economy and
business, and removing subsidies and price control mechanism,
liberalization: facilitating cross boarder flow of goods and services
without barriers and promoting investment and sales
privatization: selling of public enterprises or its assets to private
sectors.
• Cultural Globalization
• It is global inter-linkage of diverse cultures. Due to development
in communication, television networks, tourism, transportation
technologies and consumption pattern of consumers, cultural
exchanges are taking place. Eastern culture is adopting more and
more practises of western culture. Similarly, even the western
culture is now influenced by cultures of emerging eastern
countries like China, India, and middle-east.
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• Political Globalization
• It refers to the creation of mutual agreements of nations on
major political issues related to good governance, legal
system, human rights, free media, women rights, child
labour, and right to access state information and so on.
Political globalization has resulted in different regional
groupings that protect the interests of the member
countries.
• Environmental Globalization
• Environmental globalization is related with the conservation
of the global environment. Countries adhering to a global
perspective on environment protection jointly plan and
implement strategies to fight against burning issues like
pollution, global warming, depletion of ozone layer, loss of
bio- diversity, and preservation the world environment
through proper use of natural resources.
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 Factors affecting globalization
1. Change in communication and information
technology
2. Change in transportation technology
3. Deregulation
4. Removable of capital exchange control
5. Removable of trade barriers
6. Change in consumer taste
Emerging market in developing countries

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 Drivers of Market Globalization

• 1. Liberalization of Cross-boarder Trade and Resource Movement

• One of the important factors which have given a great impetus to
globalisation since 1980s is the almost universal economic policy
liberalization which is fostering a borderless business world. Liberalization
facilitates cross boarder flow of goods and services without barriers
promoting investment and sales.

• 2. Technological Development
• Technology refers to practical application of knowledge in a particular
area. It involves accomplishing tasks using skill, knowledge, tools and
equipment. Technology is truly "stateless" as there are no national
boundaries limiting its applications. Once a technology is developed, it
soon becomes available every where in the world. It facilitates new
product development that provides greater facilities and comfort to
consumers. Revolutionary changes in electronic goods manufacturing,
automobile, communication and other industries have significantly
influenced global trade.
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• 3. Reduction in Cost of Communication and Transportation
• The development of microprocessor, internet, optic fibre and
information processing technology has helped companies to link
their worldwide operations into sophisticated information
network. Jet air travel, by decreasing travel time, has also
helped to link the worldwide operations of international
business. These changes have enabled the companies to
achieve tight coordination of their worldwide operations.
• 4. Increase Global Competition
• A high degree of competition compels companies to explore
new ways of increasing their efficiency. Companies can enhance
their efficiency by extending their international reach to new
markets at early stage and by shifting certain production
activities to reduce costs. Global competitions result in the
emergence of new companies with new ownership and
contractual agreements and new activities being located in new
cities abroad.
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• Changing Political Situation
• 5. A major reason for growth in global business has been the end of
cold war between the communist and non communist countries.
Nearly half a century after World War II business between these
two groups was minimal. With the transformation of political and
economic policies in former USSR, most of Eastern Europe, China
and Vietnam, trade now flourishes between those countries and
rest of the world.
• 6. Emergence of International and Regional Institutions
• The World Trade Organization (WTO) has emerged as a legal and
institutional foundation of multilateral trading system. Its scope
covers trade in goods, services and intellectual property rights. It
encourages open trade. WTO promotes trade without
discrimination, predictable and growing access to markets,
economic reforms, and fair competition. World Bank, IMF, UNCTAD
are working for growth of global business. Regional economic
blocks like EU, ASEAN, and SAARC have emerged to promote trade
among member states through harmonization of trade policies,
laws and regulations. All these factors present good prospects for
growth of global business.
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• International Business
• International business (IB) involves all sets of
commercial activities that are carried out across
national boundaries. It is concerned with the cross
border movement of goods, capitals, services,
employees and technology etc. International
business also covers transactions in intellectual
property i.e. patents, trademarks, copyrights,
know-how etc. via licensing and franchising, and
investment in physical and financial assets in
foreign countries.

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• According to Daniels, Radebaugh and Sullivan,
"International business is all commercial
transactions – private and governmental; sales,
investments, and transportations- that take place
between two or more countries.”
• According to Joshi, R. Mohan; "International
business refers to all those business activities
which involve cross boarder transactions of goods,
services, and resources between two or more
nations.”
•
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• Reasons for international business expansion

• Market Expansion
• International business provides opportunities for companies
to go beyond national borders for catering the needs of
customers. The needs of people from different countries vary
along with their taste and preference. Hence, companies
involved in international business can offer variety of
products and services and capture a larger market share both
in terms of sales and profit.
• Earn Foreign Currency
• International companies manufacture and export their goods
and services across different countries. Such exports enable
companies to earn valuable foreign currencies. Companies
can use the generated foreign currencies to pay for imports of
raw material and other services.
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• Optimum Utilization of Resources
• Companies operating at international markets can acquire
goods and services at cheaper rate from different vendors
across national boundaries. International mode of business
enables companies to acquire scarce resources that are
unavailable in local market.
• Minimise Business Risk
• International companies can minimise their business risk by
diversifying their business across different nations.
Companies selling goods and services in different regions
can cover their loss in one country by the profit generated
from another country. Also, these companies can transfer
their surplus resources from one country to another thereby
reducing loss arising out of wastages.
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• Benefits to the National Economy
• International business not only brings a lot of foreign exchange for
the country but also creates employment opportunities. With the
growth of international business, more companies are entering into
developing economies like China and India. These companies have
not only exploited the previously unused factors of production but
also contributed to high level of employment in the region.
• Increase Competitive Capacity
• International companies face stiff competition both at local and
international level. Hence, to minimise the impact of such
competition, companies seek to continuously improve their
competitive edge through various measure that include low cost
resource acquisition, use of superior technology, and innovative
marketing techniques etc. International companies also continuously
invest in people (employees) for enhancing their competitive edge.
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• Domestic vs international business.
• 1. Meaning- The business operations are carried on
within national boundaries are domestic business
and the business operations are carried on
beyoned national boundaries are IB.
• 2. Scope- The scope of domestic business is limited
to national market only where as IB scope is
extended to different countries market of world.
• 3. Currency- The domestic business transaction are
expressed in national currency value, IB
transactions are expressed in foreign hard
currencies. The variation in exchange rate effect the
business.
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• 4. Legal framework – Domestics business
transactions are under national laws, customs
and regulations. IB is transacted under foreign
laws, customs and regulations.
• 5. Risks- Risk is relatively low in domestic
business where as in IB, risks can be political,
financial and market. Information may be lacking
about foreign market.
• 6 Environment- Domestic business is conducted
in familiar national environment. IB is conducted
in variety of unfamiliar environment and in
different cultural practices.
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• 7. Transfer Pricing- Domestic business does not
involve transfer pricing. IB uses transfer pricing for
transactions among various subsidiaries to reduce
tax burden.
• 8. Management- Domestic business needs a
national view point in management. IB needs a
geocentric global view point in management.
Broad range of management strategies and skills
are needed in IB.

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 Theory of Mercantilism, Theory of Absolute
Advantage, Theory of Comparative Advantage, Factor
Endowment Theory, Product Life-Cycle Theory,
Theory of Competitive Advantage; Foreign direct
investment based theories ; Implications of
international trade and investment theories;
Contemporary issues of international trade.
 Theory of Mercantilism
 Mercantilism was the first theory of international trade
that emerged in England in the mid-16th century. The
main principle of Mercantilism was that countries were
better off if they maintained a trade surplus i.e., it was in
countries best interest of countries’ to export more than
what they import. By doing so, a country would
accumulate gold, silver and other wealth consequently
increasing its national wealth, prestige, and power.
Consistent with this belief, the mercantilists saw no virtue
in a large volume of trade. Rather, they recommended
policies to maximize exports and minimize imports. To
achieve the higher ratio of exports, imports were limited
by tariffs and quotas, while exports were subsidized.
 ADAM SMITH's THEORY OF ABSOLUTE ADVANTAGE

In 1776 Adam Smith developed this theory and , Smith

questioned why the citizens of any country should have
to buy domestically produced goods when they could
buy those goods more cheaply from abroad. He further
reasoned that if trade were unrestricted, each country
would specialize in those products that gave it a
competitive advantage. Consequently, each country's
resources would shift to the efficient industries because
the country could not compete in the inefficient ones.
Through specialization, countries could increase their
efficiency because of three reasons:
 Labour could become more skilled by repeating the
same tasks.
 Labour would not lose time in switching from the
production of one kind of product to another.
 Long production runs would provide incentive for the
development of more effective working methods.
A country could then use its excess specialized
production to buy more imports than it could have
otherwise produced. But in what products should a
country specialize? Although Smith believed the
marketplace would make the determination, he
thought that a country's advantage would be either
natural or acquired.
 Natural Advantage
 A country may have a natural advantage in producing a
product because of climatic conditions, access to certain
natural resources, or availability of certain labour forces.
 Acquired Advantage
 Countries that produce manufactured goods and services
competitively have an acquired advantage usually either in
product or process technology. An advantage of product
technology is that it enables a country to produce a unique
product or one that is easily distinguished from those of
competitors. An advantage in process technology is a
country’s ability to produce a homogeneous one not easily
distinguished from that of competitors’ product efficiently.
 Assumptions
 There exists two country and two products.
 There exists perfect and free competition.
 Labour is the only basis of cost calculation and labour is
uniform in quality and mobile within a country.
 Market forces determine the volume, pattern,
composition and direction of trades.
 There is no transportation cost in trade between two
countries.
 Specialization occurs 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 imports of goods
produced by other countries more efficiently.
 Conclusion

 Thus as a result of specialization and trade, output

of both cotton and wine would be increased and
consumer in both the nations would be able to
consume more, Thus, we cane see that trade is a
positive-sum game. It produces net gains for all
involved. However Smith could not give any
solution to the countries having absolute cost
disadvantages in production of both the goods.
 COMPARATIVE ADVANTAGE THEORY

 Comparative Advantage Theory was propounded by David

Ricardo in 1 1 . He took Adam Smith’s theory one step
further by exploring "What happens when one country can
produce all products at an absolute advantage?" This theory
says that global efficiency gains may still result from trade if
a country specializes in those products that it can produce
more efficiently than other products-- regardless of whether
other counties can produce those same products even more
efficiently.
 Assumptions
 There must be two countries and two products.
 There is no transportation and transfer costs.
 Only labour cost was considered important in calculating
production cost.
 The market structure driving production is based on
perfect and free competition.
 There exists full employment of all factors in both the
countries.
 Production technologies in both countries exhibit
constant returns to scale.
 Factors of production can be easily moved from one sector
to other at a no cost as the countries specialize through
trade.

