SCHOOL OF MANAGEMENT STUDIES

DEPARTMENT OF BUSINESS ADMINISTRATION

UNIT 1 –GLOBAL BUSINESS MANAGEMENT

SBAA5301

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 UNIT 1 – INTRODUCTION TO INTERNATIONAL BUSINESS

Introduction to International Business : Evolution- Theories of global trade and investment-

Mercantilism—Theories of Absolute Advantage-Theory of Comparative advantage ,Factor
Endowment theory- Product Life Cycle theory- Porter’s National Competitive advantage.

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Introduction to International Marketing:

The term International business has emerged from “International marketing”. International business
involves transactions across the national boundaries. It includes the transfer of goods, services,
technology, managerial knowledge and capital to other countries. International business has gained
greater visibility and importance in recent years because of the large multinational corporations.

Meaning

Trade is the concept of exchanging goods and services between two people or entities. International
trade is then the concept of this exchange between people or entities in two different countries.
International trade is a part of total marketing process.
 It refers to the marketing activities carried on by a marketer in more than one nation.

 “Trade carried on across national boundaries”

Definition

 “The Performance of business activities that directs the flow of goods and services to
consumers or users in more than one nation” – Hess & Cateor
 International marketing has also been defined as ' the performance of business activities that direct
the flow of goods and services to consumers or users in more than in one nation'.
 “It is different from domestic marketing in as much as the exchange takes place beyond the
frontiers, thereby involving different markets and consumers who might have different needs,
wants and behavioral attributes.
Scope of International Marketing:

 Though international marketing is in essence export marketing, it has a broader connotation in

marketing literature. It also means entry into international markets by:
 Opening a branch/ subsidiary abroad for processing, packaging, assembly or even complete
manufacturing through direct investment.
 Negotiating licensing/ franching arrangements whereby foreign enterprises are granted the right to

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 use the exporting company's know-how's, viz., patents, processes or trademarks with or without

financial investment.

 Establishing joint ventures in foreign countries for manufacturing and or marketing and offering
consultancy services and undertaking turnkey projects broad. Depending upon the degree of firm‟s
involvement, there may be several variations of these arrangements.

CHARACTERISTICS (OR) FEATURES OF INTERNATIONAL TRADE

1. Sovereign Political Entities – There are more restrictions imposed on the country for
importing and exporting the goods and services in order to safeguard their national products. These
restrictions include the following.

2. Imposition of Tariffs & Customs Duties – These are levied both on import and on export of
goods and services in order to make them costly in the importing country and not to ban their entry
into the country completely. GATT – General Agreement on Tariffs and Trade has reduced
significantly in tariff globally and on regional basis due to the emergence of regional
economic grouping.

3. Restrictions on Qualities – are imposed in order to protect home industries from the competition
of the foreign commodities.

4. Exchange control and quantitative controls – are put together along with the grant of import
license.

5. Legal Systems – Presence of various legal systems makes the task of businessmen more
difficult. Most of the countries follow English common law as modified from time to time.

6. Monetary systems – The exchange rates are fixed under the rules framed by the International
Monetary Fund. Some countries follow multiple rates, in which different rates are applicable
to different transactions.

7. Mobility of factors on production – Recently the movement of labour has increased manifold
with the advent of air transport. The development of International banking has also increased the
mobility of capital and labour.

8. Market Considerations – The demand pattern, channels of distribution, methods of promotion

etc, are different from market to market.

9. Procedures and documentations – The different laws and customs of trade in each country

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 demand different procedures and documentary requirements for the import and export of the
goods and services

International Marketing vs. Domestic Marketing:

There are a number of similarities and differences between international and domestic marketing.

1. Both in domestic marketing and international marketing success depend upon satisfying the basic
requirements of consumers. This necessarily involves finding out what the buyers want and
meeting their needs accordingly.
2. It is necessary to build goodwill both in the domestic market and international market. If a firm is
able to develop goodwill of consumers or customers, its tasks will be simpler than the one, which

has not been able to do so.

3. Research and development for product development and modification is necessary both for
international marketing and domestic marketing.
Difference between international marketing and domestic
marketing.
1. Sovereign Political Entities:
Each country has is a sovereign political entity and goods and services had to move across national

boundaries. As a result, they may have to face a number of restrictions. This may fall in any of the
following categories;Tariffs and customs duties Quantitative restrictions Exchange controls Local
Taxes.
2. Different Legal Systems:

Each country has its own legal system and it differs from country to country. The existence of
different legal systems makes the task of businessmen more difficult as they are not sure as to which
particular system will apply to their transactions. In the case of domestic marketing the buyers are
aware of the legal systems in their country.
3. Cultural Differences:

In domestic marketing there is only one nation, same language and culture where as at international
marketing many languages and different cultures.
4. Different Monetary Systems:

Each country has its own monetary system and the exchange value of each country's currency is
different from that of the other. The exchange rates between currencies fluctuate every day. In case of
domestic marketing there is only one currency prevailing in the country.

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 5. Differences in the Marketing infrastructure:

The availability of the marketing facilities available in different countries may vary widely. For
example, an advertisement medium very effective in one market may not be available or may be
under developed in another market.
6. Trade Restrictions:

Trade restrictions, particularly import controls are a very important problem which an international
marketer faces.
7. Transport Cost:

In International trade, transport cost is a major marketing expense where as in domestic trade
transport cost influences only to certain extent.
8. Procedures and Documentations:

Each country has its own procedures and documentary requirements and traders have to comply
with these regulations if they want to export or import goods from foreign countries.
9. Degree of Risk:
There is a greater degree of ri involved in international marketing than in domestic marketing
due to Large volume of transactions
 Higher value of transaction Longer time period
 More time of transit Longer credit period
 Comparatively less knowledge Exchange fluctuations.
10. Stability in Business Environment:

In domestic marketing there is relatively stable business environment. At international marketing

multiple environments, many of which are likely instable.
11. Transition from Domestic market to international market

The Decision to enter foreign markets must be based on strong economic factors. Temperamental
decision to export is transient in character and totally unsuitable for export marketing. Success in
exporting requires total involvement and determination, which can come only out of basic
economic necessity as perceived by the corporate unit.
They grouped as
 Pre-export behaviour
 Motivation to Export.

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Pre-Export Behaviour:

Every firm at some point of time starts as a non-exporter. The point to be studied is what made some of
these firms get involved in export business. This must give a clue to the question as to whether a present
non-exporter will become an exporter and if so why and when. The factors, which influence a non-
exporting firm's decision to go in for export business, can be classified under the following categories:
1. Firm characteristics: Firm characteristics include product characteristics; size and growth of the
domestic market, optimum scale of production, and potential export markets. If the firm is
manufacturing a product, which is internationally marketable, and the present and future market
prospects in the domestic market are not much encouraging, the motivation of the firm to get
involved in export business will be considerable.
2. Perceived External Export Stimuli: This will include fortuitous order, market opportunity and
government's stimulation in the form of incentives and assistance.
3. Perceived Internal Export Stimuli: This refer to the management's expectations about the effects of
exports on the firm's business. This covers the level of capacity utilization, the higher level of
profits and the growth objectives of the firm.

4. Level of Organizational commitment: The decision makers must agree on the level of
commitment. This is crucial because it will determine whether adequate resources will be made
available for embarking on international marketing. Resources will be required for hiring new staff
specialized in international marketing, hiring of consultants for carrying out overseas market
potential studies etc.,
2. Motivation to Export: (Economic reasons)

There are some basic economic reasons which might influence a firm decision regarding export business:
These are under:
 Relative Profitability: The rate of profit to be earned from export business may be higher than the
corresponding rate on the domestic sales.
 Insufficiency of Domestic Demand: The level of domestic demand may be insufficient for utilizing
the installed capacity in full. Export business offers a suitable mechanism for utilizing the unused
capacity. This will reduce costs and improve the overall profitability of the firm. Recession in the
domestic market often serves as a stimulus to export ventures.
 Reducing business risks: When a firm is selling in a number of markets, the downward fluctuations
in sales in one market, which may be the domestic market, may be fully or partly counter balanced
by a rise in the sales in other markets. Secondly, geographic diversification also provides the
momentum to growth in as much as a single or few markets will have only limited absortive
capacity.

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  Legal restrictions: Governments may impose certain restrictions on further growth and capacity
expansion of some firms within the domestic market in order to achieve certain social objectives.
But there may not be any such restrictions, if the additional capacity is utilized for exports. Then
the firm may be tempted to export its products abroad.
 Obtaining imported inputs: Nations have to pay for imports of materials, technology or processes
not available within their national boundaries. Governments, therefore, may be compelled to
impose export obligations on the firms, especially those in need of imported inputs. In other words,
in order to import, the firms will have to export.
 Social responsibility: Sometimes businessmen themselves feel a sense of responsibility and
contribute towards the national exchequer by increasing their exports. They also build up their
image in domestic marketing by their export activities. They also look at exporting to attain status
and prestige.

 Increased productivity: Increased productivity is necessary for ultimate survival of a firm. This will
lead the firm to increase production and then move to export business. To meet the increased costs
of Research and Development, larger markets become a necessity and exports become
unavoidable.Technological improvement: Entry to export market may enable a firm to pick up new
produce ideas and to add to product line, improve its product, reduce costs and discover new
applications for its product.
Special difficulties in international marketing

There are a number of difficulties in undertaking international business. Some of them the special
difficulties are as follows:
1. Quantitative restrictions to protect local industries.
2. Government regulations restricting imports by way of import licenses, etc. Exchange controls.
3. Local taxes like sales taxes on imported goods.
4. Different monetary systems like Dollars in USA, Sterling in UK, YEN in Japan.
5. Different legal system regarding import and export of goods.
6. Differences in procedures and documentation.
7. Differences in market characteristics.
8. Lower mobility of factors of production.
9. Cultural dimensions of international marketing.
10. Economic Unions.
11. Trade barriers - Tariff and non tariff barriers.
12. Lack of export incentives to exporters.
13. Lack of adequate export financing especially for small scale industries.

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14. Complications of Exporting.
15. Paper work is more in export business.
16. Competition from local exporters, competition from exporters from other countries and
competition from producers of goods in the importing countries.
17. Shipping and freight problems.
18. Non-availability of latest information about the market conditions, etc.

METHODS OF ENTERING FOREIGN MARKET

Exporting Surplus Production
a. Most common and simplest way for entering the overseas markets for the first time.
b. Risk element is minimum.
c. By meeting consumers directly in overseas markets.
d. By selling the goods to an import house or buying agents.
e. By selling the goods to an exporting house.
Licensing : Formal and Legitimate entry
A License is issued to a foreign firm to manufacture the product by using the firm‟s name, patent,
trademark and technology under certain agreements.
 The license issuing company will get an agreed percentage on the sales as service charge or
remuneration.
 This arrangement is possible only
 When there are curbs on imports.
 When a country is sensitive to foreign ownership.
 When a firm wants to protect its patents and trade marks against cancellation or
imitation.
 Suitable for small and medium sized industry and does not require huge capital.

Collaboration or Joint Venture : Refers to joining the management and sharing the profit of the firm.
Key Reasons for the popularity of this strategy
1. Insufficient capital or Human Resources
2. Better future for the company in the foreign market
3. Intention of a company to take advantage of the local firm‟s distribution system.
4. Helps to minimize the political and economic risk
5. Implications are no absolute control
6. Loss of freedom of action in production or marketing operations.

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Production in a foreign country – A Firm finds that it is not possible to export goods due to
1. High export expenditure
2. The cost of production is low(Material, Labour)
3. Tariff and Non-tariff barriers
4. Planning to manufacture and market the goods locally in order to avoid importing country‟s
barriers and other restrictions.
5. Suitable when the market is for a special type of goods.

5. Management Contract
1. Not a common method.
2. Entry is due to the external political pressures from the host country government.
3. Normally adopted when the firm‟s investments in a foreign country are expropriated by
the host government and when no suitable and adequate managerial capacity exists in
the host country.
4. The firm gets fees for specific time.
6. Providing Consultancy Services and Undertaking Turnkey Projects
The country which do not have technical field offer facilities to firms from other countries, invite
the host countries to participate in their development programmes through their expertise services. The
firm with expertise will enter contracts with the host country‟s which may include
 Turnkey Project – Includes the provision of services like designing, civil, construction,
erection etc.
 Consultancy Service Contract – includes consultation for the commissioning of plant
and feasibility report, advice to the project authority etc.
 Engineering Service Contract – includes commissioning of plant or supervision
services like designing etc.
 Civil Construction Contract – They are with or without preparation of designs or drawings.

PROBLEMS IN INTERNATIONAL TRADE

 Political and Legal Differences – Generally the political and legal climate of foreign markets
are different. The political and Legal environment will not be uniform in all provinces of
many home markets.
 Problems due to Cultural Differences – The cultural differences create problems in International
marketing.
 Problem due to Economic Differences

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  Change by Currency – The currency unit differs from nation to nation, leads to currency
convertibility, besides the problems of exchange rate fluctuation.
 Problems relating to language
 Lack of Proper Marketing facilities - Example an advertising medium very effective in one
market may not be effective in another market.
 Restriction relating to Trade
 Transport Cost.

THEORIES OF INTERNATIONAL BUSINESS

1. Theories of Trade Mercantilism
2. Theories of Absolute Advantage (Adamsmith)
3. Theory of comparative advantage (Ricardo -1817)
4. Product Life Cycle Theory
5. Porter’s National Competitive Advantage Theory

1. Theories of trade mercantilism:

Developed in the sixteenth century, mercantilism was one of the earliest efforts to develop an economic
theory. This theory stated that a country‟s wealth was determined by the amount of its gold and silver
holdings. In it‟s simplest sense, mercantilists believed that a country should increase its holdings of gold
and silver by promoting exports and discouraging imports. In other words, if people in other countries
buy more from you (exports) than they sell to you (imports), then they have to pay you the difference in

gold and silver. The objective of each country was to have a trade surplus, or a situation where the value
of exports are greater than the value of imports, and to avoid a trade deficit, or a situation where the value
of imports is greater than the value of exports.
 Mercantile trade theory emerged in England in the mid of 16 century.

 Gold and silver is the main national wealth and essentials of commerce.

 During 17 century gold and silver became the currency of trade between countries and they
tried to earn gold and silver by exporting and importing.
 To discourage imports and to achieve surplus government imposed “Tarriffs and Quotas
and subsiding export” came into existence.

Note : A closer look at world history from the 1500s to the late 1800s helps explain why mercantilism
flourished. The 1500s marked the rise of new nation-states, whose rulers wanted to strengthen their
nations by building larger armies and national institutions. By increasing exports and trade, these

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rulers were able to amass more gold and wealth for their countries. One way that many of these new
nations promoted exports was to impose restrictions on imports. This strategy is
called protectionism and is still used today. Nations expanded their wealth by using their colonies
around the world in an effort to control more trade and amass more riches. The British colonial
empire was one of the more successful examples; it sought to increase its wealth by using raw
materials from places ranging from what are now the Americas and India.

2. Theories of absolute advantage (Adam Smith)

Adam Smith‟s „Absolute Advantage theory‟ stated that a nation‟s wealth shouldn‟t be judged by how
much gold and silver it had but rather by the living standards of its people. In 1776, Adam Smith
questioned the leading mercantile theory and offered a new trade theory called absolute advantage, which
focused on the ability of a country to produce a good more efficiently than another nation. Smith
reasoned that trade between countries shouldn‟t be regulated or restricted by government policy or
intervention. He stated that trade should flow naturally according to market forces. By specialization,
countries would generate efficiencies, because their labour force would become more skilled by doing the
same tasks . Production would also become more efficient, because there would be an incentive to create
faster and better production methods to increase the specialization.
Example

In a hypothetical two-country world, if Country A could produce a good cheaper or faster (or both) than
Country B, then Country A had the advantage and could focus on specializing on producing that good.
Similarly, if Country B was better at producing another good, it could focus on specialization as well.
Smith reasoned that with increased efficiencies, people in both countries would benefit and trade should
be encouraged.

3. Theory of Comparative Advantage (Ricardo -1817)

David Ricardo, an English economist, introduced the theory of comparative advantage in 1817. Ricardo
reasoned that even if Country A had the absolute advantage in the production of both products,
specialization and trade could still occur between two countries. The challenge to the absolute advantage
theory was that some countries may be better at producing both goods and, therefore, have an advantage
in many areas. In contrast, another country may not have any useful absolute advantages. To answer this
challenge, Comparative advantage occurs when a country cannot produce a product more efficiently than
the other country; however, it can produce that product better and more efficiently than it does other
goods. The difference between these two theories is subtle. Comparative advantage focuses on the
relative productivity differences, whereas absolute advantage looks at the absolute productivity.

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Example to illustrate the subtle difference between absolute advantage and comparative advantage. Sonu
is a singer who charges Rs. 5000 per hour for his services. Sonu can also play guitarist than the Guitarist
in his troop who is paid Rs. 500 per hour. Even though Sonu clearly has the absolute advantage in both
skill sets, should he do both jobs? The answer is No. For every hour Sonu decides to play keyboard, he
would be giving up Rs.4500 per hour income. His productivity and income will be highest if he decides
to sing in the troop and hire a skilled guitarist for his troop. Now If both Sonu and his guitarist decide to
do their task they will earn more as a team.This is comparative advantage. Hence may be a person or a
country it has to specialize in doing what they do relatively better than others.

4. Factor Endowment/ Factor Proportion Theory.

The Hecksher-Ohlin theory of factor endowment in international trade is used to determine comparative
advantage of various countries. According to the theory, a country will have a comparative advantage in a
good produced by factors it is abundantly endowed with. While dealing with this theory we must keep in
mind that factor endowments are meant to be dealt in ratios. The theory states that the differences in the
costs of production stems from the differences in the supply of factor endowments
For example, a country may have large amounts of both capital and labour, however, one factor may be
proportionally more than the other. This is what makes the difference.
Note: The factors of production in an economy are labour, capital, entrepreneurship and land. Another
phrase for factors of production is factor endowment. Factor endowments are essentially factors of
production used by an economy to make the most of manufacturing. Abundance of these resources often
leads to countries becoming prosperous and wealthy nations.
5. Product Life Cycle Theory

Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory in the
1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct

stages: (1) new product, (2) maturing product, and (3) standardized product. The theory assumed that
production of the new product will occur completely in the home country of its innovation.

 In the 1960s this was a useful theory to explain the manufacturing success of the United States. US
manufacturing was the globally dominant producer in many industries after World War II.
 It has also been used to describe how the personal computer (PC) went through its product cycle.
The PC was a new product in the 1970s and developed into a mature product during the 1980s and
1990s.
 Today, the PC is in the standardized product stage, and the majority of manufacturing and
production process is done in low-cost countries in Asia and Mexico.

The product life cycle theory has been less able to explain current trade patterns where innovation and

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manufacturing occur around the world. For example, global companies even conduct research and
development in developing markets where highly skilled labor and facilities are usually cheaper. Even
though research and development is typically associated with the first or new product stage and therefore
completed in the home country, these developing or emerging-market countries, such as India and China,
offer both highly skilled labor and new research facilities at a substantial cost advantage for global firms.

6. Porter’s National Competitive Advantage Theory

In the continuing evolution of international trade theories, Michael Porter of Harvard Business School
developed a new model to explain national competitive advantage in 1990. Porter’s theory stated that a
nation’s competitiveness in an industry depends on the capacity of the industry to innovate and
upgrade. It is also called Diamond‟s approach. His theory focused on explaining why some nations are
more competitive in certain industries. To explain his theory, Porter identified four determinants that he
linked together. The four determinants are (1) local market resources and capabilities, (2) local market
demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics.

1. ocal market resources and capabilities (factor conditions). Porter recognized the value of the factor
proportions theory, which considers a nation‟s resources (e.g., natural resources and available

labor) as key factors in determining what products a country will import or export. Porter added to
these basic factors a new list of advanced factors, which he defined as skilled labor, investments in
education, technology, and infrastructure. He perceived these advanced factors as providing a country
with a sustainable competitive advantage.
2. Local market demand conditions. Porter believed that a sophisticated home market is critical to
ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose
domestic markets are sophisticated, trendsetting, and demanding forces continuous innovation and the
development of new products and technologies. Many sources credit the demanding US consumer
with forcing US software companies to continuously innovate, thus creating a sustainable competitive
advantage in software products and services.
3. Local suppliers and complementary industries. To remain competitive, large global firms benefit
from having strong, efficient supporting and related industries to provide the inputs required by the

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 industry. Certain industries cluster geographically, which provides efficiencies and productivity.
4. Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and
industry rivalry. Local strategy affects a firm‟s competitiveness. A healthy level of rivalry between
local firms will spur innovation and competitiveness.
In addition to the four determinants of the diamond, Porter also noted that government and chance
play a part in the national competitiveness of industries. Governments can, by their actions and
policies, increase the competitiveness of firms and occasionally entire industries. Porter‟s theory,
along with the other modern, firm-based theories, offers an interesting interpretation of international
trade trends. Nevertheless, they remain relatively new and minimally tested theories.
5. Global Strategic Rivalry Theory

Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul
Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive
advantage against other global firms in their industry. Firms will encounter global competition in their
industries and in order to prosper, they must develop competitive advantages. The critical ways that firms
can obtain a sustainable competitive advantage are called the barriers to entry for that industry.
The barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry or
new market. The barriers to entry that corporations may seek to optimize include:
 Research and development,

 The ownership of intellectual property rights,

 Economies of scale,
 Unique business processes or methods as well as extensive experience in the industry, and
 The control of resources or favorable access to raw materials

Importance of export business in India

 Meeting imports of industrial needs: it is essential to imports capital equipments, raw materials of
critical nature, technical know-how for building the industrial base in the country for rapid
industrialization and developing the necessary infrastructure.
 Debt Servicing : India has been receiving external aid over the years for its industrial development
resulting in the need for debt servicing. Therefore, it is essential to concentrate on export
earnings to cover both imports and debt servicing.
 Fast Economic Growth : The countries that would like it grow economically should create
exportable surpluses i.e., surpluses after meeting domestic demands.
 Optimum Use of Natural Resources : Foreign exchange can be utilized in establishing
industrial unit based on different natural resources availability in the country by making the
necessary imports of plant and machinery for the purpose.