 Explanation with Table

 Conclusion
 The basic message of the theory of comparative
advantage is that potential world production is greater
with unrestricted free trade than it is with restricted
trade. This occurs even in countries that lack an
absolute advantage in production of any goods.
 FACTOR ENDOWMENT THEORY (H-O MODEL)

 Heckscher (in 1919) and Ohlin (in 1933) put forward a

different explanation of comparative advantage. They
argue that comparative advantage arises from difference
in national factor endowments. By factor endowments,
they meant the extent to which a country is endowed
with such resources as land, labour and capital.
Different nations have different factor endowments, and
different factors endowments explain difference in costs.
The more abundant a factor the lower is its costs.
 The Heckscher- Ohlin theory predicates that countries
will export those goods that make intensive use of those
factors that are locally abundant, while importing goods
that make intensive use of factors that are locally scare.
Thus, the Heckscher- Ohlin theory attempts to explain
the pattern of international trade that we observe in the
world economy. Like Ricardo's theory the Heckscher-
Ohlin theory argues that free trade is beneficial. Unlike
Ricardo's theory, however, the Heckscher- Ohlin theory
argues that the pattern of international trade is
determined by difference in factors endowments, rather
than difference in productivity.
 Assumptions
 There should be two countries, two products, and two factors of
productions.
 Different goods have different factor intensities. (For example
textile goods are labour intensive whereas electronic goods are
capital intensive)
 Countries differ with respect to their factor endowments. (For
example Nepal has higher supply of labour whereas Japan has
higher supply of capital)
 There should be perfect competition in commodity and factor
markets.
 There should be constant return to factors.
 Factor immobility between countries and factors endowment
 There are no transportation costs, insurance premium, and
tariffs.
 Free trade between two countries.
 Limitations
 According to H-O model in case of factor endowments
regarding supply of new technology is static. But
endowments can be created through new technologies
and innovation. Superior technologies, high quality skill
human recourse can reduce the cost of production, which
has direct impact on foreign trade.
 The theory has assumed homogenous product and same
taste. Transportation costs, tariffs and other cost may
increase price factor. People are ready to pay for such costs
because of different in taste preference.
 The theory assumed non-existence of money. However,
with the introduction of money, it is easier for traders to
determine profit by deciding whether to buy locally or to
import based on the exchange rates.
 Leontief Paradox
 Most of the economists prefer the Heckscher- Ohlin
theory to Ricardo's theory because it makes fewer
simplifying assumptions. It has been subjected to many
empirical tests. A study in 1953, by the American
Economist Wassily Leontief, has raised the questions
about the validity of Heckscher- Ohlin theory. Using H-O
theory, Leontief postulated that since the United Sates
was relatively abundant in capital compared to other
nations, the United States would be an exporter of capital
intensive goods and importer of labor intensive goods. To
his surprise, however, he found that US exports were less
capital intensive than US imports. Since this result was at
a variance with the predication of the theory, it has
become known as the Leontief paradox.
One possible explanation is that that US has a special
advantage in producing new products or goods made
with innovative technologies. Such products may be less
capital intensive than products whose technology has
had time to mature and become suitable for mass
production.
Thus, US may be exporting goods that heavily use
skilled labour and innovative entrepreneurship, such as
computer software, while importing heavy
manufacturing product that use large amounts of
capital. Some empirical studies tend to confirm this.
Recent tests of H-O theory using data for a large
number of countries tend to confirm the existence of the
Leontief paradox.
 INTERNATIONAL PRODUCT LIFE CYCLE THEORY
 The international product life cycle (IPLC) theory of trade
states that the location of production of certain kinds of
products shifts as they go through their life cycles, which
consists of four stages- introduction, growth, maturity, and
decline.
 Companies develop new products because there is an
observed need and market for them nearby. This means
that a U.S. company is most apt to develop a new product
for the U.S. market, a French company for the French
market, and so on. At the same time, almost all new
technology that results in new products and production
methods originates in high income countries. They have
most of the resource to develop new products and most of
the income to buy them.
 Product life cycle stages
 Introduction
 In the introduction stage a company creates a new
product and early production generally occurs in a
domestic location so that the company can obtain rapid
market feedback as well as save on transport costs. Also,
the company may sell a small part of its production to
customers in foreign markets.
 In this stage, the production process is more labour-
intensive than in later stages. Because the product is not
yet standardised, its production process must permit
rapid changes in product characteristics, as market
feedback dictates. This implies high labour input as
opposed to more capital-intensive automated production.
 Growth
 In this stage the sales of new product grows and
consequently competitors enter the market in search of
profit. The demand for the product grows substantially in
foreign markets. In fact, this demand may justify
producing in some foreign countries to reduce or
eliminate transport charges.
 As sales are growing rapidly in home and foreign market,
competitors entering into the market develop new
varieties of product for gaining market share. In this
stage, the original producing country will increase its
exports but it will lose some key export markets in which
local production has commenced.
 Maturity
 During this stage the world wide demand for the product
begins to stabilize. The product becomes more
standardised and competition is based on cost. Longer
production runs become possible for foreign plants
which, in turn, reduce price per unit cost, thus creating
more demand in emerging economies.
 In order to capture this demand, the production of goods/
products shift to emerging economies where the company
can employ unskilled, in-expensive labour efficiently for
standardised production. Consequently, exports from
innovating country decreases as foreign production
displaces it in global market.
 Decline
 In this stage, those factors occurring during the
maturity stage continue to evolve. The markets in
high-income countries decline more rapidly than
those in low-income economies as affluent customers
demand ever-newer products. By this time, the
country in which the innovation first emerged- and
exported from – becomes the importer. Emerging
economies that have low cost of production now
export products to the declined or small-niche markets
in high income countries.
 Exceptions to PLC
 There is little opportunity for export sales, regardless
of the stages in PLC, if the transportation costs are
very high.
 There are many types of products for which shifts in
production location do not usually take place
regardless of the stages in PLC. High-tech products
with extremely short life-cycle, luxury products, highly
differentiated products, and product that require
specialized technical labour to evolve into their next
generation are exceptions to PLC.
 Theory of National Competitive Advantage
 Prof. Michael Porter of Harvard Business School, after
conducting an extensive research works on 100 industries
in 10 different countries, found the "determinants of
national competitive advantages", and explained why
some nations succeed and other fail in international
competition.
 He also explained why USA and Germany in chemical,
Japan in Automobile and Switzerland in preci0us
industries were successful. According to Porter there are
four broad attributes of a nation shape the environment
in which local firms compete, and this attributes promote
or impede the creation of competitive advantage.
 Factor Endowments
 Factors like land, labour, natural resources, and
infrastructure give initial competitive advantage to a nation.
But a sustained competitive advantage comes from
advanced or specialized factors- skilled labour, capital, and
communication infrastructure, research facilities and
technological know-how.
 Demand Conditions
 Demand conditions in a country include the size and
sophistication of its market and the appropriateness of
product standards. Porter argues that a nation’s firms gain
competitive advantage if their domestic consumers are
sophisticated and demanding. Such consumers pressurize
local firms to meet high standards of product quality and to
produce innovative products by providing firms with
insights into emerging customer needs.
 Related and Supporting Industries
 The presence of suppliers or related industries, that are
internationally competitive, fosters national advantage in an
industry. The benefit of investments in advance factors of
production by related and supporting industries can spill
over into an industry, thereby helping it achieve a strong
competitive position internationally. Technological
leadership of U.S. in semi-conductor industry provided the
basis for U.S. success in personal computer and several other
technically advanced electronic products.
 Firm's strategy, structure and rivalry
 According to Porter a nation’s competitive advantage is also
determined by the firm's strategy, structure and rivalry
within a country. Porter argues that nations are
characterised by different management ideologies which
either help them or do not help them to build national
competitive advantage. For example, Porter noted the pre-
dominance of engineers in top management at German
and Japanese firms. He attributed this to these firms'
emphasis on improving manufacturing process and design.
He further argues that a strong association exists between
vigorous domestic rivalry and the creation and persistence
of competitive advantage in an industry. Domestic rivalry
creates pressure to innovate, to improve quality, to reduce
costs and to invest upgrading advanced factors.
 In conclusion Porter's argued that the degree to which
a nation is likely to achieve international success in a
certain industry is a function of the combined
impact of those four attributes. He argues that the
presence of all four components is usually required for
this diamond to positively impact on competitive
performance of the firms.
 Further, Porter argues that two additional variables-
chance and government – can influence the national
diamond in important ways. Chance includes events
like major innovations that can reshape industry
structure and provide opportunity for one nation’s
firms to displace another’s. Government policies and
regulations play an important role in determining
competitiveness of firms.
Foreign Direct Investment Based theories
 Foreign Direct Investment (FDI)
A foreign direct investment (FDI) is an investment
made by a company or entity based in one country,
into a company or entity based in another country.
The Organization of Economic Cooperation and
Development (OECD) defines control as owning 10%
or more of the business.
 The Foreign Direct Investment (FDI) theories can be
classified broadly into two categories. One is at the
macro level and the other is at the micro level.
 Macro Level

 Capital market theory,

 Dynamic macroeconomic theory,
 FDI theories based on exchange rates,
 FDI theories based on economic geography, gravity
approach to FDI and
 FDI theories based on institutional analysis.
 Micro Level
 Existence of firm specific advantages
 Theory of internalization, and
 Eclectic FDI theory (John Dunning).
 Japanese FDI theories and five stage theories (John
Dunning).

 What are the factors that attract FDI ?

 Why the firms prefer to invest abroad?
 And how they make entry to the foreign countries etc.
are tried to be answer these theories. Here an attempt
has been made to discuss the FDI theories.
 The macro-level determinants that affects the host
country’s FDI flows are market size, economic growth rate,
GDP, infrastructure, natural resources, political situation
etc. The macro-level theories are discussed below.
 Capital market theory- It is one of the oldest theories of
FDI. According to this theory, FDI is determined by
interest rates. Capital market theory is a part of portfolio
investments. Capital market theory talked about three
positions which attract FDI to the less developed countries
(LDCs). First is the undervalued exchange rate, which
allows lower production costs in the host countries.
Second position said that since there is no organized
securities exists, therefore long term investments in
LDCs will often be FDI rather than purchase of securities.
And the third position is that since there is limited
knowledge about host countries‟ securities that is why
it favors’ FDI which allows control of host country assets’.


 Dynamic macroeconomic FDI theory –
 According to this theory the timing of investments is
depends on the changes in the macroeconomic
environment. The macroeconomic environment
consists of gross domestic product, domestic
investment, real exchange rate, productivity and
openness which are the determinants of FDI flows.
This theory states that FDIs are a long term function of
multinational companies‟ strategies.
 FDI theories based on exchange rate – It tried to show
the relationship between FDI and exchange rate. The
theory tries to explain how the flow of FDIs affects the
exchange rates. The theory said FDIs as a tool of
exchange rate reduction.
 FDI theory is based on economic geography – It
focuses on countries and explained why internationally
successful industries emerge in particular countries.
These explanations were based on the differences
among countries in terms of availability of natural
resources, nature of labor force and local demand,
infrastructure etc. The FDI theories based on
economic geography also covers the ways in which
governments can affect the resources within the
jurisdiction by various policy actions since economic
unit of analysis is defined by political boundaries.
 The Gravity approach to FDI – It explores that if two countries
are very close in terms of geographically, economically, and
culturally, then the FDI flows between the countries is the
highest. The theory includes traditional gravity variables such as
size, level of development, distance, common language and
other institutional variables such as shareholder
protection and openness to FDI flows as the determinant of
FDI flows.

 Institutional analysis FDI theory - It is based on, who

explores the importance of institutional framework on the flows
of FDI. The theory said that political stability is the key
factor of a healthy institutional framework. According to
This theory, FDI is determined more by institutional variables
viz. policies, laws, and their implementation and less by
inflexible fundamentals. The four institutions contributing to
FDI flows are governments, markets, education and socio-
culture.
 Micro Level
 Existence of Firm specific Advantage theory of
FDI- It was developed by Stephen Hymer (1976).
According to this theory, firms invests abroad because
of certain firm specific advantages such as, access
to raw materials, economies of scale, intangible
assets such as trade names, patents, superior
management etc., low transaction costs etc. etc. If
markets work effectively and there are no barriers in
terms of trade and competition, international trade is
the only way to participate in the international market.
He believes that local firms will have always better
informed about local economic environment and for
FDI to take place there must some conditions.

 Theory of internalization
 Due to market imperfections, firms aspire to make use
of their monopolistic advantage themselves. Buckley
and Casson (1976) suggest that firms can overcome the
market imperfections by internalizing their own
markets. That means, internalization involves a
vertical-integration in the form of bringing new
operations and activities under the controlled of the
firm. It remove the competition. And firm have an
option to choose location for their constituents that
minimized overall costs of their operations
 The eclectic theory
 This theory was advocated by John Dunning, and argued
that a location in question attracts FDI because it
combines the unique advantages of ownership, location
and internalization. According to Dunning, FDI will occur
when three conditions are uniquely combined they are
ownership advantages, location advantages and
internalization.
 Ownership advantages refers to intangible assets which
are possess by the firm exclusively and may transferred
within MNCs at lower costs, leading to higher incomes or
reduced costs. Ownership of limited natural resources,
patents, trademarks etc, is some of the examples of
ownership advantages.
 Location advantages determine who will become the
host country for the activities of MNCs. Benefits of factors
of production, resource availability, lower costs of
transportation, telecommunications, and large market
size, common government policies, and distance from the
home country, cultural relations etc. are the location
specific advantages.
 Internalization -when the first two conditions are
fulfilled, it must be profitable for the firm to use these
advantages in collaboration of some of the factors outside
the country of origin. The eclectic paradigm of OLI shows
that OLI parameters are different from company to
company and it reflects the economic, political and social
conditions of the host countries.
 Japanese FDI theories
 Five stage theories of John Dunning- It suggests that
countries tend to go through five main stages of
development and these stages can be classified according
to the propensity of those countries to be outward and
inward direct investors.
 At the first stage, the country is unable to attract inward
FDI since it has no specific advantages except the
possession of natural resources. Demand levels are
minimal because of its low per capita income,
inappropriate government policies, inadequate
infrastructure and unskilled labor force. At this stage, little
outward FDI can be seen and foreign companies will
prefers to export and import from the country.
 In the second stage, inward FDI starts rising and
outward FDI remains low. Domestic markets may grow
either in size or purchasing power, and making some
local productions by the foreign firms. Initially this
production by foreign firms takes the form of import
substitution manufacturing investments. Low labor
cost and growing infrastructure and government
policies able to establish export oriented firms by the
foreign investors. Outward FDI is still low in this stage
as well.
 In the third stage marked by declining rate of
inward investments and growing outward
investment which results in raising Net Outgoing
Investment. Large inward investments lead to high
technological capabilities and standardize
products. High labor costs leads to high income
and demand high quality products.
 In the fourth stage, the comparative advantage of
low labor costs deteriorated and outward
investment will directed to the low wage countries.
Outflows of investments takes place strongly and
seeks advantages in the foreign countries
especially low labor cost.
 And in the final stage, the inflows and outflows of
investments come into balanced and the
investment decisions are completely based on the
strategies of MNCs.

Implication of International Trade
and Investment Theories
 Implication of International Trade and Investment
Theories can be discussed in three different
implications they are as:

 LOCATION
 FIRST- MOVER ADVANTAGES
 GOVERNMENT
 ( Note on word document)
Contemporary Issues of International Trade
 A. LEGAL ISSUES OF INTERNATIONAL BUSINESS
 1.Jurisdiction
 Jurisdiction is a primary issue for any international
business, including e-business. This refers to the
ability of a legal body to make decisions and force an
individual or business to abide by them. Legal systems
vary by country, although there can be similarities. For
example, if a business is sued in one country and that
country's judicial body makes a judgment, the
business's home country may or may not recognize the
judgment, depending on how its own laws are
structured.
2.Intellectual Property
Intellectual property may be established in one legal
jurisdiction, but can be more uncertain in another
legal jurisdiction. The areas of intellectual property
most often considered are copyrights and trademarks.
If a business hires a web developer, certain steps may
need to be taken to ensure that copyright has been
appropriately transferred to the business from the
developer. Likewise, trademarks must be registered in
each country in which a business operates.
 3.Taxes and Securities
Issuing shares in a business may be illegal without the
prior approval of the target country's exchange
commission or similar legal body. This means that
selling securities may require the consent of a large
number of different authorities. Taxation can
represent an equally complex situation, both in terms
of taxes levied on the business, but also sales taxes that
various countries may or may not impose.
 4.Internet-Specific Issues
 International business is subject to sovereign
regulation of the Internet. For example, an e-business
may be able to provide a link to another site, but how
deeply they can link into another business's site can
depend on that business as well as the copyright and
trademark laws of its country. Another legal issue that
may be faced is that of cyber-squatting, which
happens when a business or individual buys a domain
name reflecting the trademark of another party and
then attempting to sell it to them. This practice is
illegal.
 B. Ethical Issues In International Business

 The ethics can be found in all aspects of human

activity as the individuals have been preoccupied with
the quality of their behaviour towards the people
around. Even if they do not purposefully intend to
improve their relations with the others, people always
evaluate their behaviour from the point of view of their
correctness. The Common Ethical Issues are:
 1.Employment practices 2.Corruption 3.Pollution
 Employment practices
Wages and the working environment in different
overseas locations are often inferior to those in
developed countries, even when you fulfil all local
legal requirements. An effective approach is to develop
company standards which protect workers while
fitting into the local economy. The worker standards
have to guarantee a living wage, protect the safety of
workers and establish a reasonable number of working
hours for the week.
 Corruption
 MNc making huge payments to secure business in
developing countries. The payments, even if they seem
to be customary, are usually illegal under local laws as
well. When any company makes such payments, it is
encouraging a local system of corruption through
unethical behaviour. Smaller gifts, of a size that would
not normally influence a major decision, are
considered ethical in some societies and may be legal
under local and country’s laws in U.S. If you find that
large sums are routinely required to do any business in
a country, you may want to re evaluate your decision to
enter that market.
 Pollution
 Not all foreign countries have environmental
legislation that makes it illegal to pollute. Companies
may discharge harmful materials into the environment
and avoid costly anti-pollution measures. An ethical
approach to your expansion into such markets is to
limit your environmental footprint beyond what is
required by local laws. An ethically operating company
ensures its operations don't have harmful effects on
the surrounding population. Since your company has
the knowledge and expertise to operate within local
existing environmental regulations, it is ethical to
apply similar standards in your new locations.
 C. Social Issues In International Business

 The Country with which we do international trade might be

ruled by a corrupt leader or a party. Military rulers pose a
serious threat for international business. If the Home country
and the trading country are at war. If two countries are at war
then there wont be any international trade between them.
 The Attitude of the host country towards foreign investment is
negative. Host countries may impose special rules for MNC’s.
If The country where we do our International trade lacks social
infrastructure .
 Inadequate facilities may require a company carrying on
international business to build housing, establishing schools
and providing transportation facilities for the employees.
Government Interference is yet another Issue. If the political
representative or government employees of a host country
insists on becoming a partial owner of the foreign business.
 D. Environmental Issues in International
business
 Environmental issues are harmful and adverse effect of
human activity, as well as on the bio-physical environment.
 Global Warming will cause calamitous trouble created around
the world. The major contributor to global warming is caused
by a greenhouse effect due to massive carbon dioxide emission.
The major contributor into the rising of greenhouse gases level
is due to industrial and transportation activities involving the
burning of fossil fuels as well as the deforestation. Therefore,
government intervention seems to be tremendously essential
to combat with global warming issues. However, this essay will
focus more on how the government policies regarding on
global warming specifically on fossil fuels combustion (oil,
coal and gas) issue affect the international business including
the arguments. The positive and negative sides it could also be
the opportunities and challenges.
 Relocation of polluting industries from developed to
developing countries. Developing countries are affected by the
relocation of polluting industries from the developed
 Similarly, several products which are banned in the developed
nations are marketed in the under developed world.
 The dumping of nuclear and hazardous wastes in developing
countries and the shifting of polluting industries to the
developing countries impose heavy social costs on them.
 The exploitation of the natural resources of the developing
countries to satisfy the global demand also often causes
ecological problems.
 When the multinationals employ in the developing nations
polluting technologies which are not allowed in the developed
countries or do not care for the ecology as much as they do in
the developed nations, it is essentially a question of ethics.
 Ban on importing some goods. Some countries prohibit the
import of goods which cause ecological damage.
 E. Labour Issues In International Business
 One of the important social issues in the developed
countries in respect of business with the developing countries
pertains to ill treatment of labour and children. Child labour
used in the manufacture of exports from the developing
countries is widely criticized by people in the developed
countries.
 For example, it is alleged that child labour is used by the
carpet industry in India or Nepal and some other countries
and social activist in the developed nations demand ban on
the import of goods embodying child labour. Consumers are
called upon to boycott such goods.
 Similar issue is the sweat labour. The argument here is that
goods are manufactured by labour working in
inhuman/unhealthy working conditions not getting fair
wages should be banned or boycotted. Creating important
developing country, like garments, are alleged to be suffering
from such problem.
 According to a Report, it is a regrettable feature of many
export processing zones that both male and female workers
are trapped in low wage and low skilled jobs .
 The frequent absence of minimal standards and poor labour
management relations have predictable outcomes, such as
high labour turnover, absenteeism, stress and fatigue, low
rates of productivity, excessive wastage of materials and
labour unrest which are still too common.
 The Labours working are also forced to work for maximum
number of hours in a day and are also paid only low wages.
 The Work Environment is also poor and unsafe and there are
also no proper facilities available in case of any unfortunate
happenings.
 And There are also reports of these labourer’s being tortured
both physically and mentally if they fail to act according to
the orders given to them by the superior authorities.
THE END
THANKYOU
 Unit – 3
BBM
Global Business Environment

By
L. P. Joshi
Bhairahawa Multiple Campus
 Political System
A political system is a complete set of institutions,
political organizations, interest group, the
relationships between those institutions, and the
political norms and rules that govern their
functions.
In simple words, a political system consists of
political parties, political ideologies, and government
institutions that make up the political environment.
The political system of a country affects the
business practices. Different political systems/
ideologies have different impacts -promote or
hinder- on international business. A stable, efficient
and candid political system facilitates the growth of
international business.
Actors in Political System