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 Meeting Competitions: To improve the exports, the government announces several concessions and
incentives. By utilizing these concessions domestic producers concentrates his mind towards the
improvement of quality of goods produced and reduces the cost of production so as to face the acute
competitive situation in the foreign markets by making intensive use of latest technology.
 Increasing Employment Opportunities : The problem of employment and
underemployment can be solved to some extent by increasing the level of export.
 Increasing in National Income: A country‟s national income increases to a sizable extent
through organized export marketing.
 Increasing the standard of Living: International trade improves the standard of living of people in
a country as it is able to meet the demand of the people and industries in a country.
o Import of necessary items.

o Purchasing power increases.

o Widespread industrialization

o Competitive quality

 Develops International Collaboration: To settle international issues some countries from

group or a common platform to discuss various issues concerning their international trade and take
decision. OPEC & EEC are such groups.
 Develops Cultural Relations: Local representatives and other related persons come into contact with
foreign representatives and know their habits and customs.
 Brings Political Peace: Various countries with different political ideologies import or export their
product, which enhances the chances of peace.

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 SCHOOL OF MANAGEMENT STUDIES
DEPARTMENT OF BUSINESS ADMINISTRATION

UNIT 2 –GLOBAL BUSINESS MANAGEMENT -

SBAA5301

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UNIT 2
Environment of IB
Political –Legal-Technological- Cultural- Demographic and Economic environment , cultural management-
Models to aid international managers- Modes of international business
Organizing international business-international designs- factors influencing choice of a design –issues in
organization design – conflict management – reconciliation- adjudication and arbitration issues, supporting
institutions – negotiation

International Business Environments

There are numerous types of business environments, however the political, the cultural, and the economic
environments are the prime ones. These factors influence the decision-making process of an international
business firm. It is important to note that the types of environments we discuss here are interlinked;
meaning one’s state affects the others in varying dimensions.

The Political Factors

The political environment of a nation affects the legal aspects and government rules which a foreign firm
has to experience and follow while doing business in that nation. There are definite legal rules and
governance terms in every country in the world. A foreign company that operates within a particular
country has to abide by the country’s laws for the duration it operates there.

Political environment can affect other environmental factors −

 Political decisions regarding economy can affect economic environment.

 Political decisions may affect the socio-cultural environment of a nation.
 Politicians may affect the rate of emergence of new technologies.
 Politicians can exert influence in the acceptance of emerging technologies.

There are four major effects of political environment on business organizations −

1. Impact on Economy − The political conditions of a nation have a bearing on its economic status.
For example, Democratic and Republican policies in the US are different and it influences various
norms, such as taxes and government spending.

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 2. Changes in Regulation − Governments often alter their decisions related to business control. For
example, accounting scandals in the beginning of the 21st century prompted the US SEC turn more
mindful on the issues of corporate compliance. Sarbanes-Oxley compliance regulations (2002) were
social reactions. The social environment demanded the public companies to be more responsible.

3. Political Stability − Political stability effects business operations of international companies. An

aggressive takeover overthrowing the government could lead to a disordered environment,
disrupting business operations. For example, Sri Lanka’s civil war and Egypt and Syria disturbances
were overwhelming for businesses operating there.

4. Mitigation of Risk − There are political risk insurance policies that can mitigate risk. Companies
with international operations leverage such insurances to reduce their risk exposure.

2. The Economic Factors

Economic factors exert a huge impact on international business firms. The economic environment includes
the factors that influence a country's attractiveness for international business firms.

1. Business firms seek predictable, risk-free, and stable mechanisms. Monetary systems that
acknowledge the relative dependence of countries and their economies are good for a firm. If an
economy fosters growth, stability, and fairness for prosperity, it has a positive effect on the growth
of companies.

2. Inflation contributes hugely to a country's attractiveness. High rate of inflation increases the cost of
borrowing and makes the revenue contract in domestic currency. It exposes the international firms
to foreign-exchange risks.

3. Absolute purchasing power parity is also an important consideration. The ratio of exchange rate
between two particular countries is identical to the ratio of the price levels. The law of one price
states that the real price of a product is same across all nations.

4. Relative purchasing power parity (PPP) is valuable for foreign firms. It asks how much money is
needed to buy the same goods and services in two particular countries. PPP rates prompt
international comparisons of income.

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3. The Cultural Factors

Cultural environments include educational, religious, family, and social systems within the marketing
system. Knowledge of foreign culture is important for international firms. Marketers who ignore cultural
differences risk failure.

 Language − There are nearly 3,000 languages in the world. Language differences are important in
designing advertising campaigns and product labels. If a country has several languages, it may be
problematic.

 Colors − It is important to know how people associate with colors. For example, purple is
unacceptable in Hispanic nations because it is associated with death.

 Customs and Taboos − It is important for marketers to know the customs and taboos to learn what
is acceptable and what is not for the marketing programs.

 Values − Values stem from moral or religious beliefs and are acquired through experiences. For
example, in India, the Hindus don’t consume beef, and fast-food restaurants such as McDonald's
and Burger King need to modify the offerings.

 Aesthetics − There are differences in aesthetics in different cultures. Americans like suntans, the
Japanese do not.

 Time − Punctuality and deadlines are routine business practices in the U.S. However, Middle East
and Latin American people are far less bound by time constraints.

 Religious Beliefs − Religion can affect a product’s labelling, designs, and items purchased. It also
affects the consumers' values.

 Cultural Differences

 Ireland’s evening meal is called tea, not dinner.

 If you nod in Bulgaria, it means "no" and moving the head from one side to the other means "yes".

 Pepsodent toothpaste did not sell well in Southeast Asia, as it promised white teeth. Black or yellow

teeth are symbols of prestige there.

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5.Protectionism: It is a policy of protecting the domestic businesses from foreign competition by applying
tariffs, import quotas, or many types of other restrictions attached to the imports of foreign competitors’
goods and services.

There are many protectionist policies in place in many nations despite the fact that there is a popular
consensus that the world economy, as a whole, benefits from free trade.

5. Government-levied tariffs − The best form of protectionist measure is the government-levied tariffs.
The common practice is raising the price of the imported products so that they cost more and hence become
less attractive than the domestic products. There are many believers that protectionism is a helpful policy
for the emergent industries in the developing nations.

 Import quotas − Import quotas are the other forms of protectionism. These quotas limit the amount

of products imported into a country. This is considered to be a more effective strategy than
protective tariffs. Protective tariffs do not always repel the consumers who are ready to pay higher
prices for imported goods.

 Mercantilism − Wars and recessions are the major reasons behind protectionism. On the other

hand, peace and economic prosperity encourage free trade. In 17th and 18th centuries, the European
monarchies used to rely heavily on protectionist policies. This was due to their aim to increase trade
and improve the domestic economies. These (currently discredited) policies are called mercantilism.

 Reciprocal trade agreements − Reciprocal trade agreements limit the protectionist measures in lieu

of eliminating them fully. However, protectionism still exists and is heard when economic hardships
or joblessness is aggravated by foreign competition.

 Currently, protectionism is in a unique form. Economists term the form as administered

protection. Most rich nations have fair trade laws. The announced purpose of Free Trade Laws is
twofold −

 First is to make sure that foreign countries do not subsidize exports so that market incentives are not

distorted and hence efficient allocation of activity among the countries is not destroyed.

 The second purpose is to assure that international companies do not dump their exports in an

aggressive manner.

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6. Demographic factors:
Demographic factors such as size of the population, population growth rates, age composition, ethic
composition, family size, family life cycle, income levels, have very significant implications for business.
The demographic environment differs from country to country and from place to place within the same
country or region. Further, it may change significantly over time. Because of the diversity of the
demographic environment companies are sometimes compelled to adopt different strategies within the same
market

7. Competiton:
Competition will also influence the international marketing. As like domestic marketing the trader always
aware of his competitors. But the quantum of competitors is more in international marketing than domestic
marketing. Normally by the following ways the international merchant will face the competitors.
 Competition vis-à-vis producers in the importing country.
 Competition vis-à-vis exporter from the competing countries. Competition vis-à-vis
other exporters from one's own country.
 The exporters have no control over these types of competition and hence they have to compete with
all the three types of competitions.
8. Logistics
Logistics is that part of the supply chain process that plans, implements, and controls the efficient, effective
forward and reverses flow and storage of goods, services, and related information between the point of
origin and the point of consumption in order to meet customers' requirements. The concept of logistics play
vital role in international marketing by the ways sense.
The merchant has to seek the availability of required type of transport such as sea, air freezer space, etc.
9. Cost of transportation.
Unless the exporters are in a position to meet the above requirements of transport facilities and costs they
cannot export their products to the target markets.
10. Risks
There is a greater degree of risk involved in international marketing than in domestic marketing due to
 Large volume of transactions
 Higher value of transaction
 Longer time period
 More time of transit
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  Longer credit period
 Comparatively less knowledge
 Exchange fluctuations.
 Political risks
 Commercial risks
 Act of nature
 Act of enemies

The exporters have to face these risks in the international markets. These risks can be covered by taking
insurance policies from the ECGC and General Insurance.

MODERN THEORIES

There are many theories and concepts associated with international trade. When companies want to go
international, these theories and concepts can guide them to be careful and prepared.

There are four major modern theories of international trade.

1. The Heckscher and Ohlin Model

The Heckscher–Ohlin theory deals with two countries’ trade goods and services with each other, in
reference with their difference of resources. This model tells us that the comparative advantage is actually
influenced by relative abundance of production factors. That is, the comparative advantage is dependent on
the interaction between the resources the countries have.Moreover, this model also shows that comparative
advantage also depends on production technology (that influences relative intensity). Production technology
is the process by which various production factors are being utilized during the production cycle. The
Heckscher–Ohlin theory tells that trade offers the opportunity to each country to specialize. A country will
export the product which is most suitable to produce in exchange for other products that are less suitable to
produce. Trade benefits both the countries involved in the exchange.The differences and fluctuations in
relative prices of products have a strong effect on the relative income gained from the different resources.
International trade also affects the distribution of incomes.

2. The Samuelson and Jones Model

According to Samuelson–Jones Model, the two major reasons for which trade influences the income
distribution are as follows −
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  Resources are non-transferable immediately and without incurring costs from one industry to

another.

 Industries use different factors. The change in the production portfolio of a country will reduce the

demand for some of the production factors. For other factors, it will increase it.

 There are three factors in this model − Labor (L), Capital (K), and Territory (T).

 Food products are made by using territory (T) and labor (L), while manufactured goods use capital
(K) and labor (L). It is easy to see that labor (L) is a mobile factor and it can be used in both sectors.
Territory and capital are specific factors.

 A country with abundant capital and a shortage of land will produce more manufactured goods than

food products, whatever may the price be. A country with territory abundance will produce more
foods.

 Other elements being constant, an increase in capital will increase the marginal productivity from

the manufactured sector. Similarly, a rise in territory will increase the production of food and reduce
manufacturing.

 During bilateral trade, the countries create an integrated economy where manufactured goods and

food production is equal to the sum of the two countries’ productions. When a nation does not trade,
the production of a product will equal its consumption.

 Trade gains are bigger in the export sector and smaller in the competing import sector.

3. The Krugman and Obsfeld Model

The Krugman–Obsfeld Model is the standard model of trade. It implies two possibilities −

 The presence of the relative global supply curve stemming from the possibilities of production.

 The relative global demand curve arising due to the different preferences for a selected product.

 The exchange rate is obtained by the intersection between the two curves. An improved exchange

rate – other elements being constant – implies a substantial rise in the welfare of that country.

4. The Michael Porter Model

Michael Porter identified four stages of development in the evolution of a country. The dependent phases
are − Factors, Investments, Innovation, and Prosperity.Porter talked extensively on attributes related
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to competitive advantages which an organization can achieve relative to its rivals which consists of Lower
Cost and Differentiation. These advantages derive from factor(s) that permit an organization to outperform
its competition, such as superior market position, skills, or resources.In Porter's view, the strategic
management of businesses should be concerned with creating and continuing competitive advantages.

GLOBAL COMPETITIVENESS

The International Institute for Management Development defines competitiveness as "a field of economic
knowledge which analyzes the facts and policies that shaped the ability of a nation to create and maintain
an environment that sustains more value creation for its enterprises and more prosperity for its people." The
World Economic Forum defines global competitiveness as "the ability of a country to achieve sustained
high rates of growth in gross domestic product (GDP) per capita."

Factors Affecting Global Competitiveness

Business firms abide by the rules and regulations formed by the government. The government assumes a
very important role in enhancing competitiveness. Governments must promote trade by reengineering
systems and procedures. Governments should be more responsive, reducing bureaucratic red tape.

 Physical infrastructure plays a critical role in improving the global competitiveness of a country.
This will lead to the smoother movement of people, products, and services, facilitating faster
delivery of goods and services.

 The business environment should be as such that it improves coordination among public-sector
agencies. The best methods include providing support and incentives for R&D activities, HRD and
education, encouraging innovativeness and creativity, facilitating the improvement of industrial
blocks, and productivity enhancements of SMEs.

 High total factor productivity (TFP) is a boon for economic growth. It shows the synergy and
efficiency of both capital and HR utilization and promotes national competitiveness.

 Productivity campaigns are important because they promote public-awareness and provide
mechanisms to use the productivity tools and techniques.

 Intensifying R&D activities that contribute to creativity, innovation, and indigenous technological
development is also an important factor.

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  Improving the capacities of SMEs to become increasingly productive suppliers and exporters
makes strategic sense.

MODES OF ENTRY IN AN INTERNATIONAL TRADE

The long-term advantages of doing international business in a particular country depend upon the following
factors −
 Size of the market demographically
 The purchasing power of the consumers in that market
 Nature of competition
By considering the above-mentioned factors, firms can rank countries in terms of their attractiveness and
profitability. The timing of entry into a nation is a very important factor. If a firm enters the market ahead
of other firms, it may quickly develop a strong customer base for its products.
There are seven major modes of entering an international market. In this chapter, we will take up each
mode and discuss their advantages and disadvantages.
The various methods of market entry open to firm in a given country are:
 Exporting
 Licensing
 Franchising
 Joint Venture
 Foreign subsidiaries
 Special Modes
1. Exporting
An item produced in a domestic market can be sold abroad. Storing and processing is mainly done in the
supplying firm’s home country. Export can increase the sales volume. When a firm receives canvassed
items and exports them, it is called Passive Export.
Alternately, if a strategic decision is taken to establish proper processes for organizing the export functions
and for obtaining foreign sales, it is known as Active Export.
 Advantages − Low investment; Less risks
 Disadvantages − Unknown market; No control over foreign market; Lack of information about
external environment
2. Licensing

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In this mode of entry, the manufacturer of the home country leases the right of intellectual properties, i.e.,
technology, copyrights, brand name, etc., to a manufacturer of a foreign country for a predetermined fee.
The manufacturer that leases is known as the licensor and the manufacturer of the country that gets the
license id known as the licensee.
 Advantages − Low investment of licensor; Low financial risk of licensor; Licensor can investigate
the foreign market; Licensee’s investment in R&D is low; Licensee does not bear the risk of product
failure; Any international location can be chosen to enjoy the advantages; No obligations of
ownership, managerial decisions, investment etc.
 Disadvantages − Limited opportunities for both parties involved; Both parties have to manage
product quality and promotion; One party’s dishonesty can affect the other; Chances of
misunderstanding; Chances of trade secrets leakage of the licensor.
3. Franchising
In this mode, an independent firm called the franchisee does the business using the name of another
company called the franchisor. In franchising, the franchisee has to pay a fee or a fraction of profit to the
franchisor. The franchisor provides the trademarks, operating process, product reputation and marketing,
HR and operational support to the franchisee.
Note − The Entrepreneur magazine’s top ranker in "The 2015 Franchise 500" is Hampton Hotels. It has
2,000 hotels in 16 countries.
 Advantages − Low investment; Low risk; Franchisor understands market culture, customs and
environment of the host country; Franchisor learns more from the experience of the franchisees;
Franchisee gets the R&D and brand name with low cost; Franchisee has no risk of product failure.
 Disadvantages − Franchising can be complicated at times; Difficult to control; Reduced market
opportunities for both franchisee and franchisor; Responsibilities of managing product quality and
product promotion for both; Leakage of trade secrets
4. Turnkey Project
It is a special mode of carrying out international business. It is a contract under which a firm agrees – for a
remuneration – to fully carry out the design, create, and equip the production facility and shift the project
over to the purchaser when the facility is operational.
5. Mergers & Acquisitions
In Mergers & Acquisitions, a home company may merge itself with a foreign company to enter an
international business. Alternatively, the home company may buy a foreign company and acquire the

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foreign company’s ownership and control. M&A offers quick access to international manufacturing
facilities and marketing networks.
 Advantages − Immediate ownership and control over the acquired firm’s assets; Probability of
earning more revenues; The host country may benefit by escaping optimum capacity level or
overcapacity level
 Disadvantages − Complex process and requires experts from both countries; No addition of
capacity to the industry; Government restrictions on acquisition of local companies may disrupt
business; Transfer of problems of the host country’s to the acquired company.
6. Joint Venture
When two or more firms join together to create a new business entity, it is called a joint venture. The
uniqueness in a joint venture is its shared ownership. Environmental factors like social, technological,
economic and political environments may encourage joint ventures.
 Advantages − Joint ventures provide significant funds for major projects; Sharing of risks between
or among partners; Provides skills, technology, expertise, marketing to both parties.
 Disadvantages − Conflicts may develop; Delay in decision-making of one affects the other party
and it may be costly; The venture may collapse due to the entry of competitors and the changes in
the partner’s strength; Slow decision-making due to the involvement of two or more decision-
makers.
7. Wholly Owned Subsidiary
Wholly Owned Subsidiary is a company whose common stock is fully owned by another company, known
as the parent company. A wholly owned subsidiary may arise through acquisition or by a spin-off from the
parent company A wholly owned subsidiary is a company whose common stock is completely (100%)
owned by a parent company.Wholly owned subsidiaries allow the parent company to diversify, manage,
and possibly reduce its risk.In general, wholly owned subsidiaries retain legal control over operations,
products, and processes.
ORGANIZATIONAL STRUCTURES
Every international business firm has to face various issues related to organizational policies. These
organizational issues are to be addressed carefully in order to keep the business healthy and profitable.
Although there are numerous issues, both small and big, we will primarily concentrate only on the major
issues that need to be addressed.
Centralization vs. Decentralization

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Centralization is the systematic and consistent reservation of authority at central points in the organization.
In centralization, the decision-making capability lies with a few selected employees. The implications of
centralization are
 Decision making power is reserved at the top level.
 Operating authority lies with the mid-level managers.
 Operation at lower level is directed by the top level.
Almost every important decision and operational activities at the lower level are taken by the top
management.
Decentralization is a systematic distribution of authority at all levels of management. In a decentralized
entity, major decisions are taken by the top management to build the policies concerning the entire
organization. Remaining authority is delegated to the mid- and lower-level managers.
Use of Subsidiary Board of Directors
International firms, especially the fully-owned ones, usually have a board of directors to oversee and direct
the top-level management. The major responsibilities of board-members are to −
 Advice, approve, and appraise local management.
 Help the management unit in providing response to local conditions.
 Assist the top management in strategic planning.
 Supervise the firm’s ethical issues.
ORGANIZATIONAL STRUCTURES
Any international business organization, depending on its requirements and operations, would have an
organization structure to streamline all its processes. In this section, we will try to understand some of the
major types of organizational structures.
onal structures.

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Initial Division Structures
Initial division structures are common in subsidiaries, export firms, and on-site
manufacturers. Subsidiaries that follow this kind of organization structure include firms where the main
export is expertise, for example, consultants and financial firms. Export firms include those having
technologically advanced products and manufacturing units. Companies having on-site manufacturing
operations follow this structure to cut down their costs.

International Division Structure

This structure is built to handle all international operations by a division created for control. It is often
adopted by firms that are still in the development stages of international business operations.
Advantages
 International attitude gets the attention of top management
 United approach to international operations
Disadvantages
 Separates domestic managers from their international counterparts
 Difficulty in ideating and acting strategically and in allocating resources globally

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Global Product Division
Global product divisions include domestic divisions that are allowed to take global responsibility for
product groups. These divisions operate as profit centers.

Advantages
 Helps manage product, technology, customer diversity
 Ability to cater to local needs
 Marketing, production, and finance gets a coordinated approach on a product-by-product, global
basis
Disadvantages
 Duplication of facilities and staff personnel within divisions
 Division manager gets attracted to geographic prospects and neglects long-term goals
 Division managers spending huge to tap local, not international markets

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Global Area Division
Global area division structure is used for operations that are controlled on a geographic rather than a
product basis. Firms in mature businesses with select product lines use it.

Advantages
 International operations and domestic operations remain at the same level
 Global division managers manage business operations in selected geographic area
 Ability to reduce cost per unit and price competitively
Disadvantages
 Difficult to align product emphasis in a geographically oriented manner.
 New R&D efforts are often ignored, as sale in mature market is where the focus is.

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Global Functional Division
This structure is to primarily organize global operations based on function; product orientation is secondary
for firms using global function division structure.
Advantages
 It emphasizes on functional leadership, centralized-control, and leaner managerial staff
 Favorable for firms that require a tight, centralized coordination and control over integrated
production mechanisms
 Helps those firms that need to transport products and raw materials between geographic areas
Disadvantages
 Not suitable for all types of businesses. Applicable to only oil and mining firms
 Difficult to coordinate manufacturing and marketing processes
 Managing multiple product lines can be challenging, as production and marketing are not integrated.

Mixed Matrix
This structure combines global product, area, and functional arrangements and it has a cross-cutting
committee structure.
Advantages
 Can be designed to meet individual needs
 Promotes an integrated strategic approach tailored to local needs and priorities
Disadvantages
 Complex structure, coordinating and getting everyone to work toward common goals becomes
difficult.
 Too many independent groups in the structure

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FACTORS AFFECTING ORGANIZATIONAL DESIGN
The choice of an appropriate organization design is dependent on a number of factors. These factors can
be internal or external. However the main factors affecting organizational design are : size,
environment, strategy, and technology. Organizational design is the process of deciding on and executing a
business’ structure.

Strategy and Organization Design

Organizational strategy means the way the business positions itself in its setting in relation to its
stakeholders, given the organization’s resources, capabilities, and mission. Of course structure follows
strategy due to the fact that organisational structures are designed to accomplish objectives by implementing

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the strategies. When strategy changes, structures must change. All strategy attempts to fulfill the vision, and
the organizational structure needs to support that effort.
For example, a business which has decided to expand to international markets might organize itself into
geographical divisions. Basically two kinds of strategies are preferred at present: Generic and Competence-
based strategies. To sum up, strategy influences structure and structure influences strategy.