1. Political Parties
Based on different political ideologies, the
different political system prevail in the
different countries of the world. Every
country has its own political thoughts,
believes and value system which govern the
political system. Political parties are the
prime actors in political system of the
country. For eg...........
2. Constitutional Institution
Every country has their own framework of
constitution. Mainly there are three
important constitutional institution bodies
they are executive, legislative and judiciary.
Executive the government who implements
the laws and laid down policies and
regulation in the country. Legislative prepare
the laws that guide whole administrative
activities. Judiciary, the court carry out
judicial activities reviewing the law, interpret
laws and give ruling on different disputes.
3. Administration
General administration of the country is
the most important wing implement laws,
policies and programs. It maintain law and
order situation of the country. It is
represented by civil service, police and
military and jails.
The functioning of political parties,
constitutional institutions and the general
administration of a country had direct
affect on the functioning of business firm
Dimension of Political System
Collectivism Verses Individualism
Democratic Verses Totalitarian
System that emphasized collectivism tends to
totalitarian while the system that place a high
value on individualism tends to be democratic.
It is possible to have democratic societies that
emphasis a mix of collectivism and
individualism, similarly it is possible to have
totalitarian that are not collectivist
 Collectivism
It refers to a system that stresses the primacy
of collective goals over individual goals. It is
emphasized the need of society as a whole are
generally viewed as being more important than
individual freedom.
Advocacy of collectivism can be traced to
ancient Greek philosopher Plato- 427-347 BC
who argued that individual rights should be
sacrificed for the good of majority and the
property should be owned in common. In
modern times it is used by socialists
 Socialism

“Socialism means the organization of workers

for the conquest of political power for the
purpose of transforming capitalist property
into social property.” – Emile
 Ideology of the Socialists
1. Communists – It is believed that socialism
could be achieved only through violent
revolution and totalitarian dictatorship.
2. Social Democrats – It is committed
themselves to achieving socialism by
democratic means and turned their backs
on violent revolution and dictatorship
 Individualism
Individualism is the opposite of collectivism. In a
political sense, it refers to a philosophy that an
individual should have freedom in his or her economic
and political pursuits. An ancient Greek philosopher,
Aristotle (384-322 BC) argued that individual diversity
and private ownership are desirable. Communal
property receives little care, where as property owned
by an individual will receive the greater care and
therefore it is most productive. Later on Margaret
Thatcher& Ronald Reagan, argued that private
property is more productive than communal property
and will thus stimulate progress.
 Democracy and Totalitarianism
Democracy and totalitarianism are at different ends of
political dimension. Democracy refers to a political
system in which government is by the people,
exercised either directly or through representatives.
Totalitarianism is the form of government in which
one person or political party exercise absolute
control over all spheres of human life and opposing
political parties are prohibited. However in the recent
years some degree of individualism particularly in the
economic sphere is encouraged .
 Democracy
The pure form of democracy as originally
practiced by several city-states in ancient
Greece, is based on a beliefs that citizens
should directly involved in decision making. In
complex, advanced society with huge
populations this is impractical. Most of the
modern democratic states practice what is
commonly referred to as representative
democracy. People representatives are
periodically elected and form a government,
whose functions is to make decisions on
behalf of the electorate.
 Totalitarianism
In a totalitarian country, all the constitutional
guarantees on which representative
democracy are built - such as an individual’s
right to freedom of expression and
organization, a free media, and regular
elections- are denied to the citizens. Four
major forms of totalitarianism exists in the
world today. They are:
Communist totalitarianism
Theocratic totalitarianism
Tribal totalitarianism
Right- wing totalitarianism
Communist totalitarianism - It advocates that
socialism can be achieved only through
totalitarian dictatorship.

Theocratic totalitarianism –It is found in

that state where political power is
monopolized by a party, group or individuals
that govern according to religious principles.
Tribal totalitarianism – It found in African
nations where a political party monopolized
power of particular tribe. Party represent
the interest of a tribe.

Right- wing totalitarianism- It permits

individual economic freedom but restrict
individual political freedom on the ground
that it would lead to rise in communism.
Many right wing totalitarian government is
backed military
 Legal System
A legal system is the mechanism for creating, interpreting, and
enforcing the laws in a specified jurisdiction. It refers to the
rules and laws that regulate behavior of individuals and
organizations.
The legal system of a country is of vital importance to
international business. A country’s laws regulate business
practices; define the manner in which business transactions are
to be executed, set down the rights and obligations of those
involved in business transactions. The differences in the
structure of law affect the attractiveness of a country as an
investment site. The legal system of country is also affected by
its political system. The government of the country defines the
legal framework within which firms conduct business and
often then laws that regulate business reflect the ruler’s
political ideology.
Actors in Legal system
The prime actors in legal system are the
executive, legislative and judiciary.
Executive the government who implements
the laws and laid down policies and
regulation in the country.
Legislative prepare the laws that guide whole
administrative activities.
Judiciary, the court carry out judicial activities
reviewing the law, interpret laws and give
ruling on different disputes.
 Political Risk
A political risk is the risk arising out of political
decisions or events in a country that may affect
the business environment in ways that lead
investors to lose some or all of the value of
their investment. There are different types of
political risks which are discussed below:
a. Systematic political risk
b. Procedural political Risks
c. Distributive Political Risks
d. Catastrophic Political Risks
A. Systematic political risk

Local and international companies face

political risks created by shifts in public
policies. For example, political risk arise when
a new political leader adopts a different
approach than its predecessors (rejecting
individualism in favor of collectivism) or
government may target its public policy
initiatives towards a specific economic sectors
in which it believes that the foreign companies
have unduly dominated.
B. Procedural political Risks

As products move from one point to

another in international market, each move
creates a procedural transaction. Political
actions, government corruptions, labor
disputes, and partisan judicial system etc.
can significantly raise the cost of business.
C. Distributive Political Risks

Sometimes as foreign companies achieve

greater success in host countries, the host
country governments may not perceive of
getting their fair share of reward. In such
situations, local governments may revise tax
codes, regulatory structure and monetary
policy to capture greater benefits from
foreign company.
D. Catastrophic Political Risks

The random risks arising from ethnic

dispute, civil disorder, or war etc. that
adversely affect operations of
international business are called
catastrophic political risks.
 E-Commerce
E-commerce is defined as the process of buying,
selling, or exchange products, services and
information via computer networks. In broad
perspective that include not just the buying and
selling of goods and services, but also servicing
customers, collaborating with business partners and
conducting electronic transactions with an
organizations.
Technology mediated exchange between parties(
individual or organizational) as well as electronically
based intra- organizational activities that facilitates
such exchange.
Importance of E- Commerce

1. Direct marketing- It eliminates

intermediaries between customer and
producers and make direct contact.
2.Less Cost- E commerce minimized the cost
of business due to no need showroom, huge
inventories, and other sales forces etc.
3.Relationship building- The business firms
arrange he data base of customer and their
behaviour which can be used to provide high
level of service.
4. Global business- Through e- commerce
by minimizing cost of business, it enables the
firm to make information on its product and
services available to all potential customer
around world.
5. Customized promotion- It can design
communication materials on the website to
meet the needs of small, specific group of
customers.
6. New market opportunity- It offer new
market opportunity to all e business venture
whether large or small.
Categories/ Method of E- commerce

1. Business to business (B2B)

2. Business to Consumer (B2C)
3. Consumer to business (C2B)
4. Consumer to Consumer(P2P)
 Property Rights
In a legal sense the property refers to a resource
over which an individual or business holds a legal
title; that is a resource that they own.
“Property rights refers to bundle of legal rights
over the use to which a resource is put and over
the use made of any income that may be derived
from the resource”. D. North
Property rights laws in many countries are not well
enforced by the authorities and are routinely
violated. It can be done in two ways:
Private Action
Private action refers to theft, piracy, blackmail, and
the like by private individual or groups. Generally
theft occurs in all countries, in some countries a
weak legal system allow for a much higher level of
criminals action than in others.
In Russia businessman must pay “protection money”
to Mafia or face violent retribution, including
bombings and assassinations (around
500contractor killings of businessmen in 1995 and
1996)
In Japan local version of mafia known as “Yykuza”
active in food and entertainment industry.
Public Action
Public action to violate property rights occur when
public officials, such as politicians and government
bureaucrats, extort income or resources from
property holders. This can be done through a number
of mechanisms including levying excessive taxation,
expensive licenses or permits from property holders.
Taking assets into state ownership without
compensating the owners. (1979 in Iran).
In 1994 British companies - bribes have been
demanding by Malaysian government officials in defense
equipments deal. (The Sunday Times mid February
1994, personal & development grants)
Protection of Intellectual Property
Intellectual property refers to property, such
as computer software, a screenplay, a music
score, or the chemical formula for a new
drug, that is the product of intellectual
activity. It is possible to establish ownership
rights over intellectual property through copy
rights, patents and trademarks.
Copyrights are the exclusive legal rights of
authors, composers, playwrights, artists and
publisher to publish and dispose of their
work as they see fit.
Patents- A patents grants the inventor of a
new product or process exclusive right to the
manufacturer , use, or sale of that invention.
Trademarks- Trademarks are designs and
names, often officially registered, by which
merchants or manufacturers designate and
differentiate their products. A registered
brand is a trademark.
Design- Design means any feature, pattern or
shape of a matter prepared and produced in
any manner.
The computer software industry is the most
suffered from lax enforcement of intellectual
property rights.
Loss in world market
$12.3 billion in 1994 $13.3 billion in 1995
$11. 2billion in 1996( www.bsa.org)1996
World region wise piracy
Eastern Europe 80 percent
Middle east 79 percent
Latin America 69 percent
Asia 55 percent
Western Europe 43 percent
North America 28 percent
 In China
Loss of sales $ 444 millions in 1995
$704 millions in 1996
Problems/ Issues of Intellectual Property Rights

People are not aware about industrial right

and copyright
Negligence of law enforcement that trained
people in the wrong way
People are attracted to the pirated goods
which are cheap
Pirated goods are imported from the other
country
 People don’t like to deal with police so
they do not protest and appeal against
pirated goods sellers
NCRO has no authority to punish over
the infringement of rights
Lack of formal educational and training
institutions for the study of IP
Suggestions for the protection of IP
NCRO must be provided with some legal rights
regarding punishment over infringement
Public awareness programs through electronic
media must be increased concerning the
violation of IP Acts
International institutions must support to
establish IP training institute in Nepal for the
protection of IP
IP related matters must be included in the
curriculum of formal educational and training
institutions
Government interventions and investment barriers