Size and Organization Design

Size is one of the primary contingency factors that affect organizational design. The size contingency
means the total number of workers who are to be organized. The size and operational scale of a business is
crucial to take into consideration when determining the ideal organization structure. It is noticed that giant
companies differ structurally from small ones when it comes to division of labour, rules and regulations,
performance appraisal and budgeting procedures. The bigger the organization, the higher the requirement
for greater complexity and divisions to attain synergy. The organizational structure needs to be created in
ways that specifically optimize the effort and input in comparison to output. Bigger organizations with a
broad range of operational initiatives need mindful structural considerations to accomplish this optimization.
Environment Affects Organizational Design
Organizations are open systems so they have to receive different inputs from the environment and to sell a
variety of outputs to their environment. As a result, it is crucial to comprehend what the external
environment is and which elements are likely to be significant. Factors of the external environment – such
as uncertainty, level of competition, and resources – are important in figuring out organizational design. The
environment of an organization could possibly be described as general or specific. The general environment
consists of cultural, economic, legal-political, and societal conditions within the areas where the business
functions. The specific environment comprises its owners, company’s market, industry standards,
competition, suppliers, distributors and government agencies with which an organization will have to
interact to grow and survive. A company usually is a lot more worried over the composition of its specific
environment than of its general environment.
Technology Influences Organization Design
Technology affects organizational structure and productivity by improving the efficiency of
communication and resource flow. It is a major contingency factor. Two essential technological
contingencies which affect the type of organizational structure are the variety and analyzability of work
activities. Variety indicates the number of exceptions to standard procedure but can occur in the team or
work unit. Analyzability means to the extent that the transformation of input resources to outputs could be
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DR.TR.KALAI LAKSHMI/MBA/GLOBAL BUSINESS MANAGEMENT/ UNIT 2
decreased to a number of standardized steps. Businesses can make use of technological tools to boost
productivity and to initiate new and more efficient structural designs for the business, thus adding potential
sources of economic value and competitive advantage. Technology consists of the knowledge, machinery,
work procedures, and materials which transform the inputs to outputs.
A good example of an organizational structure which has surfaced from newer technological
developments is the virtual organization that links a network of organizations via the internet.
Customers and Markets
The organization structure is also influenced by the type of market and customers it serves, and in a
customer-responsive environment this will be one of the primary determining factors of structure. If the
organization provides services to a wide variety of clients at numerous locations, it will need to have several
branch officers, as do Banks, the Post Office and so on.
Age of the organisation
At the outset of a company’s life, its small size enables the organic structural qualities which promote
flexibility and responsiveness. As it ages and grows, a business starts to mechanize, adding rules,
procedures and policies; closely defined tasks; extensive internal systems of control and command chains.
In a nutshell, maturity brings about bureaucracy. In the maturity stage, rules, regulations, budgets, a refined
division of labour and control systems have established.
Products and Services
The structure could possibly be based on the specific services and products offered. Large and diverse
businesses have independent divisions since they are working with very different products and services. In
the same way, the Post Office has separate organizations for the different services it offers like mail
delivery, parcel delivery and counter services.

CONFLICT IN INTERNATIONAL BUSINESS:

Conflict is actual or perceived opposition of needs, values and interests. A conflict can be internal (within
oneself) e individuals). Conflict as a concept can help explain many aspects of social life such as social
disagreement, conflicts of interests, and fights between individuals, groups, or organizations. In political
terms, "conflict" can refer to wars, revolutions or other struggles, which may involve the use of force as in
the term armed conflict.

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Conflict also defines as natural disagreement resulting from individuals or groups that differ in
beliefs, attitudes, values or needs. It can also originate from past rivalries and personality differences.
Other causes of conflict include trying to negotiate before the timing is right or before needed
information is available.

Factors Causing Conflicts

In an international business, there can be various factors behind a conflict −

 There can be conflicts over control of resource or area.

 Conflicts can arise over the right to participate in decision-making.
 No clear-cut goals of the organization can lead to conflicts.
 No clear-cut agreements and contracts may lead to a legal mess, causing conflict.
 Misleading communication may confuse and create conflicts.
 Corruption may also create conflicts.

CONFLICT MANAGEMENT

Organizations face a great deal of conflict within and externally while doing business. Experts agree that
managing conflicts can be actually quite challenging. International businesses use five distinct forms of
solutions to solve conflicts. These are − avoidance, accommodation, competition, compromise, and
collaboration.

 The avoidance strategy tends to ignore the conflict. Therefore, it provides no resolution to the
disagreement. The real source of the conflict is never addressed which leaves the situation
unresolved. This ultimately drives the organization away from the work at hand and makes the
conflict worse than its initial state.
 The accommodation strategy believes in handling a problem as quickly as possible. In such a
strategy, one party accepts the other’s demands. Since one party usually gets ignored, it causes an
ineffective attempt at conflict management. It only shows that the dominant party continues to rule
over the compliant party. This strategy leaves the analysis to conclude the reasons and necessity of a
mutual resolution.
 Competition occurs as both parties attempt to maximize their own agenda. Competition can quickly
escalate into greed. It does not offer the parties an opportunity to benefit the organization. This
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DR.TR.KALAI LAKSHMI/MBA/GLOBAL BUSINESS MANAGEMENT/ UNIT 2
 strategy often becomes ineffective since the two parties are more concerned about winning than
arriving at the best possible solution.
 Compromise is preferably a good strategy, as both parties involved in the process are willing to
give and take. They are concerned about their own ambitions, yet at the same time, they pay heed to
the objectives of the organization. Each party involved in a compromise fully understands and
works for the best interest of the organization.
 The collaboration strategy starts with the manager taking a preliminary initiative step in handling
the issue already set. Each party wants to solve the problem by cultivating a pleasing solution
leading to a win-win situation. The international managers however must understand the “internal
environment in which the organization members function” to make use of this strategy. The
collaboration strategy is both assertive and cooperation; yet it smoothly takes the different points of
view into consideration. Collaboration is the most effective and efficient form of conflict
management.

Five A’s Technique

Borisoff and Victor identify five steps in the conflict management process that they called the "five A's" of
conflict management − assessment, acknowledgement, attitude, action, and analysis.

 Assessment − In the assessment step, the parties involved collect real information about the
problem. The parties involved also choose the appropriate conflict-handling modes and decide the

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DR.TR.KALAI LAKSHMI/MBA/GLOBAL BUSINESS MANAGEMENT/ UNIT 2
 central factors of the problem. They also indicate compromise-able areas, and the wants of each
party.
 Acknowledgement − The acknowledgement step allows each party to hear out the other and both
parties to build the empathy needed for the solution. Acknowledgement is more than just
responding; it involves actively encouraging the other party to communicate.
 Attitude − In the attitude step, parties try to remove pseudo-conflict issues. Stereotypes of different,
culturally-based behaviours are unearthed. Similarly, differences in communication of men and
women are accepted. Generally, we can analyze problems from the styles of writing, speaking, and
other nonverbal cues.
 Action − This step includes implementation of the chosen conflict-handling mode. Each individual
evaluates the opposite party’s behavior to ascertain potential trouble spots. Also, each individual
stays aware of his own communication style and general behavior. Finally, all parties become alert
to new issues and look for productive solutions.
 Analysis − In this last step, participants decide on actions, and find the gist of what they have
agreed upon. The analysis step initiates the impetus for approaching conflict management as an
ongoing process.

RESOLVING INTERNATIONAL ORGANIZATIONAL CONFLICTS

Reconciliation- Adjudication and Arbitration Issues, Supporting Institutions – Negotiation

In international trade, when drafting international contracts, the parties usually focus on the terms of
payment and expense but little attention to terms of dispute settlement. Thus, the parties should be aware
that the disagreements and disputes can arise at any time. Therefore, in the process of concluding an
international economic agreement, the parties should note the provisions on the selection methods of dispute
settlement if a dispute occurs. Currently, there are 4 dispute resolution methods in international trade as
follows: negotiation, mediation, commercial arbitration and court.

 Negotiation
Negotiation is a settlement method which is usually applied in international dispute settlement. In
particular, the parties discuss together, struggle, compromise and agree to settle the dispute. The
result of the negotiation is that the dispute could be resolve or not. Negotiation is conducted in two

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 ways: The two parties directly meet each other to discuss and deal or one party submit complaint to
the other party and the other party answers the complaint.

 Mediation
Mediation is the method of resolving dispute between the parties through the role of a third party.
Mediation can be accomplished by two ways: One is that the parties agree with each other about
mediation, the mediator will be designated and conduct the mediation without following any rules of
mediation. The second way is that the parties agree to conduct the mediation under rules of a
professional organization or one specific arbitration institution, such as mediation rules of the
International Chamber of Commerce (ICC).

 Commercial arbitration
Arbitration is a method of dispute settlement arising in trade activities that are agreed between the
parties and carried out according to the order and proceedings. Presently, there are kinds of
arbitration such as: ad hoc arbitration and permanent arbitration.

 Court
The 3 dispute settlement methods above are voluntary in nature. They are different from the dispute
settlement in accordance with judicial procedures at court. The settlement of dispute by court is to
resolve dispute through the activities of the State tribunals. Therefore, litigants in the dispute are
often considered as a final solution to protect their legitimate interests. Especially, when there is a
conflict, the parties will choose the form of trade negotiation or mediation rather than commercial
arbitration or court.

23
DR.TR.KALAI LAKSHMI/MBA/GLOBAL BUSINESS MANAGEMENT/ UNIT 2
 SCHOOL OF MANAGEMENT STUDIES
DEPARTMENT OF BUSINESS ADMINISTRATION

UNIT 3 –GLOBAL BUSINESS MANAGEMENT

SBAA5301

1
 GLOBAL BUSINESS MANAGEMENT
UNIT III

WTO and LPG policies - Its Implications on India - Regional Trade Blocks - Integration between
countries - levels of integration and impact of integration - International strategic alliances - nature
- benefits - pitfalls - scope - how to make alliances work.

LPG STANDS FOR LIBERALIZATION, PRIVATIZATION, AND

GLOBALIZATION.
India under its New Economic Policy approached International Banks for development of the country.
These agencies asked Indian Government to open its restrictions on trade done by the private sector and
between India and other countries.
Liberalization
The basic aim of liberalization was to put an end to those restrictions which became hindrances in the
development and growth of the nation. The loosening of government control in a country and
when private sector companies‟ start working without or with fewer restrictions and government allow
private players to expand for the growth of the country depicts liberalization in a country.
Objectives of Liberalization Policy
 To increase competition amongst domestic industries.
 To encourage foreign trade with other countries with regulated imports and exports.
 Enhancement of foreign capital and technology.
 To expand global market frontiers of the country.
 To diminish the debt burden of the country.
IMPACT OF LIBERALIZATION
1. Privatization
2. Globalization
Privatization
This is the second of the three policies of LPG. It is the increment of the dominating role of private sector
companies and the reduced role of public sector companies. In other words, it is the reduction
of ownership of the management of a government-owned enterprise. Government companies can be

2
converted into private companies in two ways:
 By disinvestment
 By withdrawal of governmental ownership and management of public sector companies.
Forms of Privatization
1. Denationalization or Strategic Sale: When 100% government ownership of productive assets is
transferred to the private sector players, the act is called denationalization.
2. Partial Privatization or Partial Sale: When private sector owns more than 50% but less than
100% ownership in a previously construed public sector company by transfer of shares, it is called
partial privatization. Here the private sector owns the majority of shares. Consequently, the private
sector possesses substantial control in the functioning and autonomy of the company.
3. Deficit Privatization or Token Privatization: When the government disinvests its share capital to
an extent of 5-10% to meet the deficit in the budget is termed as deficit privatization.
4. Crisis of 1991 and Indian Economic Reforms
Objectives of Privatization
 Improve the financial situation of the government.
 Reduce the workload of public sector companies.
 Raise funds from disinvestment.
 Increase the efficiency of government organizations.
 Provide better and improved goods and services to the consumer.
 Create healthy competition in the society.
 Encouraging foreign direct investments (FDI) in India.
Globalization
Globalisation means to integrate the economy of one country with the global economy. During
Globalization the main focus is on foreign trade & private and institutional foreign investment. It is the
last policy of LPG to be implemented.
Globalization as a term has a very complex phenomenon. The main aim is to transform the world towards
independence and integration of the world as a whole by setting various strategic policies. Globalization is
attempting to create a borderless world, wherein the need of one country can be driven from across the
globe and turning into one large economy.

3
Outsourcing as an Outcome of Globalization
The most important outcome of the globalization process is Outsourcing. During the outsourcing model, a
company of a country hires a professional from some other country to get their work done, which was
earlier conducted by their internal resource of their own country.
The best part of outsourcing is that the work can be done at a lower rate and from the superior source
available anywhere in the world. Services like legal advice, marketing, technical support, etc.
As Information Technology has grown in the past few years, the outsourcing of contractual work from one
country to another has grown tremendously. As a mode of communication has widened their reach, all
economic activities have expanded globally.
Various Business Process Outsourcing companies or call centres, which have their model of a voice-based
business process have developed in India. Activities like accounting and book-keeping services, clinical
advice, banking services or even education are been outsourced from developed countries to India.
Benefits of Globalization
The most important advantage of outsourcing is that big multi-national corporate or even small enterprises
can avail good services at a cheaper rate as compared to their country‟s standards. The skill set in India is
considered most dynamic and effective across the world. Indian professionals are best at their work. The
low wage rate and specialized personnel with high skills have made India the most favourable destination
for global outsourcing in the later stage of reformation.
EVOLUTION OF WTO
GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

The General Agreement on Tariffs and Trade (GATT), the predecessor of WTO was

born in 1948 as a result of the international desire to liberalize trade.

Objectives of GATT
1. To raise standards of living
2. To ensure full employment and large and steadily growing volume of real income
3. Effective demand
4. To develop the full use of the resources of the world
5. To expand production and international trade

4
Principles of GATT

1. Non-Discrimination

2. Prohibition of quantitative restrictions – limit restrictions on trade to less rigid tariffs

3. Consultation to resolve disagreements

GATT AND THE BIRTH OF WTO

1947: The birth of GATT on 30th October 1947. The GATT was signed by 23 nations

1948: Entry into force on 1st January 1948, GATT entered into force

1949: Second round at Annecy, April to August, exchanged some 5000 Tariff concessions

1950: Third round at Torquay, September 1950 to April 1951, exchanged some 8700 Tariff
Concessions, Tariff reduction of about 25%
1956: Fourth round at Geneva completed in May. Produced same $25 billion worth of Tariff reduction
1960: The Dillion round – divided into 2 phase.

Phase 1: Concerned with negotiations with EEC member status Phase 2: General
round of Tariff negotiations
1961: The short term arrangement, covering cotton textiles, was agreed as an exception to the GATT
rules
1964: The Kennedy round meeting at ministerial level

1965: A new chapter – early 1960‟s marked the accession to the General Agreement of many newly
independent developing countries
1973: The Tokyo round – 99 countries participated, covering both Tariff and non-tariff matters

1974: The Agreement regarding international trade in textiles, known as MFA, Multi Fiber Agreements

entered on 1st January

1985: The Uruguay round September 20, envisaged to last for 4years and continued for some seven and
a half years

1993: Successful conclusion of the Uruguay round on 15th December 1993 in Geneva, Switzerland

1994: The final act of the Uruguay round signed by minister on 15th April 1994, in Marrakesh,

5
Morocco.The Uruguay round resulted in transformation of multilateral trading system under GATT
into the permanent world trade organisation for resolving trade
dispute multilateral

1995: World Trade Organisation enters into force on January 1 st 1995. On May 31st 1995, WTO
General Council approved the Head Quarters agreement, including the decision to locate the WTO in
Geneva
1996: Basic telecommunication negotiations in may 1996. Maritime transport services egotiation in

July 1996. First WTO ministerial conference held in Singapore 9thto 13th December- Established 3
working groups 1) Trade and Investment 2) Transparency in government procurement 3) Trade and
competition policy, plus a mandate to conduct a study in trade facilitation
1997: Successful conclusion of negotiations on basic telecommunication services. Forty governments
agreed to cut customs duty on information technology products, successful conclusion of negotiation on

financial services on 12th December 1997

DIFFERENCE BETWEEN GATT AND WTO
GATT WTO
 It is a set of rules and multilateral  It is a permanent institution
agreement  It is established to serve its own purpose
 It was designed with an attempt to establish  Its activities are full and permanent
International Trade Organization  Its rules are applicable to trade in
merchandise and trade in service and trade
 It was applied on a provisional basis in related aspects of intellectual property
 Its agreements are almost multilateral
 Its rules are applicable to trade in
 Its dispute settlement system was fast and
merchandising automatic
 GATT was originally a multilateral
instrument, but p lurilateral agreements
were added at a later stage
 Its disputes settlement systems was not

 faster and automatic

6
WORLD TRADE ORGANISATION

 The WTO was established on Jan 1, 1995

 The WTO is the embodiment of the Urguary Round results and the successor to GATT

 76 Government became members of the WTO on its first day

 As of September 1999, there are 134 members of the WTO and 34 countries have a

 bserver status

 There is a waiting list of 31 members

 They account for more than 90 percent of the world trade

 The WTO is based in Geneva, Switzerland

Functions of WTO
WTO administers 28 agreements contained in the final act and number of plurilateral agreements
and government procurement through various councils and committees

 WTO overseas the implementation of significant tariff cuts and also reduction of non-tariff
measures

 WTO examines regularly the trade regimes of individual member countries. It act as a watchdog
of international trade

 WTO provides dispute settlement courts

 WTO act as a management consultant for world trade

 Technical co-operations and training divisions are established in WTO‟s secretariat in order to
help developing countries

 Members countries can use WTO as a forum for continuous negotiation of exchange of trade
barriers

 WTO co-operates with other international institutions like IMF, IBRD, ILO

 WTO overseas the national trade policies of member government

7
WTO AND ANTI-DUMPING MEASURES

Dumping means selling the product at below the on going market price and or at the price below the
cost of production.
Haberter defines dumping as “the sale of goods abroad at a price which is lower than the selling price of
the same goods at the same time in the same circumstances at home, taking account of difference in
transport costs”
Types of Dumping

1. Intermittent Dumping – production is more than the demand for the product in the home
country. In such cases the producers sells the remaining stock in foreign countries at low prices
without reducing the prices in domestic countries

2. Persistent Dumping – The monopolistic sells the remaining production in foreign countries at a
low price continuously
3. Predatory Dumping – The monopolistic sells the product in foreign market at a low price
initially with a view to drive away the competitors and increase the price after the competitors
leave the market.
Objectives of Dumping

 To enter the foreign market by eliminating competitors

 To sell surplus production

 To develop WORLD TRADE ORGANISATION (WTO)
India and WTO
The WTO was founded in 1995 as the successor organisation to the General Agreement on Trade and
Tariff (GATT). GATT was established in 1948 with 23 countries as the global trade organisation to
administer all multilateral trade agreements by providing equal opportunities to all countries in the
international market for trading purposes. WTO is expected to establish a rule-based trading regime in
which nations cannot place arbitrary restrictions on trade. In addition, its purpose is also to enlarge
production and trade of services, to ensure optimum utilisation of world resources and to protect the
environment. The WTO agreements cover trade in goods as well as services to facilitate international
trade (bilateral and multilateral) through removal of tariff as well as non-tariff barriers and providing
greater market access to all member countries.

8
As an important member of WTO, India has been in the forefront of framing fair global rules, regulations
and safeguards and advocating the interests of the developing world. India has kept its commitments
towards liberalisation of trade, made in the WTO, by removing quantitative restrictions on imports and
reducing tariff rates
Some scholars question the usefulness of India being a member of the WTO as a major volume of
international trade occurs among the developed nations. They also say that while developed countries file
complaints over agricultural subsidies given in their countries, developing countries feel cheated as they
are forced to open their markets for developed countries but are not allowed access to the markets of
developed countries.
As an important member of WTO, India has been in the forefront of framing fair global rules, regulations
and safeguards and advocating the interests of the developing world. India has kept its commitments
towards liberalisation of trade, made in the WTO, by removing quantitative restrictions on imports and
reducing tariff rates.
Growth of GDP and Major sectors (in %)
Sector 980-91 992-2001 002-2007 007-2012 012-2013 013-2014 014-2015

Agriculture 6 3 3 2 5 2 .2*
Industry 1 5 4 4 6 0*
Services 7 2 8 0 1 8 8*
Total 6 4 8 2 6 6 4

Some scholars question the usefulness of India being a member of the WTO as a major volume of
international trade occurs among the developed nations. They also say that while developed countries file
complaints over agricultural subsidies given in their countries, developing countries feel cheated as they
are forced to open their markets for developed countries but are not allowed access to the markets of
developed countries.

REGIONAL TRADING BLOCS:

A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental
organization, where regional barriers to trade, (tariffs & non-tariff barriers) are reduced or
eliminated among the participating states.