Different countries are nominally committed to free trade, they tend

to intervene in international trade to protect the interests of
politically important groups or promote the interests of key
domestic producers. The governments have intervening in
international trade of the country because of either political or
economic reasons. The governments can intervene often by political
and economic policy instruments, and restrict the imports of goods
and services into their country. But in present context it is not
possible to restrict the international trade. Therefore, it is necessary
to make a detailed review of the various political and economic
policies according to present motives of the governments. The
emergence of the modern international trading system, which is
based on the General Agreement on Tariffs and Trade (GATT) and its
successor, the World Trade Organization (WTO).
The following are the government intervention and
investment barriers:
1. Trade policies, such as tariffs, subsidies, antidumping
regulations, and local content requirements tend to be pro-
producer and anti consumer. Gains accrue to producers
(who are protected from foreign competitors), but
consumers lose because they must pay more for imports.
2. There are two types of arguments for government
intervention in international trade: political and economic.
Political arguments for intervention are concerned with
protecting the interests of certain groups, often at the
expense of other groups, or with promoting goals with
regard to foreign policy, human rights, consumer protection,
and the like. Economic arguments for intervention are
about boosting the overall wealth of a nation.
3. The infant industry argument for government
intervention contends that to let manufacturing
get a toehold (grip), governments should
temporarily support new industries. In practice,
however, governments often end up protecting
the inefficient.
4. Strategic trade policy suggests that with
subsidies, government can help domestic firms
gain first-mover advantages in global industries
where economies of scale are important.
Government subsidies may also help domestic
firms overcome barriers to entry into such
industries.
5. The problems with strategic trade policy are
twofold: (a) such a policy may invite retaliation, in
which case all will lose, and (b) strategic trade
policy may be captured by special-interest groups,
which will distort it to their own ends.
6. The GATT was a product of the post war free
trade movement. The GATT was successful in
lowering trade barriers on manufactured goods
and commodities. The move toward greater free
trade under the GATT appeared to stimulate
economic growth.
7. The completion of the Uruguay Round of
GATT talks and the establishment of the World
Trade Organization have strengthened the world
trading system by extending GATT rules to
services, increasing protection for intellectual
property, reducing agricultural subsidies, and
enhancing monitoring and enforcement
mechanisms.
8. Trade barriers act as a constraint on a firm's
ability to disperse its various production activities
to optimal locations around the globe.
9. The government should make efforts to
build a new market to importing goods
and attract FDI for innovation and
modernization of domestic industries to
protect these industries from foreign
competition.
10. Business may have more to gain from
government efforts to open protected
markets to imports and foreign direct
investment than from government efforts
to protect domestic industries from
foreign competition.
Cultural environment – concept

Meaning of Culture:
Edward Taylor defined culture as that
complex whole which includes knowledge,
belief, art , morals, law, custom, and other
capabilities acquired by man as a member
of society.
Culture as a system of ideas and argue that
these ideas constitute a design for living.
Values and Norms:
Values are abstract ideas about what a group
believes to be good, right and desirable. They may
include a society’s attitudes towards such
concepts as individual freedom, democracy, truth,
justice, honesty, loyalty, social obligations, collective
responsibility etc. They tend to be stable.
Norms:
Norms are the social rules and guidelines that
govern people actions towards one another.
Norms can be subdivided into two major
categories they are : folkways and mores.
Folkways are the routine convention of every day
life. They are social convention concerning things
such as the appropriate dress code in a particular
situation, good social manner, eating with the
correct utensils. A good example of folkways
concerns attitude towards time in different
countries.
Mores:
Mores are norms that are seen as central to the
function of a society and to its social life. They
have much significance than folkways. Mores
include such factors as outcome against theft,
adultery, and incest. Certain mores have been
enacted into law. However there are also
differences between cultures as to what is
perceived as mores. Drinking alcohol in US is
widely accepted where as in Saudi Arabia it is
viewed as violating social mores and is punishable.
Why culture matters in International Business

“If you speak to a man in a language he understand,

you speak to his head. If you speak to a man in his
own language, you speak to his heart.” Nelson
Mandela

Cultural difference lead to difference in business

practices. Operating in a foreign culture affects
business in following aspects:
The way of Approaching
The way an international company responds to the
customers in its home country is different from the
way it has to deal in other host countries. Cultural
difference is the key to such requirement as it
shapes their purchase behaviors, product
preferences, and communication aspects etc.
develop cross-cultural literacy program to employ
host-country nationals, build a cadre of
cosmopolitan executives, and guard against the
dangers of ethnocentric behaviour.
Hence, international businesses need to respond
differently to customers from different cultural
backgrounds.
Management orientation
The cultural backgrounds of countries affect the
type and degree of management orientation that
international businesses need to adopt. Also, the
manager needs to adjust the managerial functions,
style in order to adapt the local cultural
requirements.
Timing of business
Production activities are affected at different
months of a year based on culture. For example,
Navaratri and Deepawali in Hindu culture and
Ramadan in Muslim culture are periods of festivity
where production is adjusted to facilitate people’s
celebrations.
Cultural context
Cultural practices affect society's view of the
importance of time. In some cultures, punctuality
is expected whereas in other culture lateness is
acceptable.
The degree of formality, use of body language,
signs and symbols vary across different cultures.
Different signs and symbols have different
meanings in different cultures.
High context cultures have more formal
communication compared to low-context
cultures..
Relationship between gender and
work roles
Masculine value prevails-
Assertiveness, success, competition
Feminine value prevails-
Quality of life, maintenance of warm
personal relationships, service , care for the
weak, solidarity.
STRATEGIES TO DEAL WITH CULTURAL
DIFFERENCE

Cultural accommodation
Enhanced cross-cultural communication
Cultural shock minimisation
Management orientation
– Ethnocentrism
– Polycentrism
– Geo-centrism
Economic integration
It is an agreement among countries in a
geographic region to reduce and
ultimately remove, tariff and non tariff
barriers to the free flow of goods or
services and factors of production among
each others; any type of arrangement in
which countries agree to coordinate their
trade, monetary and fiscal policies.
 Types of economic integration
Groups or countries are coming together all over the world with the idea of
defending themselves economically against the incursions of other blocks
in the
area.

a) FTA (free trade area)—free and open trade among members

no internal tariffs among members, but each country imposes its own
external tariffs to the third country.
◦ NAFTA (North America Free Trade Agreement)
1994; free trade area among the US, Canada and Mexico.
◦ AFTA (ASEAN Free Trade Area)
Signed in 1992 Singapore; originally 6 countries
◦ EFTA (European Free Trade Area)
1960, Austria, Denmark, Norway, Sweden, Portugal, Switzerland
and UK
b) Customs union
no internal tariffs and common external tariffs
◦ Mercosur (Southern Common Market)
Formed in 1991 by Brazil, Argentina, Paraguay and Uruguay
◦ CACM (Central American Common Market)
1960, Guatemala, El Salvador, Honduras, Nicaragua
◦ CARICOM (Caribbean Community and Common Market)
1973, 15 members
c) Common market:
free movement of products and factors (resources), which is
customs union plus factor mobility
EU (European Union – previously Euro Econ Community)
d) Economic union
common market plus common currency
coordination of fiscal and monetary policy
EMU (Economic and Monetary Union)
Leading Economic Blocs
Association of South East Asian Nations
(ASEAN)
The Association of South East Asian Nations was
established on 8th August 1967 in Bangkok by five
original member countries Indonesia, Malaysia
Philippines, Singapore and Thailand. Later on
Brunei joined in1984,Vietnam in 1995, Laos and
Myanmar in1997, Cambodia in1999. The ASEAN
region has a population about 500 million and a
total area of 4.5 million square kilometres.
Objectives of ASEAN

To accelerate economic growth, social progress, and

cultural development in the region.
To promote regional peace and stability through
abiding respect for justice and the rule of law in the
relationship among countries in the region and
adherence to the principles of UN Charter.
To develop the region as a zone of peace, freedom
and neutrality.
To promote active collaboration and mutual
assistance in matters of common interest.
In 1993 ASEAN Free Trade Area was established. A
common effective preferential tariff has come in force.
Intra- ASEAN trade and investment has increased.
During the last 30 years ASEAN has achieved a significant
shift of GDP shares from agriculture to industrial activity.
Each of the government in this region has adopted an
export led growth policy with emphasis on private- sector-
led economy. At present, intra-ASEAN trade and foreign
investment have increased tremendously. Despite their
economic transformation, the ASEAN members, play a
dominant role in world markets for rice, tin, coconut oil,
palm oil, rubber, and timber. These primary commodities are
among the top seventeen commodities traded globally. The
growing presence of multinational in this region has further
boosted up trade and investment.
SAARC
The Heads of State or Government at
their First SAARC Summit held in Dhaka
on 7-8 December 1985 adopted the
Charter formally establishing the SAARC.
Initially SAARC had seven member states:
Bangladesh, Bhutan, India, Maldives, Nepal,
Pakistan, and Sri Lanka. Later on in 2007
Afghanistan joined SAARC making it an
eight member states’ organization.
Objectives
To promote the welfare of the peoples of South Asia and to improve
their quality of life.
To accelerate economic growth, social progress and cultural
development in the region and to provide all individuals the
opportunity to live in dignity and to realize their full potential.
To promote active collaboration and mutual assistance in the
economic, social, cultural, technical and scientific fields.
To strengthen cooperation among themselves in international forums
on matters of common interests and
To cooperate with international and regional organizations with similar
aims and purposes.
To promote and strengthen collective self-reliance among the
countries of South Asia.
To contribute to mutual trust, understanding and appreciation of one
another’s problems.
To strengthen cooperation with other developing countries.
Principles
Cooperation within the framework of the
association is based on respect for the principles
of sovereign equality, territorial integrity, political
independence, non interference in the internal
affairs of other States and mutual benefit.
Cooperation is to complement and not to
substitute bilateral or multilateral cooperation;
and
Cooperation should be consistent with bilateral
and multilateral obligations of Member States.
SAFTA is an agreement between the SAARC member
countries to establish a free trade area in the region.
SAFTA aims to reduce the tariff and non-tariff barriers in
the SAARC region and promote free flow of goods to
increase trade and investment in potential economic
sectors of member countries for economic development.
The SAFTA agreement was signed on January 6, 2004 and
it came into force in January 2006. SAFTA eliminates all
kind of quantitative and non-quantitative barriers like tariff,
quota, and non tariff barriers like policy related barriers to
trade.
Objectives of SAFTA
1. Eliminating barriers to trade in and facilitating the cross
border movement of goods.
2. Promoting conditions of fair competition in the free
trade areas, and ensuring equitable benefits to all members
taking into account their respective level and patterns of
economic development.
3. Creating effective mechanism for the implementation
and application of this agreement for its joint administration
and for the resolution of disputes.
4. Establishing a framework for further regional
cooperation to expand and enhance mutual benefits.
 BIMSTEC
1997, a new sub-regional grouping was formed in Bangkok and
given the name BIST-EC (Bangladesh, India, Sri Lanka, and
Thailand Economic Cooperation). Myanmar attended the
inaugural June Meeting as an observer and joined the
organisation as a full member at a Special Ministerial Meeting
held in Bangkok on 22 December 1997, upon which the name
of the grouping was changed to BIMST-EC. Nepal was granted
observer status by the second Ministerial Meeting in Dhaka in
December 1998. Subsequently, full membership has been
granted to Nepal and Bhutan in 2003.
In the first Summit on 31 July 2004, leaders of the group
agreed that the name of the grouping should be known as
BIMSTEC or the Bay of Bengal Initiative for Multi-Sectoral
Technical and Economic Cooperation.[
Objective of BIMSTEC