9
A regional trading bloc is a group of countries within a geographical region that protect themselves from
imports from non-members. A trade bloc is basically a free-trade zone, or near-free-trade zone, formed by
one or more tax, tariff, & trade agreements between two or more countries. The Trading blocs are a form
of economic integration, & increasingly shape the pattern of the world trade. Regional trade blocks
promote the trade within the block & defend its members against global competition. Defense against the
global competition is obtained through established tariffs on goods produced by member states, import
quotas, government subsidies, onerous bureaucratic import processes, & technical & other non-tariff
barriers. Since trade is not an isolated activity, member states within regional blocks also cooperate
in economic, political, security, climatic, & other issues affecting the region. Members of successful
trade blocs usually share four common traits: similar levels of per capita GNP, geographic proximity,
similar or compatible trading regimes, & political commitment to the regional organization. Advocates of
the worldwide free trade are usually opposed to the trading blocs, which they argue & encourage regional
trade as opposed to the global free trade.
Types of Regional Trading Blocs
Trade blocs can be stand-alone agreements between several states (such as the North American Free Trade
Agreement (NAFTA) or part of a regional organization (such as the European Union). Depending on the
level of economic integration, the trade blocs can fall into the 6 different categories, such as preferential
trading areas, the free trade areas, the customs unions, the common markets, the economic union & the
monetary unions, & the political union.
Preferential Trade Area: Preferential Trade Areas (PTAs) exist when countries within a geographical
region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the
area. This is often the first small step towards the creation of a trading bloc.
Free trade area: Free Trade Areas (FTAs) are created when 2 or more countries in a region agree to
reduce or eliminate barriers to trade on all the goods coming from other members. This is the most basic
form of economic cooperation. Member countries remove all barriers to trade among themselves but are
free to independently determine trade policies with nonmember nations. An example is the North
American Free Trade Agreement (NAFTA).
Customs union: This type provides for economic cooperation as in a free-trade zone. Barriers to trade are
removed between member countries. The primary difference from the free trade area is that members
agree to treat trade with non-member countries in a similar manner. The customs union involves the

10
removal of the tariff barriers among the members, as well as the acceptance of the common (unified)
external tariff in contradiction to the non-members. This means that the members may negotiate as a
single bloc with third parties, such as with other trading blocs, or with the WTO. The Gulf Cooperation
Council (GCC)[1] Cooperation Council for the Arab States of the Gulf is an example.
Common market: A „common market‟ is the first significant step towards full economic integration, &
occurs when member countries trade freely in all economic resources – not just tangible goods. This
means that all barriers to trade in goods, services, capital, & labor are removed. In addition, as well as
removing tariffs, non-tariff barriers are also reduced & eliminated. For a common market to be successful
there must also be a significant level of harmonization of macroeconomic policies, & common rules
regarding monopoly power & other anti-competitive practices. There may also be common policies
affecting key industries, such as the Common Agricultural Policy[2] (CAP) & Common Fisheries Policy
(CFP) of the European Single Market (ESM). This type allows for the creation of economically integrated
markets between member countries. Trade barriers are removed, as are any restrictions on the movement
of labor & capital between member countries. Like customs unions, there is a common trade policy for
trade with nonmember nations. The primary advantage to the workers is that they no longer need the visa
or work permit to work in another member country of the common market. An example is the Common
Market for Eastern & Southern Africa (COMESA).
Economic & monetary union: This type is created when countries enter into an economic agreement to
remove barriers to trade & adopt common economic policies. An example is the European Union (EU).
Monetary union is a type of trade bloc which is composed of an economic union (common market &
customs union) with a monetary union. Monetary union is established through a currency-related trade
pact. An intermediate step between pure monetary union & a complete economic integration is the fiscal
union. Economic & Monetary Union of the European Union with the Euro for the Euro-zone members is
the example of monetary union.
Political union: In order to be successful the more advanced integration steps are typically accompanied
by the unification of economic policies (tax, social welfare benefits, etc.), reductions in the rest of the
trade barriers, introduction of the supranational bodies, & gradual moves towards the final stage, a
“political union”. Political union is a final stage in the economic integration with more formal political
links among the countries. A limited form of the political union may exist when two or more countries
share common decision-making bodies & have common policies. It is the unification of previously

11
separate nations. The unification of West & East Germany in 1990 is an example of the total political
union.
ADVANTAGES OF REGIONAL TRADING BLOCS
1. Free trade within the bloc: Knowing that they have free access to each other‟s markets, members are
encouraged to specialize. This means that, at a regional level, there is the wider application of the
principle of the comparative advantage.
2. Market access & trade creation: Easier access to each other‟s markets means that trade between
members is likely to increase. Trade creation exists when free trade enables high-cost domestic producers
to be replaced by lower-cost, & more efficient imports. Because low-cost imports lead to lower-priced
imports, there is a „consumption effect‟, with increased demand resulting from lower prices. These
agreements create more opportunities for countries to trade with one another by removing the barriers to
trade & investment. Due to a reduction or removal of tariffs, cooperation results in cheaper prices for
consumers in the bloc countries.
3. Economies of scale: Producers can benefit from the application of scale economies, which will lead to
lower costs & lower prices for consumers.
4. Jobs: Jobs may be created as the consequence of increased trade among the member economies. By
removing the restrictions on the labor movement, economic integration can help expand job opportunities.
5. Protection: Firms inside the bloc are protected from cheaper imports from outside, such as the
protection of the EU shoe industry from cheap imports from China & Vietnam.
6. Consensus & cooperation: Member nations may find it easier to agree with smaller numbers of
countries. Regional understanding & similarities may also facilitate closer political cooperation.
DISADVANTAGES OF REGIONAL TRADING BLOCS
1. Loss of benefits: The benefits of free trade among the countries in different blocs is lost.
2. Distortion of trade: Trading blocs are likely to distort world trade, & reduce the beneficial effects of
specialization & the exploitation of comparative advantage.
3. Inefficiencies & trade diversion: Inefficient producers within the bloc can be protected from more
efficient ones outside the bloc. For example, inefficient European farmers could be protected from low-
cost imports from developing countries.
4. Trade diversion arises when the trade is diverted away from efficient producers who are based outside
the trading area. The flip side to trade creation is trade diversion. The member countries may trade more

12
with each other than with nonmember nations. This might mean increased trade with less efficient or more
expensive producer because it is in a member country. In this sense, weaker companies can be protected
inadvertently with the bloc agreement acting as a trade barrier. In essence, the regional agreements have
formed new trade barriers with countries outside of the trading block.
5. Retaliation: The development of 1 regional trading bloc is likely to stimulate the development of
others. This can lead to the trade disputes, such as those between the EU & NAFTA, including the recent
Boeing (US)/ Airbus (EU) dispute. The EU & US have a long history of the trade disputes, together with
the dispute over US steel tariffs, which were declared illegal by the WTO in 2005.
6. Employment shifts & reductions: Countries may move production to cheaper labor markets in
member countries. Similarly, workers may move to gain access to better jobs & wages. Sudden shifts in
employment can tax the resources of the member countries.
TRADE INTEGRATION
Tradebetween a number of countries with the aim of securing the benefits of international specialization a
nd international trade.
There are four main forms of trade integration, ranging from a loose association of trade partners to a fully
integrated group of nation states:
1. A free trade area,
Where members eliminate trade barriers between themselves but each continues to operate its
own particular barriers against non members.
2. A customsunion, where members eliminate trade barriers between themselves and establish
uniform barriers against nonmembers, in particular a common external tariff.
3. A commonmarket, that is, a customs union that also provides for the free movement of labour
and capital across national boundaries.
4. An economic union, that is, a common market that also provides for the unification of members'
general objectives in respect of economic growth, etc, and the harmonization of monetary, fiscal and other
policies.
Examples of „free trade areas‟ are the
 EUROPEAN FREE TRADE ASSOCIATION (EFTA),
 THE NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA),
 THE ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN),

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 ASIA PACIFIC ECONOMIC COOPERATION (APEC),
 LATIN AMERICAN FREE TRADE ASSOCIATION (LAFTA).
Examples
 A splinter-group from LAFTA, MERCOSUR, is an example of a „customs union‟;
 the ANDEAN PACT, another LAFTA splintergroup, is an example of a „common market‟;
 while the EUROPEAN
UNION is rapidly transforming itself from a common market into a full-
blown economic union' (see ECONOMIC AND MONETARY UNION).
 Partial trade integration as exemplified by the above arrangements are beneficial insofar as th
ey create additional trade between members, but they also involve discrimination against non
members, which may reduce trade with these countries.
 Thus, many economists view the promotion of free trade on a multilateral basis through the a
uspices of the World trade Organisation as generally preferable to limited regional alliances

INTERNATIONAL STRATEGIC ALLIANCES

A strategic alliance is a business arrangement whereby two or more firms choose to cooperate for
their mutual benefit.

 Strategic alliance is an important mode of doing international business. An alliance is an inter-firm

collaboration over a given economic space and time for the attainment of the participating
companies‟ goals.
 Strategic alliances are partnerships in which two or more companies work together to achieve
objectives that are mutually beneficial while parties remaining independent. Companies may share
resources, information, capabilities and risks to achieve this.

International Strategic Alliance is the combination of two or more firm’s agreed upon future
objective, which achieved by together practices of the MNCs.

14
Characteristics of international strategic alliances
According to the YOSHINO AND KANGAN there are three necessary and sufficient characteristics :-

 Two or more firms unit to pursue a set of agreed upon goals but remain independent subsequent to
the formation of the Alliance.
 The partner firm share the benefits of the Alliance and control over the performances and the one
that makes them so difficult to manage.
 The partner firms contribute on a continuing basis in one or more key strategic areas, for example ,
technology, product, and so forth.

Scope of international strategic alliances

The scope of cooperation among firms may vary significantly.

Comprehensive alliances arise when the participating firms agree to perform together multiple stages of
the process by which goods or services are brought to the market: R&D, design, production, marketing,
and distribution. Because of the broad scope of such alliances, the firms must establish procedures for
meshing such functional areas as finance, production, and marketing for the alliance to succeed. Yet
integrating the different operating procedures of the parents over a broad range of functional activities is
difficult in the absence of a formal organizational structure. As a result, most comprehensive alliances are
organized as joint ventures.
Functionally based alliances Strategic alliances may also be narrow in scope, involving only a single
functional area of the business. In such cases, integrating the needs of the parent firms is less complex.
Thus, functionally based alliances often do not take the form of a joint venture, although joint ventures
are still the morecommon form of organization. Types of functional alliances include production alliances,
marketing alliances, financial alliances, and R&D alliances

Examples of International strategic alliances

Apple
According to "An Overview of Strategic Alliances," Apple has partnered with Sony, Motorola, Phillips,
and AT&T in the past. Apple has also partnered more recently with Clearwell in order to jointly develop
Clearwell's E-Discovery platform for the Apple iPad. E-Discovery is used by enterprises and legal entities
to obtain documents and information in a "legally defensible" manner,..

15
Starbucks
According to Rebecca Larson, assistant Professor of Business at Liberty University, Starbucks partnered
with Barnes and Nobles bookstores in 1993 to provide inhouse coffee shops, benefiting both retailers. In
1996, Starbucks partnered with Pepsico to bottle, distribute and sell the popular coffee-based drink,
Frappacino. A Starbucks-United Airlines alliance has resulted in their coffee being offered on flights with
the Starbucks logo on the cups and a partnership with Kraft foods has resulted in Starbucks coffee being
marketed in grocery stores. In 2006, Starbucks formed an alliance with the NAACP, the sole purpose of
which was to advance the company's and the NAACP's goals of social and economic justice.

Types of strategic alliances

1. 1.Functional alliance:
A functional alliance integrates certain basic “functions”between the two parties by pooling efforts to
attain specific objectives.
There are four types of functional alliances. These are –
Production alliances: Firms each manufacturer products or provide services in shared facility.
Marketing alliances: Firms share marketing services or expertise.
Financial alliances: Partners of firms share equally in contributing financial resources to the project or
one partner may provides the majority financing while the other provides expertise.
R & D alliances: Partners agree to undertake joint research to develop new product or services

2. Joint Ventures

Joint Ventures are agreements between parties or firms for a particular purpose or venture. Their
formation may be very informal, such as a handshake and an agreement for two firms to share a
booth at a trade show. Other arrangements can be extremely complex, such as theconsortium of
major U.S. electronics firms to develop new microchips,”says Charles P. Lickson in A Legal Guide
for Small Business.

3. Outsourcing

Outsourcing and globalization of manufacturing allows companies to reduce costs, benefits

consumers with lower cost goods and services, causes economic expansion that reduces
unemployment, and increases productivity and job creation.

16
 4. Affiliate Marketing
Affiliate marketing has exploded over recent years, with the most successful online retailers using it to
great effect. The nature of the internet means that referrals can be accurately tracked right through the
order process.

5. Technology Licensing
This is a contractual arrangement whereby trade marks, intellectual property and trade secrets are
licensed to an external firm. It‟s used mainly as a low cost way to enter foreign markets.

Steps in the formation of a Strategic Alliance

Forming a Strategic Alliance is a process which usually implies some major steps that are mentioned
below:

1. Strategy Development: In this stage the possibility of a Strategic Alliance is examined with respect
to objectives, major issues, resource strategies for production, technology and people. It is
necessary that objectives of the company and of the alliance are compatible. Here, the international
rules and regulations of business should be kept in mind.
2. Partner Assessment: In this phase potential partners for the Strategic Alliance are analyzed, in
order to find an appropriate company to cooperate with. A company must know the weaknesses and
strengths and the motivation for joining an alliance of another company. Besides that appropriate
criteria for the partner selection are defined and strategies are developed how to accommodate the
partner´s management style. The legal and cultural environment of Potential partner‟s needs to be
assessed.
3. Contract Negotiations: After having selected the right partner for a Strategic Alliance the contract
negotiations start. At first all parties involved discuss if their goals and objectives are realistic and
feasible. Dedicated negotiation teams are formed which determine each partner´s role in the alliance
like contribution and reward, penalties and retaining companies´ interests.
4. Operation :In this phase in the life of a Strategic Alliance, an internal structure occurs under
which its functions develop. While operating it, the alliance becomes an own new organization
itself with members from the origin companies with the aim of meeting all previously set
objectives and improving the overall performance of the alliance which requires effective
structures and processes and a good, strong and reliable leadership. Budges have to be linked, as

17
 well as resources which are strategically most important and the performance of the alliance has to
be measured and assessed.
4. End/ Development : In this stage the strategic alliances among partner organizations comes to an
end .There are several ways how a Strategic Alliance can come to an end:
5. Natural End: When the objectives, the Strategic Alliance was founded for have been achieved, and
no further cooperation is necessary or beneficial for the involved enterprises the alliance can come
to a natural end. An example for such a natural end is the alliance between Dassault and British
Aerospace which was founded to manufacture the Jaguar fighter aircraft. After the end of the
program no further jets were ordered so the involved companies ended their cooperation.
6. Extension: After the end of the actual reason for the alliance, the cooperating enterprises decide to
extend the cooperation for following generations of a respective product or expand the allianceto
new products or projects. Renault for example worked together with Matra on three successive
generations of their space minivan, whereas Airbus expanded its cooperation to include a complete
family of airplanes.
7. Premature Termination: In this case the Strategic Alliance is ended before the actual objectives of
its existence have been achieved. In1987 Matra-Harris and Intel broke up their Cimatel partnership
beforeone of the planned VLSI chips was manufactured.
8. Exclusive Continuation: If one partner decides to get out of the alliance before the common goals
have been achieved, the other partner can decide to continue the project on its own. This happened
when Saab decided to continue with the designing of a commuteraircraft (SF-340), after the partner
Fairchild had to cancel the alliancebecause of internal problems. After Fairchild left the project it
wasnamed Saab 340.
9. Takeover of Partner: Strong companies sometimes have the opportunity to take over smaller
partners. If one firm acquires another the strategic alliance comes to an end. After almost ten years
of cooperation in the field of mainframe computers a British computer manufacturer, named ICL,
was taken over by Fujitsu in 1990.

Key Issues in Implementation Of Strategic Alliances

1. Partner Selection: The success of any cooperative undertaking depends on choosing the
appropriate partner(s). Strategic alliances are more likely to be successful if the skills and resources
of the partners are complementary—each must bring to thealliance some organizational strength the

18
 other lacks. A firm contemplating a strategic alliance should consider at least four factors in
selecting a partner (or partners):
 compatibility,
 the nature of the potential partner's products or services,
 the relative safeness of the alliance, and
 the learning potential of the alliance..

2. Joint Management : A joint venture almost always takes the form of a corporation, usually
incorporated in the country in which it will be doing business. The corporate form enables the
partners to arrange a beneficial tax structure, implement novel ownership arrangements, and better
protect their other assets. It allows the joint venture to create its own identity apart from those of the
partners. Further issues and questions are associated with how a strategic alliance will be managed.
Three standard approaches are often used to jointly manage a strategic alliance : shared
management agreements, assigned arrangements, and delegated arrangements.
Approaches to Joint Management

 Shared Management Agreements:Under a shared management agreement, each partner fully

andactively participates in managing the alliance. The partners run the alliance, and their managers
regularly pass on instructions and details to the alliance's managers. The alliance managers have
limited authority of their own and must defer most decisions to managers from the parent firms.
This type of agreement requires a high level of coordination and near-perfect agreement between
the participating partners. Thus, it is the most difficult to maintain and the one most prone to
conflict among the partners.
 Assigned Arrangements :Under an assigned arrangement, one partner assumes
primaryresponsibility for the operations of the strategic alliance.
 Delegated Arrangements :Under a delegated arrangement, which is reserved for joint
ventures,the partners agree not to get involved in ongoing operations and so delegate management
control to the executives of the joint venture itself. These executives may be specifically hired to
run the new operation or may be transferred from the participating firms. They are responsible for
the day-to-day decision making and management of the venture and for implementing its strategy.

19
 Thus, they have real power and the autonomy to make significant decisions themselves and are
much less accountable to managers in the partner firms

 Other success factors

1. The success of any alliance very much depends on how effective the capabilities of the involved
enterprises are matched and weather the full commitment of each partner to the alliance is achieved.
Some key factors that have to be considered to be able to manage a successful alliance include:
2. Understanding: The cooperating companies need a clear understanding ofthe potential partner´s
resources and interests and this understanding should be the base of set the alliance goals.
3. No time pressure: During negotiations time pressure must not have an influence on the outcome of the
process. Managers need time to establish a working relationship with each other, develop a time plan,
set milestones, and design communication channels.
4. Limited alliances: Some incompatibilities between enterprises might not be avoidable, so the number of
alliances should be limited to a necessary amount, which enables the companies to achieve their goals.
5. Good connection: Negotiations need experienced managers. The managers from large firms need to be
connected very well so they have the possibility to integrate different departments and business areas
over internal borders, and they need legitimating and support from the top management.
6. Creation of trust and goodwill: The best basis for a profit-yielding cooperation between enterprises is
the creation of trust and goodwill, because it increases tolerance, intensity and openness of
communication and makes the common work easier. Further it leads to equal and satisfied partners.
7. Intense Relationship: Intensifying the partnership leads to the fact that partners get to know each other
better, each other's interests and operating styles and increases trust.

Risks Associated With International Alliances

1. Using and operating strategic alliances does not only bring chances and benefits. There are also risks
and limitations that have to be taken in consideration. Failures are often attributed to unrealistic
expectations, lack of commitment, cultural differences, strategic goal divergence and insufficient trust.
Some of the risks are listed below:[
 Partner experiences financial difficulties
 Hidden costs

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  Inefficient management
 Activities outside scope of original agreement
 Information leakage
 Loss of competencies
 Loss of operational control
 Partner lock-in
 Partner product or service failure
 Partner unable or unwilling to supply key resources
 Partner's quality performance
 Partner takes advantage of its position

Advantages
1. Shared risk: The partnerships allow the involved companies to offset their market exposure. Strategic
Alliances probably work best if the companies´ portfolio complement each other, but do not directly
compete.
2. Shared knowledge: Sharing skills (distribution, marketing, management), brands, market knowledge,
technical know-how and assets leads to synergistic effects, which result in pool of resources which is
more valuable than the separated single resources in the particular company.
3. Opportunities for growth: Using the partner´s distribution networks in combination with taking
advantage of a good brand image can help a company to grow faster than it would on its own. The
organic growth of a company might often not be sufficient enough to satisfy the strategic requirements
of a company, that means that a firm often cannot grow and extend itself fast enough without expertise
and support from partners
4. Access to new technology, intellectual property rights,
5. Create critical mass, common standards, new businesses,
6. Diversification, Improve agility, R&D, material flow, speed to market,
7. Reduce administrative costs, R&D costs, cycle time
8. Allowing each partner to concentrate on their competitive advantage.

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  Learning from partners and developing competencies that may be more widely exploited elsewhere.
 To reduce political risk while entering into a new Market

Disadvantages of strategic alliances include:

1. Sharing of profit: In a Strategic Alliance the partners must share resourcesand profits and often skills
and know-how. This can be critical if businesssecrets are included in this knowledge. Agreements can
protect these secretsbut the partner might not be willing to stick to such an agreement.
2. Creating a Competitor: The partner in a strategic alliance might become acompetitor one day, if it
profited enough from the alliance and grew enough toend the partnership and then is able to operate on
its own in the same marketsegment.
3. Opportunity Costs: Focusing and committing is necessary to run a StrategicAlliance successfully but
might discourage from taking other opportunities,which might be benefitial as well.
4. Uneven Alliances: When the decision powers are distributed very uneven, the weaker partner might be
forced to act according to the will of the more powerful partners even if it is actually not willing to do
so.
5. Foreign confiscation: If a company is engaged in a foreign country, there isthe risk that the government
of this country might try to seize this local business so that the domestic company can have all the
market on its own.
6. Risk of losing control over proprietary information, especially regardingcomplex transactions requiring
extensive coordination and intensiveinformation sharing.
7. Coordination difficulties due to informal cooperation settings and highly costly dispute resolution. Ex

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 SCHOOL OF MANAGEMENT STUDIES

DEPARTMENT OF BUSINESS ADMINISTRATION

UNIT4
GLOBAL BUSINESS MANAGEMENT SBAA5301

1
 UNIT 4
GLOBAL INVESTMENTS

Introduction , understanding payment mechanism, documentation in international trade,

financing techniques, export promotion schemes- export and import finance – global
sourcing and Indian industries structure- reasons for global sourcing – advantage and
disadvantage – challenges for Indian business.
___________________________________________________________________________
Introduction

International Trade Mechanisms involves inter disciplinary processes including Finance,

Logistics, Taxation and Supply Chain disciplines. Every Business Manager would need to know
the nuances of the trade even though he may or may not be involved in the micro management
of the processes.

Any Import or Export entails commercial transaction and payment. When an import is made
into the US, the foreign supplier would have to be paid in the currency in which he has raised
the invoice. Normally international transactions are made using USD as the currency. However
in many cases of transactions with Europe, the Euro Dollar is used as the currency too.

When an Export originates out of US to another country, the Exporter would have to receive
payment from the End Customer.

EXPORT PAYMENT MECHANISM

In Exports we have several types of trade or export transactions and the nature of the
business determines the payment terms.

Advance Payment : When a new customer approaches and places an order on the Exporter,
normally might insist on advance payment for executing the order. This method normally
continues for a few times until mutual trust is built between the two parties and they get to know
each other.