To create ,manage and evaluate energy related

data-base relevant to the region; and taking
into view various on-going activities and
suggest a road map
for meaningful intra- BIMSTEC cooperation.
To prepare and operationalize a framework
for networking among the national level
institutions in the region
To prepare the groundwork, such as
feasibility studies, data collection etc. for
intra- BIMSTEC energy related projects.
To study , compile and disseminate the
prevailing policies of the BIMSTEC member
countries in different areas of energy sector.
To enhance cooperation for capacity building
and sharing of experiences on best practices,
including reforms, regulation and energy
efficiency.
 Historical Timeline of EUROPEAN UNION

9 May 1950 Robert Schuman proposed

integration of Europe

1 January 1958 Treaty of Rome signed by six nations

(West Germany, France, Italy,
Netherlands,Belgium and
Luxembourg) led to the formation of
European Economic Community
(EEC)
1 November 1993 European Union was formed

1 January 1999 Introduced Euro

Objectives of EU
To promote, throughout the community, a
harmonious development of economic activities
To expand its spheres of influence continuously
To increase the level of life standard and
economic stability
To enhance closer relationships among the
member states and states outside its territory
Functions of EU

Eradicating custom duties among members

Implementing of unitary economic policy
Avoiding quota and quantitative restrictions on imports
and exports of goods and services among member
states
Making appropriate provisions for free flow of capital
and labour among member states
Promoting of common market and free competition
Solving the problems and complexities associated with
loan payments
Raising the standard of life of the people of Europe
The EU's decision making process, in general and
the co-decision procedure in particular, involve three
main institutions:
The European Parliament, which represents the EU’s
citizens and is directly elected by them;
The Council of the European Union, which represents
the individual member states and
The European Commission which seeks to uphold the
interests of the Union as a whole.
Two other institutions have a vital part to play:
the Court of Justice upholds the rule of European law,
and the Court of Auditor’s checks the financing of the
Union’s activities.
North American Free Trade
Agreement (NAFTA)

NAFTA is a trilateral trade bloc in North America

created by the government of three countries -
USA, Canada and Mexico. The agreement was
signed in December 1993 and came into effect
from 1st January 1994.The final provisions of
NAFTA were fully implemented on January 2008.
NAFTA It aims at dismantling trade barriers and
liberalization of government rules and the rules
concerning trade in services, intellectual property
rights, and environment. The agreement covers the
following areas:
Market access – tariffs and non tariffs barriers,
rules of origin and government procurement.
Trade rules – safeguards for trade in goods,
subsidies, countervailing and anti-dumping duties,
health and safety standards.
Services – provides for the same safeguards for
trade in services that exists for trade in goods.
Investment – establishes investment rules governing
minorities, portfolio investment, real property, and
majority owned or controlled investments from the
NAFTA countries, in addition NAFTA coverage extends
to investment made by any company incorporated in a
NAFTA country, regardless of the country of origin.
Intellectual Property - all three countries pledge to
provide adequate and effective protection and
enforcement of IPR, while ensuring that enforcement
measures do not themselves become barriers to
legitimate trade.
Dispute Settlement- NAFTA provides a dispute
settlement process that will be followed to keep
countries from taking unilateral action against an
offending party.
The Organization of the Petroleum Exporting
Countries (OPEC)

Brief History
OPEC is a permanent, intergovernmental Organization,
created at the Baghdad Conference on September 10–14,
1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela
Algeria, Angola, Equador,Indonesia, Iran Iraq, Kuwait, Libya,
Nigeria, Quatar, Saudi Arabia, United Arab Emirates and
Venezuela.
The OPEC Statute distinguishes between the Founder
Members and Full Members - those countries whose
applications for membership have been accepted by the
Conference.
The Statute stipulates that “any country with a substantial net
export of crude petroleum, which has fundamentally similar
interests to those of Member Countries, may become a Full
Member of the Organization, if accepted by a majority of
three-fourths of Full Members, including the concurring votes
of all Founder Members.”
The Statute further provides for Associate Members which
are those countries that do not qualify for full membership,
but are nevertheless admitted under such special conditions
as may be prescribed by the Conference.
Aims and Objectives of OPEC
In accordance with its Statute, the mission of the
Organization of the Petroleum Exporting
Countries (OPEC) are:
to coordinate and unify the petroleum policies of
its Member Countries and
to ensure the stabilization of oil markets in order
to secure an efficient, economic and regular supply
of petroleum to consumers,
make a steady income to producers and a fair
return on capital for those investing in the
petroleum industry.
Key Functions of OPEC:

Coordination of oil production policies

Price and market stabilisation
Maintaining stability in oil production
Apart from this, OPEC members hold quarterly
meetings to discuss global demand outlook and
supply strategies.
 Emerging foreign markets

An emerging market is a type of developing

country that is experiencing rapid growth and
industrialization, with some characteristics of a
developed market. This includes countries that may be
developed markets in the future or were in the past.
An emerging market economy describes a nation's
economy that is progressing toward becoming more
advanced, usually by means of rapid growth and
industrialization. These countries experience an expanding
role both in the world economy and on the political
frontier.
An (EME) is defined as an economy with low to middle
per capita income. Such countries constitute
approximately 80% of the global population, and
represent about 20% of the world's economies. The term
was coined in 1981 by Antoine W. Van Agtmael of the
International Finance Corporation of the World Bank.
Although the term "emerging market" is loosely defined,
countries that fall into this category, varying from very big
to very small, are usually considered emerging because of
their developments and reforms.
Hence, even though China is deemed one of the world's
economic powerhouses, it is lumped into the category
alongside much smaller economies with a great deal less
resources, like Tunisia. Both China and Tunisia belong to this
category because both have embarked on economic
development and reform programs, and have begun to
open up their markets and "emerge" onto the global scene.
EMEs are considered to be fast-growing economies.
Types of Emerging markets
FTSE’s List (6+16 countries)

The FTSE group classifies emerging markets into two

separate groups based on the country’s national income as
well as the development of its market infrastructure.
Advanced Emerging Markets:
Brazil, Hungary, Mexico, Poland, South Africa, Taiwan
Secondary Emerging Markets:
Chile, China, Colombia, Czech Republic, Egypt, India,
Indonesia, Malaysia, Morocco, Pakistan, Peru, Philippines,
Russia, Thailand, Turkey, United Arab Emirates
 The Economist’s List (24 countries)
Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hong
Kong, Hungary, India, Indonesia, Malaysia, Mexico, Morocco,
Peru, Philippines, Poland, Russia, Saudi Arabia, Singapore, South
Africa, South Korea, Taiwan
BRIC
In economics, BRIC is a grouping acronym that refers to the
countries of Brazil, Russia, India and China, which are all
deemed to be at a similar stage of newly advanced economic
development. It is typically rendered as "the BRICs" or "the
BRIC countries" or "the BRIC economies" or alternatively
as the "Big Four".
Characteristics of Emerging markets
Emerging markets have five characteristics.
First, countries per capita income is
lower-than-average per capita income. The
World Bank defines developing countries as
those with either low or lower middle per
capita income of less than $4,034. (World Bank
list, 2015)
Second is the rapid growth rate
Rapid social change - social changes due to natural
disasters, traditional economies, earthquake, tsunamis,
draught
However, these disasters can lay the groundwork for
additional commercial development as it did in Thailand.
Emerging markets are more susceptible to volatile
currency swings, such as the dollar, and commodities
such as oil or food. That's because they don't have
enough power to influence these movements. For
example, when the U.S. subsidized corn ethanol
production in 2008, it caused oil and food prices to
skyrocket, leading to food riots in many emerging
market countries.
Capital Market
The capital market are less mature in these countries than
the developed markets. Due to this it could not attract
foreign direct investment.
Rate of Return
The rate f return on this market must be higher-than-
average return for investors. That's because many of these
countries focus on an export-driven strategy. They don't
have the demand at home, so they produce lower-cost
consumer goods and commodities for developed markets.
International Business
BBM
Unit 3 (ii)
 International Monetary and Financial
Environment
• International monetary and financial
environment are the sets of internationally
agreed rules, conventions, supporting
institutions, financial tools & instruments that
facilitate international trade, cross border
investment and generally the reallocation of
capital between nation states. usance
• Foreign exchange market
• Foreign exchange is the system or process of converting
one national currency into another and of transferring
money from one country to another. The word foreign
exchange is also used to refer to foreign currency.
• An exchange rate is simply the rate at which one currency
is converted into another. It is the price of the currency,
usually in relation to another currency. Also, exchange rate
refers to the number of units of one currency that buys
one unit of another currency.
• Foreign exchange market is the place where money
denominated in one currency is brought and sold with
money denominated in another currency. For instances, if
US firm imports goods from a British company, US dollar
need to be converted into sterling. This conversion from
one currency into another is typical of the transactions
that take place in the foreign exchange market.
Foreign exchange market major segments
1. Over the counter (OTC) The market is composed
of both commercial banks and investment banks
and other financial institutions. Most of the
foreign activities take place in this market.
2. Exchange-traded market
The market is composed of securities exchanges,
such as the Chicago Mercantile Exchange and the
Philadelphia Stock Exchange, where certain types
of foreign- exchange instruments, such as
exchange-traded futures and options are traded.
Functions of Foreign Exchange Market
1. Currency conversion
Foreign exchange market enables individuals and business
organizations to convert their currency into another currency
thereby enabling them to make payments for acquired goods and
services from foreign country.
2. Insuring against foreign exchange risks
The other important function of the foreign exchange market is
to provide hedging facilities. Hedging refers to covering of export
risks, and it provides a mechanism to exporters and importers to
guard themselves against losses arising from fluctuations in
exchange rates.
3. Provision of Credit
International trade depends to a great extent on credit facilities.
Exporters may require pre- shipment and post-shipment credit
facilities which are provided by foreign exchange market. These
credit functions performed by the foreign exchange markets play
a very important role in the growth of foreign trade.
 Exchange Rate Theory

• 1. Floating Exchange Rate Theory

• This theory states that the exchange rates are freely
determined in an open market by the demand and
supply of foreign currencies. Under the floating
exchange rate system, balance of payment directly
affects the exchange rate. A surplus balance of
pa e t ill eate a e ess de a d of ou t s
currency and its exchange rate will rise and vice-versa.
• When there is no government intervention, the market
exchange system is called Free floating system whereas
the go e e t s i te e tio is fou d i Managed
floating system.
• Fixed Exchange Rate Theory
• Fixed Exchange Rate Theory advocates a stable/
fixed exchange rate which is determined by
pegging one currency with another. The exchange
rate is normally fixed over a period of time. The
ate is o l ha ged he the ou t s
economic situation deems it to be necessary.
• A stable exchange rate system eliminates
speculation and prevents flight of capital arising
out of uncertainties in the foreign exchange
market. Most of the developing countries, which
have a persistent balance of payment deficits, use
fixed exchange rate to prevent continuous
depreciation of external value of their currencies.
• Purchasing Power Parity Theory
• According to Purchasing Power Parity Theory,
when the exchange rates are free to fluctuate,
the rate of exchange between two countries in
the long run will be determined by their
respective purchasing powers.
• The value of the unit of one currency in terms of
another currency is determined at any particular
time by the market conditions of demand and
supply. In the long run that value is determined
by the relative values of two currencies as
indicated by their relative purchasing power over
goods and services in their respective countries.
Mode of Payments in International
Business
• Global Financial System
• The global financial system is the financial system
consisting of institutions and regulators that act on
international level to facilitate international flows of
financial capital for the purposes of investment and
trade financing in international business.
• The main players are the global institutions such as
International Monetary Fund and World Bank,
national agencies and government departments, e.g.
Central bank and finance ministry, private institutions
acting on the global scale.
 Components Global Financial System
• 1. Money
• 2. International financial institutions
• 3. Central Banks
• 3. Financial Instruments
• 4. Financial Market

1. Money is any thing that is generally accepted in

payment for goods and services or in payment of debt.
Different monetary theory ties change in money supply
to change in aggregate economic activity and the price
level.
• Money and recession- the periodic upward and
downward movement of aggregate output produced
in the economy is referred as the business cycle.
• Downward movement in the business cycle is
referred as recessions, whereas upward movement
is business cycle is referred as expansion.
• Inflation it is a continuous rise in price level, which
affect economic activities, There is a strong positive
relationship between inflation and growth rate of
money over a long period of time. A sharp increase
in growth of money supply is likely to be followed by
an increase in the inflation rate affect the economy.
• 2. International Financial institutions

• There are different international financial

institutions established with the different
purposes to help in world trade. Investment
and economic development. They are Bank for
International Settlement, International
Monetary Fund, World Bank etc.
• 3. Central bank
• The apex bank of the different country who
hold the control of its national currency
circulation, and regulate the whole financial
system in the country is said to be the central
Bank. The different central banks of the
countries are the important players of the
global financial system who represent the
country in international forum.
• 4. Financial instruments
Securities such as shares, debentures, bonds, and
loans or credit from financial institutions are termed
as financial instruments.
• 5. Financial Market
• The market where different types of financial
instruments are traded is said to be financial market.
It can be money market and capital market. Money
market is composed of commercial banks, other
financial institutions and investors which provides
short term financing, where as capital market
composed of stock issuing agencies, investors,
financial institutions and other business houses.
International Economic Institutions
• There are three main international economic
institutions:
• International Monetary Fund (IMF)
• World Bank
• World Trade Organization (WTO).
International Monetary Fund (IMF)
• International Monetary Fund (IMF) is an organization
of 188 countries that works together to foster global
monetary cooperation, secure financial stability,
facilitate international trade, promote high
employment and sustainable economic growth, and
reduce poverty around the world.
• IMF formally came into existence on 27 December
1945 first 29 countries signed its Articles of Agreement.
However, it started its financial operations since 1
March, 1947. Presently 188 members countries are the
members.
• Objectives
• To promote international monetary cooperation through a
permanent institution which provides the machinery for
consultation and collaboration on international monetary problems.
• To facilitate the expansion and balanced growth of international
trade, and to contribute thereby to the promotion and
maintenance of high level of employment and real income and to
the development of productive resources of all members as primary
objective of economic policy.
• To promote exchange stability, to maintain orderly exchange
arrangements among members, and to avoid competitive exchange
depreciation.
• To assist in the establishment of a multi-lateral system of payments
in respect of current transactions between members and in the
elimination of foreign exchange restrictions which hamper the
growth of world trade.
• In accordance with the above, to shorten the duration and lessen
the degree of disequilibrium in the international balance of
payments of members.
 World Bank
• The World Bank initially known as the
International Bank for Reconstruction and
Development (IBRD) was established in 1945
under the Bretton Woods Agreement of 1944.
While IMF was established to provide short term
assistance to correct the balance of payment
disequilibrium, World Bank was established to
provide long-term assistance for the
reconstruction and development of economies of
member countries.
• The World Bank is currently made up of five
different agencies. Each institution plays a
different but collaborative role in advancing the
vision of inclusive and sustainable globalization.
 •
World Bank Group Key Function

International Bank for Reconstruction and Lend to government of middle-income

Development (IBRD) and creditworthy low income
countries
Provide interest- free loans-called
International Development Association (IDA) credits- and grants to governments of
the poorest countries
Provide loans, equity and technical
International Finance Corporation (IFC) assistants to stimulate private sector
investment in developing countries

Provide guarantees against losses

Multi-lateral Investment Guarantee Agency (MIGA) caused by non- commercial risks to
investors in developing countries

• . Provide international facilities for

International Center for Settlement of Investment conciliation and arbitration of
Disputes (ICSID) investment disputes
 World Trade Organization (WTO)
• With the successful completion of the Uruguay Round
negotiation on 15th December 1993, the WTO replaced
the GAAT. The WTO began to administer the international
rule based trade since 1 January 1995. As of November
2015 its membership has reached to 162 governments
sharing 97 percent in total world trade. The WTO is
located in Geneva, Switzerland. Nepal became the
member of WTO in 23rd April 2004.
• The WTO stands as the legal institutional foundation of
the multilateral trading system. It provides the principal
contractual obligations determining how member
governments should frame and implement their national
trade legislation and regulations.
• Objectives of WTO

• To promote trade flows by encouraging nations to

adopt non-discriminatory and predictable trade
policies
• To raise standard of living and incomes, promoting full
employment, expanding production and trade, and
opti u utilizatio of o ld s esou es
• To introduce substantial development- a concept which
envisages that development and environment go
together
• To take positive steps to ensure that developing
countries, specially the least developed ones secure a
better share of growth in world trade.
• To establish procedures for resolving trade disputes
among members
• The Functions of WTO
WTO carries out the following major functions:

• Administering and implementing the trade agreements

• Providing a forum for multilateral trade negotiation
• Resolving trade disputes
• Reviewing of national trade policies
• Assisting developing countries in trade policy issues,
through technical assistance and training programs and
• Cooperating with other institutions like UN, WB, IMF,
etc in global economic policy making.
• Acting as a watchdog of international trade, constantly
examining the trade regimes of individual members
 WTO and Free Trade Policies
• The WTO is based on nine trade policies. These policies are
explained below:
•  Transparency
• WTO aims at achieving transparency in world trade relations
by obligating members to publish their respective laws,
regulations, judicial decisions, and administrating ruling
pertaining to the classification or valuation of products,
customs, rates of duties, taxes or other charges affecting sale,
distribution, transportation, insurance and warehousing with
the objectives of enabling governments and traders to become
more transparent.
•  Most Favoured Nations (MFN) Treatment
• Trade needs to be conducted without discrimination. Any
member country shall not discriminate between its trading
partners – all e e ou t ies a e g a ted ost fa ou ed-
atio s o MFN status. MFN ea s that e e ti e a e e
country lowers a trade barrier or opens up a market, it needs
to extend the benefits to all trading partners.
•  National Treatment
• This principle implies that imported and locally produced
goods should be treated equally. Article III of the GATT 1994
states that the p odu ts of te ito of a o t a ti g pa t
imported into the territory of any other contracting party shall
be accorded no less favourable treatment than that accorded
to like products of national origin in respect of all laws,
regulations, and requirements affecting their internal sale,
offering for sale, purchase, transportation, distribution or
use . This e ui e e t o ti ues i WTO also.

•  Free Trade Principle

• Lowering trade barriers is the best way of promoting trade.
Trade ensures optimum utilization of resources. All countries
including the poorest, have assets- human, industrial, natural,
financial – which they can employ to produce goods and
services for their domestic market or to compete overseas.
Liberal trade policies that allow unrestricted flow of goods
and services will result in expanded markets.
•  Dismantling Trade Barriers
• Physical restrictions on the import and export of goods
are prohibited under GATT. However, member
countries can protect domestic industry through tariff.
The WTO is ot a f ee t ade i stitutio . It pe its
tariffs and other forms of protection but only in limited
circumstances.
•  Rule-based Trading System
• The WTO stands for rule based trading system. Towards
this end, the WTO sets and enforces rules necessary for
conducting world trade fairly. Through its automatic
and speedier disputes settlement mechanism, the WTO
adjudicates on disputes between members. This helps
open trade between countries.
•  Treatment for Least Developed Countries (LDCs)
• The WTO contains special and differential treatment
provision for developing and least developed countries that
run across the whole range of agreements covered by WTO.
In fact there is a separate committee on trade and
development that oversees the implementation of this
provision by developed countries. There are specific
provisions under all the WTO agreements that stipulate
trade concessions for developing the least developed
countries. These concessions include waiver or deferral of
obligations, transfer of technology and the like.
•  Competition Principle
• The WTO system is designed to promote open and fair
competition. Removal or reduction of tariffs and subsidies
will expose locally produced goods and services to
imported ones. The WTO seeks to protect consumer
interest by promoting competition among trading
members.
•  Environmental Protection
• The preamble to WTO agreement refers to the
objective of sustainable development and to the
need to preserve the environment. Agreements
on technical barriers to Trade and Sanitary
contain provisions to protect human, animal, and
plant life, health and the environment. Similarly,
both Trade Related Intellectual Property Rights
(TRIPs) Agreement and the General Agreement
on Trade in Services (GATS) contain provisions
relating to environment.
The End
Thank You
 International Business
Unit 5
Functional Areas of International
Business
• Global Production Networks (GPN) is a concept in developmental
literature which refers to "the nexus of interconnected functions,
operations and transactions through which a specific product or
service is produced, distributed and consumed.