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Letters of Credit : An Exporter if dealing with an unknown customer at the other end may not
have any prior exposure to the credit worthiness of the Customer and would normally insist on
Confirmed Letter of Credit to be opened by the Customer before shipping the goods. In such
cases the Exporter may not be extending any credit. Also in case of high value transactions with
known customers too; exporters prefer to get paid through Letter of Credit.
While dealing with a customer, the Exporter can check seek a credit worthiness rating from the
customer‟s bank to be able to ascertain the authenticity and credibility of the Customer.
Normally Large Multi Nationals demand such credit worthiness reports as a part of their policy.
Bill of Exchange of Documentary Drafts:When there has been sufficient relation between an
Exporter and the Customer (Importer) and the customer‟s credit worthiness is known through
previous records, the Exporter might decide to extend credit and accept payment on bill of
exchange basis. This system is also called as Documentary Drafts. Documentary drafts are of
two types namely Sight Drafts and Date and Time Drafts.
Open or Ongoing Account :When there is a huge volume of continuous business transactions
between the Exporter and Importer and exports continue to happen on ongoing basis, the
Exporter can simply export on the basis of a purchase order and expect the Importer to pay
promptly on due date. This is the usual method adopted by most of the Multi National
Companies as well as the large organizations that have sufficient import volumes spread across
various countries and are dealing with multiple vendors on ongoing basis. In such cases they
just determine the annual volumes to be supplied by each vendor, issue an open purchase order
and keep reviewing only the delivery schedule. They offer standard payment commitment on a
particular date to all vendors as a global policy. The payment process will be set and
determined as a part of their business agreement.

Other Types of Trade and Related Payment Mechanisms

Besides the above types of payment mechanisms based on normal Exports and Imports, there
are other types of business models which work on various other modes of payment terms too.

Consignment Sale: An exporter might sign up a contractor with a distributor overseas to

import, hold stock and sell the goods on his behalf. In such a situation, the distributor may not
own the stocks and the ownership might continue to lie with the exporter. The distributor would

3
only be an intermediary to sell the stocks and repatriate the money realized back to the exporter
and get remunerated in terms of service charges or commission. In such cases there may be a
business agreement in place but no fixed payment mechanism may be adopted.

Counter Trade / Counter Purchase / Barter Trade:In yet another case of business
arrangement called counter trade, exports may be linked with return purchase of some other
items from the importer or from another source in the country. The payment may also involve
services other than products. This kind of trade becomes a necessity while dealing with
countries that do not have sufficient foreign currency. There is also another system of
international barter which is not very ommonly practiced in the commercial world.

DOCUMENTS REQUIRED FOR PAYMENTS IN INTERNATIONAL BUSINESS.

LETTER OF CREDIT

A letter of credit is a document containing the guarantee of a bank to honour drafts drawn on it
by an exporter, under certain conditions and up to certain amounts, provided that the
beneficiary fulfils the stipulated conditions. The letter of credit offers advantages to both the
seller and buyer. As far as the seller is concerned, a letter of credit ensures him payment for the
goods he sells, provided, of course, that he follows the instructions. Though the buyer has to
have the botheration of arranging for the letter of credit, it may enable him to obtain more
liberal discounts and a lower price from the seller. Further, the buyer is assured that the
shipment will be made by the date specified in the letter of credit, or else the credit will
expire.Letter of credit: A letter of credit is a document containing the guarantee of a bank to
honour drafts drawn on it by an exporter, under certain conditions and up to certain amounts ,
provided that the beneficiary fulfills the stipulated conditions

Bill of exchange: The negotiable instruments act, 1881, defines the bill of exchange as " an
instrument in writing containing an unconditional order, signed by the maker, directing a certain
person to pay a certain sum of money ony to, or t the order of, a certain person or the bearer of
the instrument. There are five important parties to a bill of exchange:The drawer the drawee the
payee the endorser the endorsee

4
Trust receipt: If the importer is unable to take possession of the documents by making the
payment on the d/p bill following the arrival of the goods, the merchandise may be made
available to the importer by his bank under an arrangement whereby the importer signs a trust
receipt. Under this arrangement, the importer is allowed to sell the imported goods by acting as
an agent of the bank; but the retains ownership of the merchandise until the importer has made
full settlement; all sums received from the sale of goods must be credited to the bank until such
settlement is made.

Letter of hypothecation: A letter of hypothecation is a document signed by the customer

conveying to a banker the full ownership of goods at the port of destination in respect of which
he has made advances either by loan or by acceptance or negotiation of bills of exchange. This
is a sort of blanket document which shipping documents, demands from a customer to give him
recourse son the bills and control of the documents.

Bank certificate of payment:It is a certificate issued by the negotiating bank of the exporter
certifying that the bill covering particular consignments has been negotiated and that the
proceeds received in accordance with exchange control regulation in the approved manner.

Marine insurance::Insurance granted to cover loss or damage to ships or goods in transit either
by sea, air or land is called marine insurance. Insurance of ships is called " hull insurance" while
cover provided in rspect of goods sis termed as cargo insurance.

PARTIES TO THE LETTER OF CREDIT:

The Opener: The opener is the buyer(importer). The letter of credit is opened at the initiative
and request of the buyer.
1. The Issuer: The issuer, also called the opening or issuing bank, is the bank in the
importer's country issuing the letter of credit at the request of the importer.
2. The Beneficiary: The beneficiary is the party in whose favour the credit is issued; that
is the beneficiary is the seller or exporter.
3. The confirming Bank: The confirming bank is a bank in the exporter's country, which
guarantees the credit at the request of the issuing bank. The confirming bank
undertakes all the obligations of the issuing bank as a primary party to the credit, and
even if the issuing bank fails during the currency of the credit, the confirming bank is

5
 obliged to honour its commitment.
4. The Notifying Bank: The notifying bank is the bank, which, at the request of the
issuing bank, notifies the beneficiary that the credit has been opened in his favour. If
the letter of credit is confirmed, the confirming the bank advises the beneficiary
accordingly.
5. The Paying Bank: The paying bank is the bank on which the draft or bill of the
exchange is to be drawn under the commercial credit. The paying bank may be the
issuing bank, the confirming bank or the notifying bank.
6. The Negotiating Bank: The negotiating bank is the bank, which pays or accepts the
drafts of the exporter. If no paying bank is specified in the credit, the beneficiary may
go the any bank and present the draft and related documents under the credit; and if the
bank agrees to negotiate the documents, it becomes the negotiating bank.

KINDS OF LETTER OF CREDIT

1. Clean Letter of Credit: This kind of letter of credit may be negotiated against a clean
draft. A clean draft is a draft without any documents attached to it.
2. Documentary Letter of Credit: Under this, the draft must be accompanied by the
documents specified in the letter of credit.
3. Assignable Credit; Under this kind of L/C, the beneficiary may assign his rights to
another beneficiary, either within a stated period or before the expiry date of the credit.
4. Non-Assignable Credit: As opposed to the assignable credit, the named beneficiary of
a non-assignable L/C cannot transfer his rights to another party.
5. Cash credit; under the cash credit, the exporter may draw a sight draft on the bank.
The great advantage of this type of credit, therefore, is that the beneficiary will receive
cash for his draft as soon as the goods are ready for shipment and the relevant
documents in proper order are represented to the bank.
6. Acceptance Credit: Under this arrangement, the bank merely 'accepts' the drafts
drawn by the exporter. After the bank has accepted it, the draft becomes a bank
acceptance, which may be readily discounted or sold by the exporter to the accepting
bank, to other banks or to exchange dealers.
7. Revocable credit: The revocable letter of credit may be revoked or cancelled at any
time without the consent of, and without notice to, the beneficiary. As the revocable

6
 L/C does not adequately protect the beneficiary on the basis of this type of L/C are not
common.
8. Irrevocable Credit: An irrevocable L/C is one, which cannot be revoked, amended or
modified by the issuing bank without the express consent of all the parties concerned.
9. Confirmed Credit: If a bank in the beneficiary country confirms the L/C, it becomes a
confirmed credit. In this case, the bank issuing the L/C sends it through its branch or
correspondent bank located in the beneficiary's country with the request to add its
confirmation to the credit.

10. Back-to-Back Credit: A back-to back credit is essentially a secondary credit, opened
by a bank on behalf of the beneficiary of an original credit, in favour of a domestic
supplier. The original credit backs another credit and facilitates the purchase of the
goods from a local supplier by the beneficiary of the original L/C.Revolving Credit: A
revolving credit is designed to obviate the need for establishing new credit for each
shipment when the transactions are more or less continuous. Under the revolving
credit, provision may be made for making available the credit again as soon as the
importer reimburses the issuing bank with the drafts already negotiated by the paying
bank.

11. Red Clause Credit: The red clause L/C enables the beneficiary to draw a
predetermined value of the L/C as its established. The red clause is an authority to the
negotiating bank to make advances to the beneficiary for the purpose of purchasing the
relevant merchandise. The conditions on which such advances may be made are
incorporated in the L/C.

STEPS IN THE OPERATION OF LETTER OF CREDIT:

In Letter of credit, normally four parties are involved,

 the applicant for the credit (importer),

 the beneficiary of the credit (exporter),

 the issuing bank and the advising bank incase of unconfirmed credit or the confirming
bank in case of confirmed credit.

7
 The step-by-step procedure
M/S Rainbow limited. Chennai has secured a contract for the supply of 200 ceiling fans to a
Nigerian importer. It has been decided that the terms of payment will be a confirmed
irrevocable letter of credit.
The total value of the contract is Rs.2, 00,000. Once the contract is duly signed the Nigerian
bank then sends instructions to its correspondent bank to the credit and the advice the Rainbow
limited accordingly. On receipt of this advice from the local correspondent bank in India, the
Rainbow limited., makes the shipment of he cling fns and gets the shipping documents and
other related documents. He presents these to the correspondent bank, which scrutinizes the
documents. If these are in full conformity with the terms of the credit, it will accept the
documents and make the payment to the exporter. The documents are then forwarded to the
issuing bank, which reimburses the amount to the correspondent bank. The issuing bank in
turn presents the documents to the importer and debits his account for the corresponding
amount.
The steps involved, therefore, relate to three distinct activities, viz., opening of credit,
presentation of documents and the process of payment. The entire scheme of operation can be
easily visualized with reference to the Flow chart given below.
SALES CONTRACT

SELLER
ISSUING ORDER

BUYER
CONFIRMATION

OPENING ADVICE

BANK BANK

DOCUMENTS

8
The straight lines show the flow of the credit. The dashed lines shows the flow of the documents
and the dotted lines show the process of payment.
ADVANTAGES OF LETTER OF CREDIT:

1. Purchase without cash: The importer can purchase goods on credit from foreign merchants,
who do not know him and may rely upon his standing, on the banker's credit issuing the letter
of credit.
2. Payment after satisfying conditions: The importer is assured in case of documentary letter
of credit that the exporter cannot obtain any benefit under the letter of credit without actually
shipping the merchandise and handing over the documents to the bank.

3. Better terms of trade: The issuing banker lends the advantage of his own credit to the
importer, who is able to secure terms of trade from the foreign supplier, which is otherwise not
possible.

4. Release against trust receipt: When banks are willing to assume credit risk of the importer,
shipping documents are surrendered to him in return for his trust receipt, and the goods
released.

5. Certainty of Payment: Though the importer and the exporter are not known each other, the
letter of credit provides an absolute assurance that the bills of exchange drawn under the letter
of credit will be honoured.
6. Credit facilities: The exporter can secure loans from his bank to buy or manufacture the
goods to be supplied on the strength of the letter of credit.

7. Discount facilities: The bills of exchange drawn under the letter of credit are readily
discounted with the advising/confirming banker or any other banker, because of the firm
undertaking given by the opening banker.

EXPORT PROMOTION SCHEMES

Promotional Measures in Foreign Trade Policy

Exports are regarded as an engine of economic growth in the wake of liberalization and
structural reforms in the economy. In recent times India is witnessing slowdown in exports with
its traditional partners. Under these circumstances, we need to set in motion strategies and

9
policy measures which catalyze growth of exports in several different sectors as well as in
newer markets.

Export Promotion Schemes

Foreign Trade Policy 2015-20 and other schemes provide promotional measures to boost India‟s
exports with the objective to offset infrastructural inefficiencies and associated costs involved to
provide exporters a level playing field. Brief of these measures are as under:

Exports from India Scheme

(i) Merchandise Exports from India Scheme (MEIS)

Under this scheme, exports of notified goods/ products to notified markets as listed in Appendix
3B of Handbook of Procedures, are granted freely transferable duty credit scrips on realized
FOB value of exports in free foreign exchange at specified rate (2-5%).
Duty Credit Scrips are provided for exports to diversify markets and offset the disadvantage
faced by exporters with regard to freight costs, transport hurdles and other disabilities.They are
like debit notes which can be used to pay import duties.
Such duty credit scrips can be used for payment of custom duties for import of inputs or goods,
payment of excise duty on domestic procurement, payment of service tax and payment of
custom duties in case of EO default.

Exports of notified goods of FOB value uptoRs 25, 000 per consignment, through courier or
foreign post office using e-commerce shall be entitled for MEIS benefit.
(ii) Service Exports from India Scheme (SEIS)
Service providers of notified services as per Appendix 3E are eligible for freely transferable
duty credit scrip @ 5% of net foreign exchange earned.
2. Duty exemption & remission schemes

An exporter must take Advance Authorization (AA) from the regional DGFT offices if he uses
his imported product as an input to manufacture his resultant exported product. No Advance
Authorization can obviously be given for import of prohibited items. Advance Authorization
can however be given for import of restricted items with certain conditions. Items reserved for
import through State Trading Enterprises (STEs) can be imported against Advance

10
Authorization/ DFIA provided the item of import is canalized/ bought through STEs or after
obtaining No Objection Certificate from STEs.

(i) Advance Authorization Scheme

Under this scheme, duty free import of inputs are allowed, that are physically incorporated in
the export product (after making normal allowance for wastage) with minimum 15% value
addition. Advance Authorization (AA) is issued for inputs in relation to resultant products as
per SION (Standard Input Output Norms prescribed in Handbook of Procedures Vol. II) or on
the basis of self- declaration, as per procedures of FTP. AA normally has a validity period of 12
months for the purpose of making imports and a period of 18 months for fulfilment of Export
Obligation (EO) from the date of issue. AA is issued either to a manufacturer exporter or
merchant exporter tied to a supporting manufacturer(s).

(ii) Advance Authorization for annual requirement

Authorization holders who have been exporting for at least 2 years can get annual Advance
Authorization.This gives them the flexibility to export any product throughout the year falling
under an export product group using the duty exempted imports.However specific inputs have
to be tallied with the resultant exports as per SION/ prescribed ad hoc norms.

(iii) Duty Free Import Authorization (DFIA) Scheme

DFIA is a variant to Advance Authorization scheme. It is different from Advance Authorization
as a higher minimum value addition of 20% is required, as compared to only 15% in Advance
Authorization. It has enabling provision for transferability of authorization or materials
imported against it. DFIA can be applied and obtained on post export basis as well. It is popular
with exporters who export first and then obtain the Authorization, which can be sold freely.

(iv) Duty Drawback of Customs/Central Excise Duties/Service Tax

The scheme is administered by Department of Revenue. Under this scheme products made out
of duty paid inputs are first exported and thereafter refund of duty is claimed in two ways:
i) All Industry Rates : As per Schedule
ii) Brand Rate : As per application on the basis of data/documents
(v) Rebate of Service tax through all industry rates
Refund of service tax paid on specified output services used for export of goods is available at
specified all industry rates.

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3. EPCG SCHEME

(i) Zero duty EPCG scheme

Zero duty EPCG scheme allows import of capital goods for preproduction, production and post
production (including Completely Knocked Down/ Semi Knocked Downthereof as well as
computer software systems) at zero Customs duty, subject to an export obligation equivalent to
6 times of duty saved on capital goods imported under EPCG scheme, to be fulfilled in 6 years
reckoned from Authorization issue-date (para 5.1 a of FTP).

The scheme can be taken both post exports and pre exports. The export obligation discharged
would require fulfilment of specific export obligation in addition to the existing Average export
performance over a period of three years.

Period of import would be 9 months. Exporters availing benefit under Technology Up gradation
Fund Scheme (“TUFS”) can also avail benefit of Zero duty EPCG Scheme. Import of motor
cars, SUV‟s, all purpose vehicles by hotels, travel agents, or tour or transport operators and
companies owning/ operating golf resorts not allowed. Export Obligation for domestic sourcing
of capital goods under EPCG schemes has been reduced by 10% to encourage import
substitution.

(ii) Post Export EPCG Duty Credit Scrip Scheme

A Post Export EPCG Duty Credit Scrip Scheme shall be available for exporters who intend to
import capital goods on full payment of applicable duty in cash.

4. EOU/EHTP/STP & BTP SCHEMES

Units undertaking to export their entire production of goods and services may be set up under
this scheme for import/ procurement domestically without payment of duties. For details of the
scheme and benefits available therein FTP may be required.

5. OTHER SCHEMES

(i) Towns of Export Excellence (TEE)

Selected towns producing goods of Rs. 750 crores or more are notified as TEE on potential for
growth in exports and provide financial assistance under MAI Scheme to recognized
Associations.

12
(ii) Rebate of duty on “export goods” and “material” used in manufacture of such goods
Rebate of duty paid on excisable goods exported or duty paid on the material used in
manufacture of such export goods may be claimed under Rule of 18 of Central Excise Rules,
2002.

(iii) Export of goods under Bond i.e. without payment of excise duty
Rule 19 of Central Excise Rules 2002 provides clearance of excisable goods for exports
without payment of central excise duty from the approved factory, warehouse and other
premises.

(iv) Market Access Initiative (MAI) Scheme

Under this Scheme, financial assistance is provided for export promotion activities on focus
country, focus product basis to EPCs, Industry & Trade Associations, State Government
Agencies and Indian Commercial Missions abroad to do market surveys, publicity campaigns,
participate in International Trade Fairs, set showrooms/ warehouses etc.

Details of the Scheme is available at www.commerce.nic.in

(v) Status Holder Scheme

Upon achieving prescribed export performance, status recognition as one star Export House,
two Star Export House, three star export house, four star export house and five star export house
is accorded to the eligible applicants as per their export performance. Such Status Holders are
eligible for various non-fiscal privileges as prescribed in the Foreign Trade Policy.

EXPORT FINANCE
Businessmen, industrialists and others require finance for their day-to-day activities. In export
business finance plays an important roles. An exporter needs finance for processing or
manufacturing or assembling or procuring or packing the goods for export, pre-shipment
finance is provided to the exporter to meet such requirements. After the shipment is made
exporter will have to give credit the exporter has to wait till the documents reach the importer
and he makes the payment. It will take some more time before the advice of payment is finally,
communicated to the exporter. Post-shipment finance is therefore provided to the exporter to
meet his needs for funds during the intervening period between the shipment of the goods and
the receipt of payment therefore

13
 1) Pre-shipment credit or packing credit – export packing credit is a loan or any other credit
given by a bank to an exporter for financing procuring raw materials and components to
manufacture the product or processing or assembling or packing the goods for exports. The
banks on the basis of the following give the packing credit
2) A letter of credit (l/c) opened in favor of the exporter by the importer‟s bank. A
confirmed irrevocable order for the export of goods from india having been placed on the
exporter, or any other evidence of order for exports of goods from india having been placed on
the exporter or relevant policy issued by the ecgc, or personal bond in the case of party‟s
already known to the exporter.
Cost covered by pre-shipment finance
 Cost of purchase or production
 Packing including any special packing for export

 Cost of special inspection or tests required by the importer

 Internal transport costs

 Port, customs and shipping agents charges

 Freight and insurance charges if the contract is either cif contract or c&f contract

 Export duty or tax if an

Post-shipment credit

 Post shipment finance is required by the exporter to bridge the gap between the time of
shipment of goods and the actual payment for the goods exported

 Post shipment credits are given by commercial banks against the security of approved
shipping documents tendered against letter of credit or otherwise

 It is also provided at concessional rate of interest

 The banks normally finance the post shipment credit in one of the following ways

 Negotiating export bills under letter of credit

 Discounting of bills drawn against shipment of goods – discounting of bills (d/a bills)
drawn against shipment of goods is usually done under limited sanctioned to different

14
 customers

 An advance against bills under collection

Types of post-shipment credit
 Short term credit is usually for 6 months and provided by banks
 Medium term loans are offered for a period beyond 6 months and up to 5years. These loans
are also provided by commercial banks in collaboration with exim bank of india. Medium
term loans are provided for in the caseof durable consumer goods and light capital goods
 Long term loans are provided in the case of sale of capital goods, complete plants and turnkey
jobs. The period of credit is usually more than 5 years
 Bank enjoy certain benefits they are as follows
 Reinforce by exim bank of india
 Guarantees provided by ecgc where a substantial part of the risk is covered by ecgc
 Forfeiting enables an exporter to convert an overseas credit sale into a cash sale through the
process of discounting of export receivables. The bill of exchange accepted by the importer is
surrendered to the forfeiting agency, which pays him in cash after deducting fee. The
understanding is that the agency will collect the dues from the importer on expiry of the said
period
 Finance for export on deferred payment terms – our exchange control regulations stipulate that
exporters should realize the foreign exchange for their exports within 180 days from
 The date of shipment. Contracts for export of goods against payment to be received fully or
partly after the expiry of the stipulated period for the realization of export proceeds are treated
as deferred payment export contract. Extension of long term export market strategy and
therefore provision has been made for the extension of medium and long term credit to finance
the sale of indian capital goods and related services
Free trade zone (100% export processing zones)
These are also referred to as epz‟s, are set up with the intension of providing an
internationally competitive duty free environment for export production, at low cost. This
enables the products of epz to be competitive, both quality wise and price wise, in the
international market.
India has seven epz at different parts of our country. Epz operating units broadly under the

15
product groups of electronics, engineering items, chemicals and allied products, gems and
jewellery, textiles, garments, plastics and rubber products.
The objectives of these units are

 To earn foreign exchange

 To generate employment opportunities

 To facilitate transfer of technology by foreign investment and other means

 To contribute to the overall development of the country

Entitlement for epz units

1. Each of the zones provides basic infrastructure such as developed land for construction of
factory shed, standard design factory buildings, roads, power, water supply and drainage.
In addition, customs clearance is arranged within the zone at no extra charge. Provision is
made for locating banking or post office facilities and offices by clearing agents in the
service centers located in each of the zones

2. Foreign equity up to 100% is permissible in the cost of epz units

3. Procurement of raw materials, components and consumables and export of finished

products shall be exempt from central levies

4. Exemption from industrial licensing for manufacturing of items reserved for ssi
sector

5. The government provides for import of raw materials components and spares by
registered exporters

6. The government provides incentives for import of capital goods for export units

7. Incentives are provided for import of essential raw materials for major exporting
industries under the open general licenses

8. Provision on indigenous raw materials to export units

9. Provision of cash subsidies

10. Drawback of duties

16
 11. Concessional railway freight
INCENTIVES IN INDIA
Duty exemption or drawback

i. Reduced commodity taxes such as excise duty and customs duty

ii. Exporters are either exempted from payment or refunded

Income tax concessions

i. Earnings from exports are either partially exempted from income tax or taxes at a lower rate

ii. Awards – separate awards are given for different categories of exporters

iii. Market development assistance (mda) – the mda provides assistance to the following

 Market and commodity researchers

 Trade delegations and study terms

 Participation in trade fairs and exhibitions etc

Foreign exchange
i. For participation in trade fair

ii. Foreign travel

iii. Procurement of samples and technical information from abroad

iv. Export risk insurance – export credit risk cover, ecgc

v. Quality control and pre-shipment inspection

Institutional assistance

i. ITPO

ii. EPC‟S

iii. Export development authorities

Procedure for executing an export order

The following the parties and agencies involved in executing an export order:

1) Exporter

17
 2) Importer.