• Logistics – It is the management of the flow of things between the

point of origin to the point of consumption in order to meet
requirements of customers or corporations. The logistics of
physical items usually involves the integration of information flow,
material handling, production, packaging, inventory,
transportation, warehousing, and often security.
• Logistics outsourcing – It is a process of involving a relationship
between a company and an LSP (logistic service provider), which,
compared with basic logistics services, has more customized
offerings, encompasses a broad number of service activities, is
characterized by a long-term orientation, and thus has a strategic
nature.
Global Marketing Strategy
Unit 5
BBM
International Business
VII Semester
• Global marketing - “Marketing on a worldwide scale
reconciling or taking commercial advantage of global
operational differences, similarities and opportunities in
order to meet global objectives.” Oxford University Press
• Global Marketing Strategy -The process of conceptualizing
and then conveying a final product or service worldwide with
the hopes of reaching the international marketing
community.
• It is a strategy that encompasses countries from several
different regions in the world and aims at coordinating a
company’s marketing efforts in global market.
• Practice of standardizing marketing activities when there are
cultural similarities and adapting them when cultural differ (
Kerin, Hartley, Redulies)
• GMS is a comprehensive and on going global marketing
planning process aimed at formulating and implementing
strategies that enable a firm to create competitive advantage
over competitors and operate efficiently in global market.
 Deciding the Global strategy

• Deciding whether to go
• Deciding which markets to enter
• Deciding how to enter
• Deciding on the marketing program
• Deciding on the marketing organization
• global branding, product development,
pricing, communications, and distribution
strategies;
 Global Branding
• A brand is a name, term, sign, symbol, or
design or a combination of them, intended to
identify the goods and services of one seller or
group of sellers and to differentiate them from
those of the competitor. Phillip Kotler
Global Branding
 Product Development

• Product development is developing the product

concept into a physical product in order to ensure that
the product idea can be turned into a workable market
offering. For the marketers a new product may be:

• Innovative product – The product are develop and

introduced for the first time in market, it was previously
not marketed by any other marketers.
• Imitating product - The product which may be new to
a particular firm but may not be for the marketers who
had already offered such product.
• Modified product- The existing features of the product
are modified and developed a new product is modified
product.
•
• 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
7. Test marketing
8. Commercialization
Idea Generation
• New idea generation is the systematic search for
new product ideas. To create a large number of
ideas, the sources of new-product ideas are:
– Internal sources refer to the company’s own
formal research and development,
management and staff, and intrapreneurial
programs.
– External sources refer to sources outside the
company such as customers, competitors,
distributors, suppliers, and outside design
firms.
Idea Screening
• Idea screening refers to reviewing new-product ideas
in order to drop poor ones as soon as possible.

Concept Development and Testing

• Product idea is an idea for a possible product that the
company can see itself offering to the market.
• Product concept is a detailed version of the idea stated
in meaningful consumer terms.
• Product image is the way consumers perceive an
actual or potential product.
• Concept testing refers to testing new-product concepts
with groups of target consumers. To find out how
attractive each concept is to customers, and choose
the best one.
Marketing Strategy Development

• It refers to the initial marketing strategy for

introducing the product to the market. The
marketing strategy statement
Part 1:
– Description of the target market
– The planning product positioning; sales, market
share, and profit goals
Part 2:
– Price distribution and budget
Part 3:
– Long-term sales, profit goals, and marketing mix
strategy
Business Analysis
• Business analysis involves a review of the
sales, costs, and profit projections to find out
whether they satisfy the company’s
objectives.
Product Development
• Product development involves the creation
and testing of one or more physical versions
by the R&D or engineering departments. -
Requires an increase in investment
Test Marketing
• Test marketing is the stage at which the product
and marketing program are introduced into more
realistic marketing settings.
• Test marketing provides the marketer with
experience in testing the product and entire
marketing program before full introduction.
• When firms test market: New product with large
investment; Uncertainty about product or
marketing program
• When firms may not test market: Simple line
extension; Copy of competitor product; Low costs;
Management confide
Commercialization

• Commercialization is the introduction of the new

product into the market
– When to launch
– Where to launch
– Planned market rollout (the widespread public
introduction of a new product )
 • Individual Product Decision

• Individual product decisions involve the

development of a product and related decisions
regarding marketing a product. The below things
are related in individual product decisions.
• Product attributes decision
• Branding
• Packaging
• Labeling and
• Product Support Services
 Pricing
• Pricing is the act of determining the exchange value
between the purchasing power and utility or satisfaction
acquired by an individual, group or an organization through
the purchase of goods, services, ideas, rights etc.
• Objectives of pricing

• 1. Profit Maximization
• 2. Return on Investment
• 3. Expand market share
• 4. Survival
• 5. Price stabilization
• 6. Meet competition
 Pricing Approaches

Cost-Based Pricing: Cost-Plus Pricing

– Adding a standard markup to cost
– Ignores demand and competition
– Popular pricing technique because:
• It simplifies the pricing process
• Price competition may be minimized
• It is perceived as more fair to both buyers and
sellers
 Pricing Approaches

Breakeven Analysis or Target Profit Pricing

• Break-even charts show total cost and total

revenues at different levels of unit volume.
• The intersection of the total revenue and total
cost curves is the break-even point.
• Companies wishing to make a profit must
exceed the break-even unit volume.
 Pricing Approaches
Value-Based Pricing:
Consumer attitudes toward price and quality have shifted
during the last decade. Uses buyers’ perceptions of value
rather than seller’s costs to set price.
– The company first assesses customer needs and value
perception . It then sets its target priced based on customer
perception. Determine costs that can be incurred. Design
product to deliver desired value at target price.
– Good value pricing strategies- offering just the right
combination of quality and good service at a fair price.
– Value pricing at the retail level
• Everyday low pricing (EDLP) vs. high-low pricing. Wal-Mart promises
everyday low prices on everything it sells. Similarly Big Bazaar offer
the cheapest prices by asking “Isse sasta aur kahan?” (where else
does it get cheaper ?)
 Pricing Approaches

• Competition-Based Pricing:
– Also called going-rate pricing
– May price at the same level, above, or below the
competition
– Bidding for jobs is another variation of
competition-based pricing
– Sealed bid pricing
 New-Product Pricing Strategies

Market skimming pricing is a strategy with high

initial prices to “skim” revenues layer-by-layer
from the market.
– Product quality and image must support the price.
– Buyers must want the product at the price.
– The costs of producing a smaller volume cannot be so
high that they cancel the advantage of higher prices.
– Competitors should not be able to enter the market
easily and undercut the high price.
 New-Product Pricing Strategies

Market penetration pricing sets a low initial

price in order to penetrate the market
quickly and deeply to attract a large number
of buyers quickly to gain market share.
– Price sensitive market
– Production and distribution costs must fall as sales
volume increases
– Low prices must keep competition out of the
market
 Product-Mix Pricing Strategies
The firm looks for a set of prices that maximizes
the profits on the total product mix.
Five pricing product mix pricing situations
• Product line pricing – the products in the product
line
• Optional product– optional or accessory products
• Captive product pricing - complementary
products
• By-product pricing – by-products
• Product bundle pricing – several products
 Product-Mix Pricing Strategies

Product line pricing takes into account the

cost difference between products in the
line, customer evaluation of their
features, and competitors’ prices. – the
price differences represent the perceived
quality differences
For example
Price difference for- Normal Hair, Anti
dandruff, Hair fall defense , Oily hair
 Product-Mix Pricing Strategies

Optional product pricing takes into account

optional or accessory products along with the
main product. – Decide which items to include in the
base price and which to offer as options:
For example a car price

New car with ordinary rims on the wheel - price $ 59,000

or
New car with sports rims on the wheel - price $ 60,000
 Product-Mix Pricing Strategies
Captive product pricing involves products that must be
used along with the main product.
– Price the main, or driver product low and seek
high margins on the supplies

• For services: two-part pricing is where the price is

broken into fixed fee and variable usage fee.
– Decide how much to charge for the basic service
and how much for the variable usage
– The fixed amount should be low enough to induce
usage of the service; profit can be made on the
variable fees
• (Blades for razor and a film for a camera)
 Product-Mix Pricing Strategies

By-product pricing refers to products with little

or no value produced as a result of the main
product.
• Producers will seek little or no profit
• Producers should accept any price that covers
more than the cost to cover storage and
delivery
 Product-Mix Pricing Strategies
Product bundle pricing combines several products
and offer the bundle at a reduced price.
• Price bundling can promote the sales of products

• For example 1 piece of Dettol soap $ 2

• 3 piece of Dettol soap in a bundle is
$5
 Communication Strategy
• Communication strategy is a blue print of long
term communication mix strategy of
organization, in which it communicate a concept,
a process, or information to persuade, and
remind consumers - directly, or indirectly - about
the products and brands that they sell.
• The communication mix strategy which consists
of specific blend of advertising, public relations,
personal selling, direct marketing tools that the
company uses to persuasively communicate
customer value and build customer relationships.
 Promotional Mix strategies
Push Strategy – A promotion strategy that calls for
using the sales force and trade promotion to push the
product through channels. The producers promotes the
product to channel members who in turn promote it to
final consumers.
Pull Strategy- A promotion strategy that calls for
spending a lot on advertising and consumer promotion
to induce final consumers to buy the product, creating
as demand vacuum that “pulls the product through the
channels.

A company have to consider many factors when

designing their promotion mix strategies, including type
of product, market and product life cycle stage.
International Communication Barriers

• Cultural Barriers
– Develop cross-cultural literacy
– Firm should use local input such as local advertising
agency and sales force
• Source and country of origin effects
– Receiver of the message evaluates the message based
on status or image of the sender
• Anti-Japan wave in US in 1990’s
 • Place of manufacturing influences product
evaluations
• Often used when consumer lacks more detailed
knowledge of the product
– Examples: French wines, Italian clothes and German
luxury cars
• Noise levels
– Amount of other messages competing for a
potential customer’s attention
• Developed countries - high.
• Less developed countries - low.
• Standardized advertising strategy execution
more difficult (culture, laws)
 Distribution Strategies
• A choice of distribution strategy determines
which channel the firm will use to reach potential
consumers. Should the firm try to sell directly to
the consumer or should it go through retailers;
should it go through a wholesaler; should it use
an import agent; or should it invest in
establishing its own channel? The optimal
strategy is determined by the relative costs and
benefits of each alternative, which vary from
country to country, depending on the four factors
: retail concentration, channel length, channel
exclusivity, and channel quality.
• Retail concentration
• In some countries, the retail system is very
concentrated, but it is fragmented in others. In
a concentrated retail system, a few retailers
supply most of the market. A fragmented
retail system is one in which there are many
retailers, no one of which has a major share of
the market and create challenges for
distribution system.
• Channel length
• It refers to the number of intermediaries
between the producer (or manufacturer) and the
consumer. If the producer sells directly to the
consumer, the channel is very short. If the
producer sells through an import agent, a
wholesaler, and a retailer, a long channel exists.
The choice of a short or long channel is in part a
strategic decision for the producing firm.
However, some countries have longer distribution
channels than others. The most important
determinant of channel length is the degree to
which the retail system is fragmented. The more
fragmented the retail system, the more expensive
it is for a firm to make contact with each
individual retailer.
• Exclusive distribution channel
• An exclusive distribution channel is one that is
difficult for outsiders to access. For example, it
is often difficult for a new firm to get access to
shelf space in supermarkets. This occurs
because retailers tend to prefer to carry the
products of established foodstuff
manufacturers with national reputations
rather than gamble on the products of
unknown firms. The exclusivity of a
distribution system varies between countries.
• Channel quality
• Channel quality refers to the expertise,
competencies, and skills of established
retailers in a nation, and their ability to sell
and support the products of international
businesses
 Global E- marketing strategies
• E- marketing or electronic marketing refers to the
application of marketing principles and
techniques through electronic media and more
specifically the Internet. The term Internet
marketing , e-marketing, and on line marketing
are frequently interchanged, and can often be
consider synonymous.
• Global e-marketing strategy is the part of
company’s overall marketing strategies which
consists of different electronic media, channels
and methods are used deliberately to promote,
persuade and communicate the prospective
customers about the company’s product or
services in the global market.