3) The negotiating bank

4) Shipping company

5) Insurance company

6) Reserve bank of india

7) ECGC

8) Directorate general of foreign trade

9) Customs house

10) Port trust

11) Inspection agency

12) Clearing agents

The exporter has to process the export order in the following manner.
The exporter should scrutinize the export order with reference to the terms and conditions of the
contract. The order should specify the mode of payment such as letter of credit, document
against acceptance or document against payment, and the terms of conditions as specified in the
letter of credit. The following documents have to be prepared.
1. Bill of exchange (if d/a or d/p bill)
2. Commercial invoice
3. Bill of lading
4. Marine insurance
5. Packing list
6. Certificate of origin
7. Export inspection certificate
8. A delivery note (in duplicate) is to sent to the works manager or factory manage

giving the description of goods to be exported along with the copy of the instruction given
by the importer.

9. As soon as the goods are manufactured and kept ready for shipment the following have to be
done:

18
 Clearance of the excise authority has to be obtained. Export inspection agency
should be approached.
Goods should be dispatched to the port of shipment. Ar-4 form has to be prepared.
Thereafter the works manager sends a dispatch advice to the export department.
They will obtain the marine insurance cover for the goods.
10. Then the exports department sends the following documents to its clearing and forwarding
agents along with detailed instructions:
 Commercial invoice original export order original l/c packing list
 Certificate of inspection endorsement regarding floor price
11. The clearing and forwarding agent takes delivery of the consignment and arranges its storage in
the warehouse. Thereafter he prepares requisite copies of shipping bill and submits them to the
export department of the customs house along with necessary documents mentioned above.
12. After the shipping ill has been passed by the customs, the clearing and forwarding agents
presents the port trust copy of the shipping bill to the respective authorities. Thereafter, in the
case of shed cargo, the dock challan is prepared. Where the ship loads overside, the dock
charges are indicated in the shipping bill itself and therefore, no dock challan is prepared.
13. The passed shipping bill including dock challan will be submitted to the port commissioners.
14. In response to that the ship's export clerk calls for cargo from shed or boat and after loading
prepares the mate receipt. A mate receipt is a receipt issued by the commanding office of the
ship when the cargo is loaded on the ship and contains information about the name of the
vessel, berth, date of shipment, description of packages, marks and numbers, condition of the
cargo at the time of receipt on board the ship etc.
15. The mate receipt is first handed over to the port trust authorities so that the exporter may pay
all the port dues. After paying all the port dues, the clearing agent collect the mate receipt from
the port trust authorities.
16. The clearing and forwarding agent forwards the following documents to the exporter: full set of
bill of lading, export promotion copy of the bill, copies of customs invoice, original export
order.
17. As soon as the exporter receives the above documents from the clearing and forwarding agent,
he completes the remaining formalities. He will present the following documents to the
negotiating bank. (gr form, customs invoice, certificate of origin, packing list, marine insurance

19
 policy and bank certificate)
18. The negotiating bank transmits duplicate copy of the gr form to the exchange control
department of the reserve bank of india after receipt of the export proceeds.
19. The original copy of the bank certificate along with attested copies of the commercial invoice
are returned to the exporter. The duplicate copy of the bank certificate is forwarded to the office
of the dgft in the area.
20. Finally the exporter will get the value of the value of export consignment against the above-
mentioned documents.
Export procedure for sending goods
An outline of the important steps in exporting the goods is as follows:
IEC NUMBER:
Every person importing or exporting goods require and importer-exporter code number. The
regional licensing authorities normally allot the iec number. This code number is required to
be incorporated in the various export documents submitted to the authorities for purposes of
export.
Membership cum registration:
Membership of certain bodies will help the exporters in a number of ways. There are specified
export promotion councils , commodity boards and export development authorities for various
products. Members of epc will receive different kind of assistance and services in respect of
the export business.
Exporters are advised to become members of local chamber of commerce, productivity council
or any other trade promotion organization recognized by the ministry of commerce.
Membership of such bodies will help the exporters in different ways, including obtaining the
certificate of orgin, which is necessary document required for export to certain countries.
Inquiry and offer:
An inquiry is a request from a perspective importer to be informed of the terms and conditions
of sale. It may contain full details of the goods required, their description, catalogue numbers
or grades, sizes, weights or other distinguishing features, time and method of delivery etc.
As soon as the exporter receives a business inquiry from party abroad, it should be promptly
attended to. The exporter should bear in mind that the foreign buyer have a large number of
prospective suppliers in a number of countries and thus he is in a very competitive situation.

20
Serious and sincere care should, therefore, be exercised in dealings with foreign country
customers.
As a starting point of the negotiations, the exporter would have to make an offer to the foreign
customer. An offer is a proposal in which an exporter submits, may be in the form of a letter,
his quotation and other relevant information. The offer, when accepted by the foreign buyer,
becomes an order.
Confirmation of order:
Once the negotiations are completed and the terms and conditions are acceptable to the buyer
and seller, the buyer may place an order with the exporter. The exporter should immediately
confirm the order by sending this acceptance. For the confirmation of the order, the proforma
invoice is generally sent in triplicate to the buyer, and the buyer is asked to return two copies
signed by him. The exporter should again send once copy to the importer with the exporter's
signature to confirm the acceptance of the order. The confirmation of the order usually takes
the form of a contract.
Export license:
These exports of some items are banned and of some items controlled by means of licenses,
though many items are permitted to be exported freely. Needless to say, the exporter should
make sure that the item sought to be exported is not one, which falls in the banned list. If the
item to be exported requires a license, it is necessary to obtain it before finalizing the contract.
Finance:
If the exporter requires pre-shipment financial assistance, he should take the necessary steps to
obtain it.
Production/procrument of goods:
Once the order is confirmed, the exporter should take necessary steps to ensure the timely
availability of the goods of the specifications required and execute the export order promptly.
If the exporter is not a manufacturer, he should contract with his suppliers and ensure timely
availability of the goods of the buyer's specifications.
Shipping space:
As soon as the export order is confirmed, the exporter should contract the shipping companies
which have sailings for the port to which goods have be sent and book the required shipping
space. On the exporter's application or on the application of the freight broker on the exporter's

21
behalf, the shipping company issues sits acceptance if the space applied for is given.
Packing and marking:
Once the goods re ready, they are marked and marked properly. If the buyer has given
instructions about packing and marking, they should be followed accordingly. If there are no
such instructions, it should be ensured that the packing and marking are of the standards
recommended or specified.
Quality control and pre-shipment inspection:
Thereafter get the goods inspected by the inspecting authorities under the compulsory quality
control and pre-shipment inspection. They are as follows:
 Export inspection agency
 Agmark authorities
 Textile committee - for textile goods.
 Any other authorities authorized for this purpose.

Excise clearance:
As a matter of policy, the government has granted excise duty exemption for the export
products. Excisable goods may be exported either under claim for rebate of excise duty or in
bond. In the case of export under claim for refund of excise duty, the duty is first paid and its
refund is claimed. Some times with specification the goods are allowed to export without
payment of duty on execution of a bond with sufficient surety and security in the prescribed
bond.
Customs formalities:
Goods may be shipped out of india only after the customs clearance has been obtained. For this
purpose, the exporter (or the clearing and forwarding agent on behalf of the exporter) should
present the following documents to the customs authorities.
 Shipping bill
 Declaration regarding truth of statement made in the shipping bill
 Invoice
 GR form
 Export license (if required)
 Quality control

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  Original contract
 Letter of credit (if applicable)
 Certificate from quality control authorities
 Marine insurance policy
 Certificate of orgin
 Mate receipt or bill of lading
 Packing list
 AR-4 form

 Any other documents

The customs authorities scrutinize the shipping bill and other requisite documents, and if,
prima-facie, satisfied, they pass it for export, subject to a physical examination by the staff of
the customs. The shipping bill passed by the exporter department has to presented to the cargo
supervisor or the steamship company or the shed manager, who is the port official, for
permission to bring in the cargo for export.

i. Send the shipping advice to the importer:

Once all the said above process are over and as and when goods are loaded into cargo or ship,
the exporter will inform the importer about the dispatch of goods and departure of the ship. So
that the importer get ready for his actions.

ii. Negotiation of documents:

After shipping the goods, the exporter should arrange to obtain payment for the exports by
negotiation with the relevant documents through the bank.

iii. Applying for refund (if any)

Then appropriate steps to be taken by way of applying to get the duty draw bank from customs
and other assistance, if any from government.
GLOBAL SOURCING
Global product sourcing refers to a procurement strategy through which an enterprise works to
identify the most cost-effective location for product manufacturing, even if that location may be
in a foreign country.

23
For instance, a cement manufacturing company may find that the costs of raw materials and
manufacturing are lower in some foreign country because manpower is cheaper there. The
company would therefore opt to shut down its domestic operations and set up a plant in that
foreign country.
The mentioned strategy patterns for global sourcing make the direction for global sourcing
clearer. Supply management has to observe the dimensions of the pre-portfolio mentioned
above carefully before they can formulate an adequate global sourcing strategy, and especially
in case of bimodal companies.
The general sourcing process can be divided into the following 5 stages, explained below.
Stage 1: Preliminary Research – Investigation and Tendering
At this stage, the enterprise identifies the core and non-core operational activities, analyzes
customer and market requirements and identifies competitors. The idea is to develop the firm‟s
business objectives, prospective markets and brand positioning.
The strategic sourcing scope is also outlined through a business plan developed by the executive
and the sourcing specialist, and the preliminary work strategy and baseline for measuring
performance is established and documented as a procurement process plan.
Stage 2: Market and Supplier Evaluation
At this stage, the enterprise develops a detailed list of supplier selection benchmarks, which is
used to select the most appropriate suppliers that fit the requirements. Based on the findings of
the process, the sourcing strategy may be tweaked further and a final costing model is released.
The operational and economic benefits of the project will then be estimated. RFIs will then be
sent out to the shortlisted suppliers.
Stage 3: Selection of the Supplier (Sourcing Event)
Based on the results of the RFI dispatch, a final list of suppliers is selected and negotiation for
products is carried out, culminating in a supply agreement. Technical assessment of final supply
candidates is conducted to come up with the savings estimates for each. Finally, an
implementation schedule outlining timelines for various suppliers is developed.
Stage 4: Implementation
A performance analysis schedule should be developed, outlining all activities in the
implementation process. The implementation team should be constituted by the procurement

24
 agent and the schedule and strategy should be published. Agreements related to shared supply,
resources and logistical arrangements are developed.
At this stage, expected internal and external results from the suppliers should be documented.
Periodic measurement and reporting of actual performance should be carried out.
Stage 5: Performance Monitoring
Performance of suppliers is measured, both independently and in relation to the resources and
processes applied by supply partners. This should be carried out routinely and reported
accordingly. In-depth evaluation of the efficacy of collaborative efforts with each supplier is
obtained, and the partners involved continuously isolate problems and find out ways these can
be solved for improved performance
SOURCING STRATEGY PATTERNS

Technology oriented sourcing

This strategy is closely connected with high-tech sourcing outside domestic markets.
Sometimes, companies are forced to buy from abroad as there is not much domestic alternative.

Cost oriented global sourcing

It is the strategy pattern that helps to increase competition. The major goal is not to get ahead in
technology but to save cost. It can prove to be useful for standardized products where suppliers
are easily available in domestic and international markets.

Competition oriented global sourcing

Although the goal of competition oriented global sourcing is also to reinforce competition. But
unlike cost oriented sourcing, it does not have a single cost reduction focus. It tries to gain new
product ideas and developments in uncritical market situations by addressing foreign suppliers
or it looks for wider range of supply markets and suppliers for less critical products.
A Good Global Sourcing Strategy Addresses
i. Cost – the main purpose of product sourcing strategy is to take advantage of lower labor costs
in foreign countries. However, the procuring organization will face additional costs that don‟t
factor into domestic transactional costs. These include broker fees, freight charges, taxes
called, insurance, duties and bank fees.
ii. Laws – the sourcing specialist together with the supplier should consider what body of law

25
 shall be applied to their contractual agreement, i.e., the buyer‟s country‟s law, the supplier‟s
country‟s law or the law applicable through a signed treaty between the 2 countries.
iii. Currency – some buyers may insist on transactions in their own currency for the sake of
simplicity. However, a prudent buyer will consider the possibility of using the supplier‟s
currency where the buying country‟s currency may become stronger in the period between
agreement and supply and eventual payment
iv. Lead time – global purchases have a significantly longer lead time than domestic sources. The
reason is that overseas travel is slower, unless air travel is used. In addition, there is time taken
in the custom clearance process, which does not apply for domestic sources
v. Culture and language – where the procurement agent is unfamiliar with the culture and
language of the supplier, the risks of misunderstanding, miscommunication and
offensive/awkward encounters significantly increases.
vi. Transportation – whereas domestic sourcing necessitates the use of a single mode of
transportation, global sourcing frequently includes multiple modes of transport, e.g.,
combining air or water transportation with road transport to bring goods from the supplier to
the supplier‟s port, to your own port and finally to your place of business.
vii. Methods of payment – in global sourcing, a letter of credit is used for payment, which
necessitates the cooperation of the banks of the supplier and buyer.

Global Sourcing: Challenges and Solutions

Nowadays, a large number of organizations consider sourcing as a viable option for cutting
down their expenses. However, the procurement journey of organizations is not so simple as it
may seem. Large-size business firms especially MNCs face numerous hardships when they try
to customize their cross-border sourcing activities. The four pillars of global sourcing, namely,
people, process, technology, and supply chain play a great hand when it comes to internal
procurement operations for an organization.
Challenges Relating to Global Procurement
The challenges that most business firms face while outsourcing their services are listed as
follows:
1. Non-adherence to quality standards.
2. The difference in time zones.

26
3. Long-range logistics.
4. Accountability problems.
5. Compliance issues.
6. Delays in supply.
7. Language barriers.

How Companies Should Combat these Challenges

Effective planning is needed before implementation of procurement strategies. If there are
issues relating to logistics, companies must focus on their operations and thereby, delivering
the required technologies to every location consistently. When organizations select a sourcing
destination whose infrastructure and
transportation is not up to the mark, delays in supply are a common phenomenon. Sometimes,
the lack of a professional mindset among workers also leads to supply delays.
There may be other factors in the form of customs inspections, missing paperwork, and local
regulatory compliances. More often, companies fail to identify appropriate suppliers while
operating in foreign markets. Under such circumstances, organizations may resort to
procurement agencies for assistance. Global Procurement Services help business firms in
formulating their sourcing strategies.
In some cases, the growth strategies of business firms also have a direct impact on their
procurement policies. There are instances when mergers and acquisitions delay the supply
procedures while creating an intricate web of vendors. It is because of mergers and
acquisitions organizations are ready to accept redundant technologies while drifting from
corporate technology standards. Business firms have to pay increased prices for products and
services insome cases. They have no other option apart from doing so. There are times when
companies feel it is better to control costs rather than exploring sourcing opportunities.

CHALLENGES IN FOUR PILLARS OF GLOBAL SOURCING

No doubt, there are various challenges involved in the sourcing operations of companies. But,
when it comes to international sourcing, it is the four pillars, i.e., people, process, technology,
and supply chain that makes all the difference.
These four pillars are discussed in detail as follows:

27
People:
In this age of perfect market competition, organizations have to scrutinize the intricacies of
global logistics and supply chain management. Both these aspects will become even more
complex in the forthcoming days. The supplier management team of business firms must be
competent enough to handle all vendors in the respective countries. When operating in foreign
markets, differences in language and culture are bound to occur. Service delivery management
team must present the objectives of an organization in the global arena.
Process:
In this digital age, automation is the new buzz. A large number of companies are implementing
automated technologies in their operations. It facilitates their systems and processes at large.
Agencies that provide Global Procurement Services make organizations aware of the latest
sourcing trends and advanced technologies. According to experts, automation will drive global
procurement processes shortly. Automation accelerates the speed and efficiency of operations
while benefiting organizations at large.
Technology:
Business firms should select a procurement agency whose services run on innovative
technologies. This will enable companies to buy goods from multiple OEMs in various
currencies.
Supply Chain:
Companies need to ponder upon the supply chain before initiating their sourcing operations. It
will be a better decision to go with procurement agencies that have numerous supplier
contracts. A small-size or mid-size firm can‟t get access to appropriate suppliers across the
world. Reputed sourcing agencies have enough experience while operating in various
countries. With their assistance, companies can channelize their procurement operations.
Business firms need to handle sourcing challenges strategically. If they are unable to manage,
they can take help from sourcing agencies. However, the aspects of people, process,
technology, and supply chain must be taken into account under all circumstances.
Advantages of Global Sourcing
If you run a business, you must have thought about global contract manufacturing to minimize
your manufacturing costs. Outsourcing your firm‟s production operations to low-cost countries

28
like China, India, or Taiwan could save your business plenty of money. The advantages of
conducting sourcing activities in a foreign destination are listed as follows:
Cheaper Cost:
No doubt, the labor costs in countries like China, India, and Taiwan are significantly cheaper
than labor charges in the U.S. and the U.K. Every marketer wants to get hold of quality products
while spending the minimum. This is increasingly possible with global sourcing activities of
organizations. Most marketers look for optimum utilization of manufacturing labor in these
countries. Added to this, marketers can also be assured of the quality standards of these
products. This is indeed an added advantage for organizations. By cutting down labor costs, you
have the option to allocate that money elsewhere.
A Skilled Workforce:
Every marketer wants skilled professionals to manufacture their products. Hiring an experienced
professional will keep marketers free from all sorts of headaches. The workforce in countries
like China, India, Taiwan, Vietnam, Indonesia, etc. are aware of the latest trends in production
techniques. They also know how to implement these advanced manufacturing techniques in
their operations. This enables them to manufacture products that conform to global quality
standards. The presence of a skilled workforce and low labor charges in certain countries
intrigue marketers to engage in sourcing activities in these nations.
Increased Production Capacity:
This is another major benefit of global sourcing. Because of huge investments in the
manufacturing sectors in countries like China and India, the production capacity of these
countries has increased manifold. Most of the sourcing destinations that organizations select
have dedicated huge portions of their economy and investments towards manufacturing. These
countries also have the technical labor force needed to run the manufacturing plants. The
technical labor force of these countries also has a higher skill set when compared to the U.S.
By conducting sourcing activities in these nations, organizations can also increase their
production capacity quite smoothly. This is particularly helpful in times of increasing consumer
demand. Procurement outsourcing firms give effective suggestions to organizations regarding
how to align their production operations with the spikes in consumer demand.
Infrastructure:

29
Countries with excellent infrastructure and superior transportation options catch the eyes of
marketers. If a company decides to conduct its procurement activities in a destination that has
excellent infrastructure, it is very likely to be benefited from shorter lead times. Marketers can
get hold of the finished products within a short period.
Technology:
Huge investments are being made ensuring production plants are equipped with the most up-to-
date technology in the world. Technology also has an important role to play when it comes to
the quality standards of products. It is always recommended to select a sourcing destination
where the condition of factories is good. Most factories in China, India, and Taiwan have dirt
floors and leaking roofs. If this is the case, it is bound to affect the manufacturing operations of
organizations. Though these countries are sourcing hotspots, they need to consider this aspect
for staying ahead of the technology curve.
Disadvantages of Global Sourcing
Global sourcing is not without disadvantages. Companies have to face several challenges while
engaging in global sourcing activities. The disadvantages of conducting sourcing operations in a
foreign destination are listed as follows:
Language Barrier:
It is undoubtedly the biggest obstacle when it comes to conducting sourcing activities in a
different destination. For example, if a U.S. based firm wants to operate in China, it has to be
familiar with the Chinese language and the local codes. There are hardly any similarities
between Chinese and English languages. If there are gaps in communication, organizations
cannot carry out their manufacturing operations smoothly. Marketers will also face difficulty in
communicating with suppliers. However, with the assistance of sourcing agents, organizations
are minimizing this problem.
If you want to maintain positive relationships with your business partners, you need to have
quality customer support as well as an effective channel for communications. Before operating
in a challenging environment, organizations need to adopt all the necessary measures for its
effective functioning.
Local Tariff And Tax:
Most organizations are not aware of the local tariff and tax structures relating to their sourcing
destination. To combat this problem, most companies take suggestions from local sourcing

30
agencies. If you are not familiar with the tariff and tax structure of your sourcing destination,
you may not be saving on your production costs.

Political Instability:
Political instability, both internal and external, can halt supply lines. When there are instances of
protests, riots, pirate activity, or airport closures in a particular destination, the sourcing
activities of organizations are very likely to be affected. Political instability also causes
disruptions in the supply chain in more ways than one.
Shipping Costs:
No doubt, shipping can be a fairly economical method but it can also prove to be costly
sometimes. Organizations need to perform the overall cost analysis of low-cost country
sourcing and domestic sourcing to the overall cost equation.
Organizations need to consider both sides before engaging themselves in global sourcing
activities. Agencies that provide services of procurement outsourcing address the needs of their
clients precisely. Conduct your organization‟s sourcing activities in a different destination to
reap increasing benefits.
(i) Shipping Bill

The shipping bill is the main document on the basis of which the customs permission is
given. Under manual processing of export documents, the exporter is required to file the
appropriate type of shipping bill to seek the order for customs clearance of the export
shipment. Under computerized processing, the exporter does not prepare the shipping bill;
instead it is computer generated. The customs order is called “LET EXPORT Order”. After
the shipping bill is stamped by the customs, then only the goods are allowed to be carted to
the docks.
The shipping bill contains the following particulars:
1. Nature of goods exported,

2. Name of vessel, master or agents,

3. Flag,

4. Country of destination, the port at which the goods are to be discharged,

5. Exporter‟s address,

6. Importer‟s address,

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 7. Details of the packages, such as numbers and marks,

8. Quantity details of each case, total number of cases and aggregate weight,

9. F.O.B. prices and real value as defined in the Sea Customs Act and

10. Whether the merchandise is Indian or foreign origin which is re-exported.

The shipping bill is prepared in five copies:

1. Customs copy
2. Drawback copy

3. Export Promotion copy

4. Port Trust copy and

5. Exporters copy

Importance of Shipping Bill

 It is an important document required by the customs authorities for clearance of

goods. The customs authorities endorses the duplicate copy of the shipping bill with
“Let Export Order” and “Let Ship Order”.

 After the clearance of customs, exporter can load the goods on ship.

 Shipping bill endorsed by the customs authorities facilitates the exporter to claim
incentives such as excise duty refund and duty drawback.

Types of Shipping Bills

 Free Shipping Bill: It is used in case of goods which neither attract any export
duty nor entitled for duty drawback. It is printed on simple white paper.

 Dutiable Shipping Bill: It is used in case of goods, which attract export duty. It
may or may not be entitled to duty drawback. It is printed on yellow paper.

 Drawback Shipping Bill: It is used in case when refund of duties is allowed on

the goods exported. Generally, it is printed on green paper, but when the drawback
claim is paid to a bank, then it is printed on yellow paper.

 Shipping bill for Shipment Ex-Bond: It is used in case of imported goods for
re- export and which are kept in bond. It is printed on yellow paper.

 Coastal Shipping Bill: It is used in case of shipment that is moved from one port

32
 to another port, by sea, within India. It is not an export document.

When goods are sent by sea, it is called Shipping Bill and it is Airway bill when goods are sent
by Air.

(ii) Mate’s Receipt

A mate‟s receipt is issued by the mate (assistant to the captain of the ship) after the cargo is
loaded into the ship. It is an acknowledgment that the goods have been received on board the
ship.

Contents of Mate’s Receipt

Mate’ receipt contains the details about

 Name of the vessel,

 Date of shipment,

 Berth,

 Marks,

 Numbers,

Description and condition of goods at the time they are shipped, port of loading,

 Name and address of the shipper,

 Name and address of the importer(consignee) and

 Other required details.

Types of Mate’s Receipts

Mate’s receipt can be clean or qualified.

1. Clean Mate’s Receipt: Mate of the ship issues a clean mate‟s receipt if the

condition, quality of the goods and their packing are proper and free from
defects.

2. Qualified Mate’s Receipt: If the mate‟s receipt contains any adverse remarks as

to the quality or condition of the goods/packing, it is known as „Qualified Mate‟s

Receipt‟. If the goods are not packed properly and the mate‟s receipt contains any
adverse remarks about the packing such as “Poor Packing‟, the shipping company

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 does not assume any responsibility in respect of the goods during transit. It is
necessary for the exporter to secure the mate‟s receipt without any adverse remarks.
On the basis of the mate‟s receipt, the Bill of Lading is prepared by the shipping
agent. If there are adverse remarks in the mate‟s receipt, the same will be
incorporated in the Bill of Lading, which may turn to become a claused Bill of
Lading, and this may not be acceptable for negotiation.

3. Mate‟s receipt is first handed to the Port Trust Authorities who hands over to the

exporter soon after he clears their dues. This procedure is adopted to facilitate for
collection of port dues from the exporter.

Significance of Mate’s Receipt

 Mate‟s receipt is an acknowledgment of goods. It is not a document of title.

 It is issued to enable the exporter or his agent to secure bill of lading from the shipping
company.

 Bill of Lading, which is the title to the goods, is prepared on the basis of Mate‟s receipt so
it should be obtained without any adverse remarks.

 Port Trust Authorities are enabled to collect their dues as it is routed through them.

CART TICKET
A cart ticket is also known as cart chit. This is prepared by the exporter, which contains the
details of the vehicle number, description of goods, quantity, name of the shipper, shipping
bill number and port of destination. The driver of the vehicle carries the cart ticket. At the
time of entry into Port, the cart ticket is verified by the Port Authorities to satisfy that the
vehicle is carrying only those goods, which are mentioned in the cart ticket. After being
satisfied, the gatekeeper/warden/inspector issues the gate pass to the driver and allows entry
of the vehicle into the premises of the port.
 Certificate of Measurement :Freight is charged either on the basis of weight or
measurement. When weight is the basis of measurement, the shipping company for the
purpose of calculation of freight may accept the weight declared by the exporter.
However, when measurement is the basis for calculation of freight, the shipping company
may insist on a certificate issued by Chamber of Commerce or other approved

34
 organization in respect of goods. The certificate of measurement contains the details in
respect of description of goods, quantity, length, breadth and depth of the packages,
name of the vessel and port of destination of the cargo etc.

BILL OF LADING
Bill of Lading is a document issued by the shipping company or his agent acknowledging the
receipt of cargo on board. This is an undertaking to deliver the goods in the same order and
condition as received to the consignee or his agent on receipt of freight, the shipping
company is entitled to. It is a very important document to the exporter as it constitutes
document of title to the goods. Each shipping company has its own bill of lading. The
exporter prepares the bill of lading in the form obtained from the shipping company or
agents of shipping company.The goods can be consigned to order of the exporter, which
means the exporter can authorize someone else to receive the goods on his behalf. In such a
case, the exporter would discharge the bill of lading on its reverse. When the bill of lading is
negotiated through the bank, it would be endorsed in favour of the bank that would endorse
further to the importer, on receipt of payment. Bill of Lading is made in signed set of 2
originals, any one of which can give title to the goods. The shipping company also issues
non-negotiable copies (unsigned) which are not documents of title to goods but serves the
purpose of record only.The reverse side of Bill of Lading contains the terms and conditions
of the contract of carriage. The clauses on most of the bills of lading are common. A Bill of
lading should be clean to facilitate the exporter to obtain the proceeds of export without
difficulty.

Main Purposes

It serves three main purposes.

 As a document of title to the goods

 As a receipt from the shipping company and

 As a contract of affreightment (transportation) of goods.

Types of Bill of Lading

1. Received for Shipment B/L: A shipping company issues it when goods have been given
to the custody of the shipping company, but they have not been placed on board.

2. On Board Shipped B/L: The shipping company certifies that the cargo has been received

35
 on board the ship.

3. Clean B/L: It indicates a clean receipt. In other words, it implies that there has been no
defect in the apparent order or condition of goods at the time of receipt or shipment of
goods by the shipping company.

4. Claused or Dirty B/L: It shows that the B/L is qualified which expressly declares a
defective condition of goods. The clause may state “bale number 5 hook-damaged” or
“package number 10 broken”. By superimposing this type of clause, the shipping
company is limiting its responsibility at the time of delivery of goods, at the destination. It
is very important to note that bank accepts only a clean B/L at the time of negotiation.

5. Transshipment or Through B/L: When the journey covers several modes of transport
from the place of starting to the place of destination, this type of B/L is taken. It indicates
that transshipment would be en route. For example, part of the journey is by ship and the
rest of journey may be by road, rail and air

6. Stale B/L: According to international commercial practice, B/L along with other
documents must be presented to the bank not later than twenty one days of the date of
shipment as given in the B/L. In some cases, the importer may indicate the number of
days within which the documents are to be presented from the date of shipment. Exporter
has to comply with the stipulation indicated. Otherwise, the B/L becomes stale and is not
accepted by the bank for payment. A stale bill is one which is tendered to the presenting
bank so late a date that it is impossible for the bank to dispatch to the consignee‟s place, in
time, before the goods arrive at the destination port. In other words, bank finds it
impossible to see the documents reach before the ship reaches the destination.

7. To Order B/L: In this case, the B/L is issued to the order of a specified person.

8. Charter Party B/L: It covers shipment on a chartered ship.

9. Freight paid B/L: When the shipper pays the freight, then this type of B/L is issued
with the words “Freight paid”.

10. Freight Collect B/L: When the freight on the B/L is not paid and to be collected at
the point of destination, it is marked “Freight Collect” and this B/L is known as “Freight
Collect B/L”.Generally, the importer insists on the “clean on-board shipped” bill of lading
with the prohibition of transshipment of goods as goods can suffer damage during

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 transshipment. If transshipment is allowed, even period of journey may take longer.

11. B/L is a non-negotiable document: A bill of lading is not a negotiable document

while it is a transferable document. Transferability enables the exporter to claim payment

from the bank even before the goods reach the destination. Similarly, it enables the
importer to sell the goods even before they reach the destination.

12. Parties mentioned in B/L: There are three main columns in B/L. These are shipper

(consignor), consignee or order of and notifying party. Notifying party is party to whom
notice is to be sent on the arrival of goods at the place of destination. When the B/L is
made to the order of, the person, in whose name it is ade to the order of, has the right to
endorse further.

To illustrate:

Consignor: Cherry & Co, BhopalConsignee or to the order of: Dimpy & Co, Newjersey,
U.S.A. Notifying Bank: Bank of America, Newjersey In this case, Dimpy & co has the
total right for the cargo as the consignee. So, Cherry & Co can not transfer title to the
goods to the third party. If payment of the goods is not received, consignor loses title to
the goods and so B/L is not to be made in this way. However, where advance payment
has been received or goods are shipped under irrevocable letter of credit, bill of lading can
be made in the name of the consignee. In the normal circumstances, exporter takes the bill
of lading to his order and endorses to the bank at the time of negotiation and in this way
his interests are fully protected.

Who can lodge claim: B/L is the only evidence to file claim against the shipping company in
the event of non-delivery, defective delivery or short delivery. If the importer makes payment,
he can lodge the claim, as he will be in possession of negotiable copy of B/L. Otherwise,
exporter can lodge the claim and receive the value of goods.

Contents of B/L

 Name and address of the shipper.

 2 Name and address of the vessel.

 Name of port of loading.

 Date of loading of goods.

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  Name of port of discharge and place of delivery.

 Quantity, quality, marks and other description.

 Number of packages.

 Freight paid or payable.

 Number of originals issued.

 Name of the shipping company.

 11 Voyage number and date.

 Signature of the issuing authority.

Importance to the Exporter

 It is an acknowledgment from the shipping company that the goods have been received for
the purpose of shipment.

 After receipt of B/L, it helps him to send the shipping advice to the importer.

 If any damage occurs to the cargo during transit, he can hold the shipping company
responsible, if he has received clean bill of lading.

 A copy of bill of lading is required to be attached to the application form to claim the
incentives

 It is a contract of carriage between the exporter (shipper) and the shipping company.

Importance to the Importer

 It is a document of title to the goods, which enables him to transfer the tittle by
endorsement and delivery.

 The exporter can send a non-negotiable copy of B/L as advance intimation of shipment to
the importer.

 3 It enables him to pay the freight amount as the B/L contains freight details.

Importance to the Shipping Company

 It helps the shipping company to collect the freight amount from the exporter (CIF
contract) or importer (FOB contract).

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  Shipping company can protect itself from the wrongful claims of exporter/importer by
incorporating condition of goods/packaging, at the time of receipt. In case the shipping
company, inadvertantly, omits to mention the advesrse conditon, at the time of receipt,
advantage can be claimed by exporter/importer, by submitting wrongful claim.

Airway Bill

 Airway Bill is also called Air consignment Note. It is a receipt issued by an airline for
the carriage of goods. As each shipping company has its own Bill of Lading, so each
airline has its own airway bill.

 Airway Bill or Air consignment note is not treated as a document of title to goods and
is not issued in negotiable form. Delivery of the goods is made to the consignee
without the production of airway bill.

Importance of Airway Bill

 It is a contract of carriage of goods between the consignor and airlines or his agent.

 It acts as a customs declaration form.

 It contains details of freight and so works as a freight bill.

Bill of Entry

Bill of Entry is a declaration form made by the importer or his clearing agent in the prescribed
form under Bill of Entry Regulations, 1971 on the strength of which clearance of imported
goods can be made.

 When goods are imported into a country, customs duty has to be paid by the importer. For
this purpose, importer prepares the Bill of Entry declaring the value of goods, quantity and
description. This is prepared in triplicate. Customs authorities may ask the importer to
produce the invoice of the exporter, broker‟s note and insurance policy to satisfy about the
correctness of value of goods declared.

 For the purpose of giving information, goods are classified into three categories.

 Free Goods: These goods are not subjected to any customs duty.

 Goods for Home Consumption: These goods are imported for self-consumption.

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 Bonded Goods: Where goods are subject to customs duty, till duty is paid, goods are kept
in Bond.

Contents of Bill of Entry

 Name and address of importer.

 Name and address of exporter.

 Import licence number.

 Name of port where goods are to be cleared.

 Desription of goods.

 Value of goods.

 Rate and value of import duty payable.

DOCUMENT RELATED TO PAYMENT

Letter of Credit

A letter of credit is a document-containing guarantee of a bank to make payment to the

exporter, under certain conditions and up to a certain amount, provided the conditions
contained in the letter of credit are complied with. For a detailed presentation, reader may refer
to the chapter on Export Financing.

Bill of Exchange

The Negotiable Instruments Act, 1881 defines a Bill of Exchange as “ an instrument in

writing containing an unconditional undertaking, signed by the maker, directing a certain
person to pay a certain sum of money only to, or to the order of, a certain person or to the
bearer of the instrument”.

There are five important parties to a Bill of Exchange:

The Drawer: The drawer is the person who has issued the bill. In an export transaction,
exporter draws the bill as money is owed to him.

The Drawee: The drawee is the person on whom the bill is drawn. Exporter draws the bill on
the importer who is the drawee. Drawee is the debtor who owes money to the exporter

40
(creditor).

The Payee: The payee is the person to whom the money is payable. The bill can be drawn by
the exporter payable to the drawer (himself) or his banker.

The Endorser: The endorser is the person who has placed his signature on the back of
the bill signifying that he has obtained the title for the bill on his own account or on account
of the original payee.

The Endorsee: The endorsee is the person to whom the bill is endorsed. The endorsee can
obtain the payment from the drawer.

Types of Bills of Exchange

Sight Bill of Exchange: In this Bill of Exchange, also known as demand Bill of Exchange,
the drawee has to make the payment, on presentation.

Usance Bill of Exchange: In case of Usance or Time Bill of Exchange, payment is to

be made on the maturity date, after a certain period, known as tenor. When the calculation of
period is made with reference to the sight of bill, the bill is known as „after sight usance bill‟.
Sometimes, the maturity date is calculated with reference to the date of bill of exchange, it
is known as „after date usance bill‟.

Clean Bill of Exchange: A clean Bill of Exchange is one when the relative shipping
documents do not accompany with it. In this case, the relative shipping documents
i.e. Bill of Lading is sent directly to the importer to enable him to take delivery of the cargo.

Documentary Bill of Exchange: A documentary Bill of Exchange is one where the

relative shipping documents such as Bill of Lading, marine insurance policy, invoice and
other documents are sent along with the Bill of Exchange. This is the common form in
export trade.

The documents are given to the bank either for collection or negotiation. In case the importer
gets the documents on acceptance, it is called Documents against Acceptance. If the importer
gets the documents only on payment, it is called Documents against Payment.

After shipment of goods, the exporter draws the bill on the importer or, more frequently, on
bank acting for the importer, as agreed between the exporter and importer. The exporter
usually draws the bill to his own order or that of his bank. Later, he endorses the bill in favour

41
of his bank. Exporter may request his bank to collect or purchase the bill. In case of
purchase of bill, exporter receives the export proceeds immediately. In any case, the
exporter‟s bank sends the documents to its branch or correspondent‟s bank in importer‟s
place. The bank at that end sends the intimation of receipt of documents to the importer
either for acceptance or payment, dependant on the nature of bill drawn. In case of
Documents against acceptance, importer accepts the bill and then only gets title to goods. In
case of Documents against payment, importer has to make the payment for securing delivery of
documents.

Trust Receipt: In case of D/P bill, the importer has to make the payment to take delivery of
goods. If the importer is unable to make the payment, on arrival of the shipment, and take
possession of goods, he executes a Trust Receipt to take delivery of goods. Importer will have
the right to sell the goods and would be acting as agent of the bank. Importer will be
depositing the sale proceeds with the bank, as and when sales are made. Till the importer
makes the final settlement, bank retains ownership for the merchandise and the role of the
importer is not that of owner but that of agent to the bank. This arrangement facilitates the
importer to take delivery of goods when sufficient funds are not available with him. This
facility provides the flexibility to the importer while the interests of bank are protected, at
all times.

Bank Certificate of Payment: It is a certificate issued by the negotiating bank to the

exporter that the bill covering the shipment has been negotiated through it and export proceeds
have been received from the importer. The certificate indicates the details of the merchandise
exported. Exporter submits this certificate of payment for establishing that the export
transaction has been completed totally by him. This certificate is required to comply with the
requirements for the discharge of export obligation.

DOCUMENTS RELATING TO INSPECTION

Certificate of Inspection

It is a certificate issued by the Export Inspection Agency certifying that the consignment has
been inspected under the Export (Quality Control and Inspection) Act, 1963 and found that the

42
requirements relating to quality control and inspection have been complied with, as
applicable, and the goods are export worthy.

DOCUMENTS RELATED TO EXCISABLE GOODS

GP Forms

GP stands for Gate Pass. A GP form, gate pass, is issued for the removal of excisable goods
from the factory or warehouse. Form GP1 is issued for the removal of excisable goods on
payment of duty. GP2 is issued for the removal of excisable goods without payment of duty.

Form C

It is not to be confused with C form. Form C is used for applying for rebate of duty on
excisable goods (other than vegetable, non-essential oils and tea) exported by sea. It is to be
submitted, in triplicate, to the Collector of Central Excise.

Forms AR4/AR4A

These forms are meant for removal of excisable goods for export by sea/post. Now, in their
place, ARE-1 form is used.

DOCUMENTS RELATED TO FOREIGN EXCHANGE REGULATIONS-LEGAL

REGULATED DOCUMENTS

Foreign Exchange Regulations require that all exports other than exports to Nepal and Bhutan
shall be declared on the following forms:

GR Form

GR is an exchange control document required by Reserve Bank of India. It is required to be

filled, in duplicate, for all exports in physical form other than by post. An exporter has to
realize the export proceeds within a period of 180 days from the date of shipment, in India. To
ensure control on realization, RBI has introduced this procedure.

GR form, in duplicate, is to be submitted by the exporter to the customs along with the
Shipping Bill. Customs will give their running serial number on both the copies. After
admitting the customs shipping bill, customs will certify the value of goods declared by the
exporter in the space earmarked and also record their assessment of value. Customs retains

43
the original copy and return the duplicate to the exporter. Customs sends the original GR form
to RBI, which will be an indication of the goods, which are to be exported. Exporter has to
submit the duplicate of GR form to the authorized dealer, named in GR form, along with
other shipping documents within a period of 21 days of shipment for the purpose of
negotiation. After the negotiation of bill, the authorized dealer will report the transaction of
negotiation to RBI. On receipt of the original, RBI is apprised of the developments in respect
of the export transaction.

Once the export proceeds are received from the importer, the authorized dealer has to forward
the duplicate copy of GR form together with the copy of invoice to RBI. RBI recognizes that
the export transaction has been concluded and export proceeds have been fully realized. At
certain customs offices, shipping bills are processed electronically. So, at those offices,

GR form has been replaced by SDF (Statutory Declaration Form).

PP Form

It is required to be filled in for all export transactions, in duplicate, for all countries to be
made by post parcel, except when made on “value payable” or “cash on delivery basis”.

VP/COD Form

It is required to be filled for all export transactions to all countries by post where the export
proceeds are realized on “value payable” or “cash on delivery basis”.

SOFTEX Form

It is required to be prepared, in triplicate, for export of computer software in non- physical

form.

All the above documents serve the purpose of monitoring the realization of export proceeds in
the stipulated manner

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 SCHOOL OF MANAGEMENT STUDIES

UNIT 5 GLOBAL BUSINESS MANAGEMENT - SBAA5301

1
UNIT 5 GLOBAL OPERATIONS MANAGEMENT
Strategic issues in operations management – Manufacturing Management , logistics Management and
procuring –technology transfers- issues Marketing Management – benefits of international markets-
Major activities in international marketing-Human Resource Management- Approaches- Expatriation and
Repatriation Process, Training – Compensation – Industrial Relations.
_________________________________________________________________________________

Introduction to Strategies in Operations Management

The term ‗globalization‘ describes businesses‘ deployment of facilities and operations around the world.
Globalization can be defined as a process in which geographic distance becomes a factor of diminishing
importance in the establishment and maintenance of cross border economic, political and socio-cultural
relations. It can also be defined as worldwide drive toward a globalized economic system dominated by
supranational corporate trade and banking institutions that are not accountable to democratic processes or
national governments.
There are four developments, which have spurred the trend toward globalization. These are:
 Improved transportation and communication technologies;
 Opened financial systems;
 Increased demand for imports;
 Reduced import quotas and other trade barriers.
When a firm sets up facilities abroad it involves some added complexities in its operation. Global markets
impose new standards on quality and time. Managers should not think about domestic markets first and
then global markets later, rather it could be think globally and act locally. Also, they must have a good
understanding of their competitors. Some other important challenges of managing multinational
operations include other languages and customs, different management style, unfamiliar laws and
regulations, and different costs.
OPERATIONS MANAGEMENT
Operation Management is the management process that transform inputs into goods and services
which adds value for customer.
GLOBAL OPERATIONS MANAGEMENTS
Global Operations Management (GOM) concentration prepares graduates with state-of-the-art
knowledge of managing operations in a global context. The focus will be on contemporary issues

2
related to operations function which are of relevance in a firm‘s ability to effectively collaborate with its
supply chain partners in order to remain competitive in a global economy. The GOM concentration
prepares students for careers with global manufacturing, service, and consulting organizations by
offering a variety of courses in management of materials, quality, supply chains, services, global
projects, and operations strategy.

Key issues to be considered for managing Global Operations Management

Managing global operations would focus on the following key issues:
 To acquire and properly utilize the following concepts and those related to global operations,
supply chain, logistics, etc.
 To associate global historical events to key drivers in global operations from different
perspectives.
 To develop criteria for conceptualization and evaluation of different global operations.
 To associate success and failure cases of global operations to political, social, economical and
technological environments.
 To envision trends in global operations.
 To develop an understanding of the world vision regardless of their country of origin, residence or
studies in a respectful way of perspectives of people from different races, studies, preferences,
religion, politic affiliation, place of origin, etc.

Strategic issue in Operation Management

When an international company possesses a particular technology and decides to begin manufacturing,
it needs to adopt a sound operation strategy so as to enjoy competitive advantage. Manufacturing
involves transformation or conversion of new materials and inputs into good and services. It is therefore
associated with activities or decisions related with manufacturing. The operation strategy in a
manufacturing company involves many issues.
The more important among them are:
1. Manufacturing management
2. Procuring
3. Logistics management
4. Other issues in managing global operations

3
Manufacturing management
International manufacturing management provides an unparalleled opportunity for companies to grow
into new markets while at the same time boosting their competitiveness. However, most of today‘s
networks are legacy structures only a fraction was strategically planned. As a result, there is huge
potential to be captured from rethinking traditional structures, approaches and supply relations, and
huge potential for getting it wrong.
Forces accelerating global manufacturing
1. Huge factor cost differences
2. High growth in emerging markets
3. Lower transaction cost
GLOBAL MANUFACTURING STRATEGIES
The success of a global manufacturing strategy depends on four key factors:
compatibility, (ii) configuration, (iii) coordination and (iv) control.
Virtual manufacturing describes the situation in which a firm subcontracts the manufacturing process to
another company, i.e., the firm chooses to outsource.
1.Manufacturing Compatibility
Compatibility refers to the degree of consistency between a firm‘s foreign direct investment decisions
and its competitive strategy. Cost-minimization and the drive for globalization force MNEs to pursue
economies of scale in manufacturing, often by producing at low labor-cost sites. Other key variables
include dependability, quality, flexibility and innovation. Offshore manufacturing refers to manufacturing
activities that occur beyond the borders of a firm‘s home country.
2.Manufacturing Configuration
MNEs consider three basic configurations en route to developing their global manufacturing strategies.
They are:
 centralized manufacturing in a single country (a global export approach)
 Regionalized manufacturing in the specific (a regionalized marketing and manufacturing
approach)
 Local manufacturing in each country market served (a multidomestic marketing and
manufacturing approach).
 Rationalization represents the specialization of production by product or process in different parts
of the world in order to take advantage of varying costs of labor, capital and raw materials.

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3. Coordination:Coordination represents the linking or integrating of participants all along the global
supply chain into a unified system.
4 .Control : Control embraces systems, such as organizational structure and performance measurement,
which are designed to help ensure strategies are implemented, monitored and revised, when appropriate.
Key issues in international manufacturing management
1. Geographical dimension
2. Regulatory regimes dimension
3. Working issues for labour force
4. Location issues
5. Increase in cost of production
Case study – How Toyota lost its way ( manufacturing scenario)
Management accountants are well placed to advise on the benefits of pursuing ‗lean‘ manufacturing
techniques, but some might argue that the credibility of those techniques has been undermined by
Toyota‘s recent quality problems. Rather, the conclusion seems to be that commercial pressures diverted
Toyota from the lean principles they formerly valued. The lean manufacturing approach pioneered by
Toyota concentrated on the identification and minimisation of waste in production, supply chains and
management processes. Seven types of waste were targeted, including over processing, waiting times,
and unnecessary transportation; so the approach was credited with improving quality, speeding up
production and reducing costs. Strategies included getting suppliers to design cheaper and lighter
components, and making productivity gains. Toyota‘s recent growth has been significant. It has added 17
new manufacturing sites to the 58 it had in 2000, and expanded the product range significantly in a bid to
rapidly increase market share. In 2000, Toyota produced 5.2m cars; by 2009 its capacity was 10m. Yet
Toyota was able to cut more than $10bn from global operating costs in the period 2000-2006. The
relentless pursuit of growth, the rapid expansion of supply chains, the pressure for ever-more productivity
gains all combined to apparently undercut the commitment to quality which used to be part of the Toyota
tradition. ‗The company was hijacked by financially oriented pirates‘ commented former top US
executive Jim Press who left Toyota in 2007. In 2009/2010 the quality problems came to a head when
Toyota had to recall 5.3 million vehicles in the US, in relation to five separate issues affecting various
models: accelerator entrapment by floor mats; unintended acceleration caused by ‗sticky‘ pedals; issues
with software relating to braking systems, power steering, and front drive shafts. US regulators linked the
problems to 51 deaths, and had reports of unintended acceleration dating from 2003.

5
LOGISTICS MANAGEMENT
Logistics is increasing its impact on business, as it creates value for companies and assistsin delivering
improved profits. The application of logistics varies across continents. Modern logistics is generally a
new concept in Asia, with the focus on the basic transport processes of road, rail, air and sea. These
processes have in some areas been integrated into what is known as multimodal transport.
 Logistic is the function that enables the flow of materials from suppliers into an organization
through operations within the organization out to the customers.
 It is derived from the Greek word ―logistikos‘ which means ‗to reason logically‘
 It basically consists of all operations required for goods (both tangible and intangible) to be made
available in markets or at specific destinations.
 International marketing is becoming more important to companies as the world shifts from
distinct national markets to linked global markets.
 Logistics management is that part of supply chain management that plans, implements, and
controls the efficient, effective forward and reverse flow and storage of goods, services and
related information between the point of origin and the point of consumption to meet customers'
requirements.
 The Transport and Logistics Industry is the back bone of any economy, and the driving force
behind all sectors, be it agriculture, manufacturing or services.
 However, like all industries, it is confronting tremendous change in present times – driven by tech
innovations, changing consumer expectations and stringent regulations. Although the global
outlook for the industry is optimistic (estimated at about US$ 4 trillion in 2018, It is slated to
grow to US$ 6.3 trillion, at a CAGR of 4.9%), the road ahead is challenging, especially for small
and medium enterprises.

Functions in Logistics management

 Logistics management activities typically include inbound and outbound transportation
management, fleet management, warehousing, materials handling, order fulfillment, logistics
network design, inventory management, supply/demand planning, and management of third-party
logistics services providers.

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  Logistics function also includes sourcing and procurement, production planning and scheduling,
packaging and assembly, and customer service.
 It is involved in all levels of planning and execution--strategic, operational and tactical.
 Logistics management is an integrating function, which coordinates and optimizes all logistics
activities, as well as integrates logistics activities with other functions including marketing, sales
manufacturing, finance, and information technology.
 Physical conveyance or coordinations framework ought to have a key introduction, i.e., linkages
with internal and external environs. The following is displayed a model of key coordinations
framework with information sources, process, yields, exercises and activities,
 A key coordinations framework should most importantly be arranged, sorted out, executed and
gathered. The administrative capacities should be directed as to the fundamental strategic
capacities like request handling warehousing, and so on, concerning crude materials, in-
process stock just as definite products. For this to happen inputs-physical assets, HR,
budgetary assets and data assets must be focused on the framework. The yields of the framework
are utility creation, viable development, focused edge in coordinations administration and coming
about consumer loyalty.

Advantages of an efficient logistics system

1.Reducing Transportation Costs: This is the single biggest challenge for the industry, since
transportation constitutes a major chunk, about 30% of total expenses. But with rising fuel prices, this can
go up to 50%.Reducing Carriers: Companies can redistribute their business among fewer carriers and
negotiate for lower rates. However, this increases the risk of over dependency on few carriers.
1. Consolidating Shipments: They could consolidate shipments and get bulk rates, but this could be at
the risk of delayed deliveries which would impact consumer satisfaction.
2. Reducing Fuel Expenses: Logistics companies may not be able to control the fuel prices, but
controlling fuel expenses is definitely within their reach.
3. Fleet management routing software can help to ensure that freight carriers ply on the shortest, most
efficient routes – avoiding traffic congestions, taking into account road restrictions by vehicle type and
time of day This not only reduces the total miles driven, wear and tear and maintenance costs, but also
lowers violations and safety risks, which can result in reduced insurance premiums.

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2. Improving Business Processes: A research by Inboundlogistics.com cited that 36% of the enterprises
polled strongly agreed that they relied on their 3PL partners to drive cost reductions and business process
improvements. This means logistics partners are expected to have the knowledge and experience to look
beyond supply chain and logistics operations to drive changes within the overall operations framework.
They also need to be financially stable, flexible and open to taking reasonable risks for long term gains.
At the end of the day, the logistics business is highly competitive; hence industry benchmarking plays a
key role in business process improvements. It‘s like the proverbial rat race – to be the best and the fastest.
3. Enhancing Customer Service: Nowadays, the markets are dynamic, supply chains have become
longer and more complex, and customer expectations have changed, both in terms of delivery times and
service quality. Now customers also expect their logistics partners to solve problems and help them grow
in a competitive environment.This means logistics partners must recruit the right people with the right
skills and attitude. They must also focus on enhancing and standardizing the customer experience across
all geographies, channels and touch-points, be it in-person interactions, phones, online chats, emails or
social media.
4. Improving Supply Chain Visibility:
In order to have accurate, on time deliveries every time, logistic companies need to have full visibility on
all aspects of the supply chain:
Shipments ought to be tracked, to ensure they are following the prescribed route and schedule, and in
case of disruptions, notifications and alerts be activated so that prompt action can be taken. Customers
need to get updates, viz., shipping notifications, ETAs, as well as be able to track shipments on a web
portal.
Logistics companies need to have visibility on the entire work flow in a warehouse – receipt of inventory,
storage, order management and completion, and shipment. Plus – visibility on what is headed towards
them, so that they can plan their workforce accordingly.
5.Supply Chain Finance: Access to supply chain finance is critical for shippers / logistic companies to
ensure smooth business operations and optimization of cash flow, especially in today‘s uncertain times of
geopolitical tensions, unexpected custom duties, exchange rate fluctuations, natural disasters etc.
Typically, finance is required for letters of credit, open accounts, freight audit payments etc. While there
are many more options for finance now than before, checking freight invoices has never been easy – rates
are diverse and complicated, and carrier references may not always be correct.

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Moreover, transportation is a cash intensive business. Delays in payment could adversely affect the
shippers.
6.Impact of the Economy: Political instability, decline in manufacturing sector performance, increase in
consumer price index, inflation etc. adversely impacts demands for products and services, which also
impacts freight demand. Conversely, government investments in infrastructure projects increases wages
and demand for products.
7.Driver Shortage: Anywhere in the world, truck drivers have difficult and demanding jobs. With
increased government regulations, companies tend to be more selective in recruitment. Candidate‘s
driving records are scrutinized for traffic violations or inspection discrepancies, lest it have a negative
impact on the company‘s Compliance Safety and Accountability (CSA) score.
8.Government Regulations:
Governments wield a tremendous power over global shipments. So many companies are involved in the
trade shipments, and more than a dozen have release and hold authority. Even after the shipments clear
the ports, the US Consumer Product and Safety Commission, FDA, EPA and Dept of Agriculture need to
give their approval.
In addition, zoning permit laws and taxation on international and domestic shipping also impact logistics.
10 . Sustainability:
There is a considerable focus on reducing emissions, primarily due to anti idling and emission reduction
regulations by governments, but also on account of public perceptions and cost savings.
Companies can comply by adopting route and load optimization, tracking and reporting emissions,
upgrading engines and choosing alternative fuels.
The latest truck models come with the best engine performance, emission compliance and much better
mileage. These offer great savings in the long run, but require steep upfront costs.

MAJOR PROBLEMS THE GLOBAL LOGISTICS INDUSTRY IS FACING

Logistics is a huge industry. There are many challenges facing this industry today. Here are some of the
major issues mentioned below.
1. Changing customer needs
Now logistics solutions must be tailored to the customers‘ needs. There should be full transparency in
orders and all stages from raw material stage to the final sale must be visible. Reverse logistics is used by
many. It is a challenge to keep up with the good quality services as there are so many factors involved.

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2. On time delivery
It is a challenge to provide on time delivery in the logistics industry. In the case of vessels, it takes
months to discharge. Air cargo takes less time, but they are expensive.
3. Infrastructure
There is a lack of infrastructure. Many terminals are trying to make room for large vessels. This is
causing congestion problems. If these infrastructure issues are not resolved fast, we will continue to have
congestion problems.
4. Capacity
The freight rates will increase or decrease based on over capacity and tightening capacity of the airships
or conatianerused for shipping,. The strength of the workforce and the import and export regulations also
influence the tranpostation cost.
5. Security
Security is a major concern in this industry. Goods are passed from one provider to the other. They are
kept in local warehouses and then delivered by truck. So, security is a big problem.
PROCUREMENT:
Procurement management is a strategic approach to optimizing organizational spend. It invoices
sourcing, requisitioning, ordering, inspection, and reconciliation. It means acquiring your goods and
services from preferred vendors, within your determined budget, either on or before the deadline.‖.
GLOBAL PROCUREMENT:
Global procuring or sourcing occurs when buyers purchase goods and services from sellers located
anywhere in the in the world. Global sourcing of goods, crops and other commodities has been common
for many years in industries such as manufacturing and agriculture, used as appositive strategy to reap
economic advantage.
ENABLING FACTORS OF GLOBAL PROCURING
1. Growing pools of highly skilled resources
2. State-of-the-art facilities
3. Advances in telecommunications
4. Improvement in collaborative tools and platforms
5. Maturing delivery models

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 MODES OF GLOBAL PROCCURING
 Importation
 Establishment of international procurement offices (IPOs)
 Sourcing through direct investment
Overcoming Procurement Challenges
Modern procurement teams have evolved beyond their traditional role of simply obtaining goods and
services for their company while seeking to reduce total spend to generate cost savings. In addition to
managing spend analysis and planning for their entire organization, procurement professionals manage
supplier relationships, partner with their counterparts in finance, marketing, production, and sales to
perform complex initiatives that bring together strategic sourcing, risk management, support for
promotional efforts, and process optimization in order to build value across all levels of the business.
The procurement challenges these teams face have grown in scope and gravity along with their
responsibilities—and so has the team‘s potential impact on the company‘s bottom line. As a result, when
the procurement function faces a major challenge, solving it quickly and efficiently protects not just the
department‘s efficacy, but the financial and competitive health of the company as a whole
Challenges Faced by Procurement Teams
Procurement managers (and their teams) at companies of all sizes face a variety of procurement
challenges every day. But the most common challenges seem to crop up at just about every business now
and then.
Savvy procurement leaders plan ahead, building effective workflows and processes to deal with a familiar
set of problems, including:
1. Maverick Spend :Maverick spend is also called invisible spend or rogue spend. Is is a purchase
made outside your company‘s established procurement procedures. Items purchased with rogue spend
can‘t readily be accounted for in inventory and financial records. This complicates procurement
strategy and financial planning, as well as departmental budgets, inventory management, and records
for internal, external, and financial audits.
2. Process Inefficiencies: In a well-planned and efficient procurement system, buying is a manageable
mix of urgent purchases and planned ones. However in a adequate process development and attention
to workflows (including things like approval hierarchies, contingency plans, etc.), buying may look a
little, well, higgledy-piggledy. When spend priorities shift away from strategic spend and toward last-
minute buys at the cheapest available price, procurement processes begin to suffer. For example:The

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 overall procurement schedule is thrown into disarray, sacrificing potentially significant savings and
value from negotiated discounts, vendor incentives, and early payment on scheduled buys.
 Production, marketing, and sales timelines suffer, complicated by extended bidding periods or
requests for proposals (RFPs) on big projects and inconsistent delivery schedules and uncertain
vendor reliability for small ones.
 Supplier-related issues, such as inadequate capacity, policy and process-related risk exposure, etc.
may be overlooked in the name of simply obtaining the required goods and services as quickly
and cheaply as possible, creating more expense and damaging existing supplier relationships and
contract negotiation.
3. Supplier Management
Supplier management is a key role in ensuring goods and services are supplied at the right price, at
the right time, and the right quality, suppliers are more than just vendors .Managing supplier
relationships is very important aspect of procurement . It concentrates on pairing those preferred
vendors who have the skill, capacity, and reliability to handle your most critical demands at your
quality and price points. If supplier relationship management is maintained properly it can become a
critical part of an effective overall procurement strategy, But without an easy way to evaluate,
onboard, monitor, and optimize the vendors in your supply chain the Business may face a list of
complications, including late or missing shipments, duplicate orders, and a bloated, inefficient supply
chain full of underperformers who take up attention better directed at your potential partners in
productivity.
4. Risk Management and Mitigation
One of the most important, and often overlooked, sources of potential value within the procurement
function is risk mitigation. The inflow of goods and services, and the long, snaking supply chain that
produces it, carries a hefty amount of risk touching on a number of factors, including:
 Compliance (Legal, internal, and industry)
 Supplier contracts
 Fraud (from theft, invoice fraud, etc.)
 Sourcing risks (product quality/cost, vendor compliance issues, delivery, tracking, etc.)
All of these risks can have a significant impact on the bottom line and competitive advantage, and are
best managed with centralized, efficient, and transparent data and supply chain management.
Information Overload

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From the smallest decisions (―Which vendor will give us the best value for our breakroom napkins?‖) to
major challenges like multi-stage production initiatives, you need good data, and user-friendly access to
it, to make informed and strategic choices. A lack of a centralized data solution can wreak havoc on your
analytics, planning, and macro-scale decisions—but it can also toss a spanner in the workflows at all
stages of procurement.
Automation in procurement
Squaring off against the potential pitfalls of procurement takes strategic thinking, an eye for detail, and a
willingness to bring both your procurement processes and your organization into the digital age.
Equipped with artificial intelligence (AI) and focused on automation, modern procurement solutions take
the struggle out of procurement and ramp up the value.
Consider these benefits, and how they can ameliorate your toughest procurement challenges:
 Centralized, cloud-based data management, integrated with your supply chain, sales, production,
finance, and marketing teams, means all transactional data is proactively recorded and instantly
available for spend analysis, advanced financial reporting and planning, and important supplier
contract negotiations
 Users can access their data from both desktops and mobile devices, and with triple-checked
verification, everything from purchase order reviews and approvals to supplier evaluation and
shipping performance reviews is faster and more accurate.
 eProcurement can be integrated with, or replace, outdated paper-based systems, saving your
company on paper, document storage, and environmental impact costs.
 Supply chain management is easy to update in real time.
 Contingencies for critical shortages or urgent reorders can be added to workflows automatically,
and legal-reviewed boilerplate makes constructing, reviewing, and approving successful contracts
a snap.
 Risk management is simplified and streamlined with greater data transparency and shared
information for all stakeholders. Reporting, analytics, and audits are more accurate, complete, and
efficient.
 Automation frees the staff from low-value tasks to focus on more strategic concerns. Human error
decreases, speed increases, and your overall procurement efficiency skyrockets.

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Updating of procurement Team
Defeating even the toughest procurement challenges is a lot easier when your team has the tools and
technology required to succeed. By integrating automation and artificial intelligence into your workflows
and freeing your staff to focus on the big picture, companies can ensure procurement department is
building value, and a strong bottom line, for your company.

TECHNOLOGY TRANSFER
Technology transfer is the process of sharing of skill, knowledge, technologies, methods of
manufacturing, sample of manufacturing and facilities among governments and other institutions to
ensure that scientific and technological developments are accessible to a wider range of users who can
then further develop and exploit the technology into new products, processes, applications, materials or
services.
Reasons for technology transfer
1. Profit from selling technology
2. Location and logistics advantage
3. Competitive edge
4. Grants and subsidiaries
5. Limitations of home country
6. superior capital market
7. Enhance competence
Method of technologic transfer
1. FDI
2. Licensing
3. Franchising
4. Management Contracts
5. Contract manufacturing
6. Joint Venture
7. Technological consortium and joint R&D projects
Importance of technological transfer
1. Encourage use of technology
2. Create competitive advantage

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3. Promote research and development
4. Enhance capability and innovations
5. Leverage business environment

TECHNOLOGY ADVANCEMENTS:
Adopting new and innovative technology solutions has become imperative for logistics companies. Given
that labor is scarce, competition is intense and customers have become more demanding, technology
advancements can increase productivity by minimizing time, cost and errors.
 Automation systems / data driven software solutions such as advance packaging labelling,
warehouse sorting etc. have become the need of the hour.
 Shipment tracking systems enable companies to monitor their shipments round the clock, get
alerts and notifications, and set up customized reporting.
 Data Analytics can help with Improving customer experience, operational efficiency and safety.
 Robotics and autonomous machinery have been adopted by many key players in the logistics
industry. These help in drastically cutting down time taken for order completion and delivery.
 IOT can play a key role in reducing risks and ensuring safe delivery of goods. The best fleet
management system connects with specialized sensors built into new generation trucks. This
software provides real time in-transit visibility of trucks, shipments on board, and key vehicle
parameters.
 Thanks to cloud computing, many of the above software solutions are relatively inexpensive.
However, many companies lack trained manpower resources to actually derive insights from
them.
Global Sourcing: Challenges and Solutions
Nowadays, a large number of organizations consider sourcing as a viable option for cutting down their
expenses. However, the procurement journey of organizations is not so simple as it may seem. Large-size
business firms especially MNCs face numerous hardships when they try to customize their cross-border
sourcing activities. The four pillars of global sourcing, namely, people, process, technology, and supply
chain play a great hand when it comes to internal procurement operations for an organization.
Challenges Relating to Global Procurement
The challenges that most business firms face while outsourcing their services are listed as follows:
 Non-adherence to quality standards.

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  The difference in time zones.
 Long-range logistics.
 Accountability problems.
 Compliance issues.
 Delays in supply.
1. Language barriers.

Companies faces challenges in Four Pillars of Global Sourcing

No doubt, there are various challenges involved in the sourcing operations of companies. But, when it
comes to international sourcing, it is the four pillars, i.e., people, process, technology, and supply chain
that makes all the difference. These four pillars are discussed in detail as follows:
1. People: In this age of perfect market competition, organizations have to scrutinize the intricacies
of global logistics and supply chain management. Both these aspects will become even more
complex in the forthcoming days. The supplier management team of business firms must be
competent enough to handle all vendors in the respective countries. When operating in foreign
markets, differences in language and culture are bound to occur. Service delivery management
team must present the objectives of an organization in the global arena.
2. Process: In this digital age, automation is the new buzz. A large number of companies are
implementing automated technologies in their operations. It facilitates their systems and processes
at large. Agencies that provide Global Procurement Services make organizations aware of the
latest sourcing trends and advanced technologies. According to experts, automation will drive
global procurement processes shortly. Automation accelerates the speed and efficiency of
operations while benefiting organizations at large.
3. Technology: Business firms should select a procurement agency whose services run on
innovative technologies. This will enable companies to buy goods from multiple OEMs in various
currencies.
4. Supply Chain:Companies need to ponder upon the supply chain before initiating their sourcing
operations. It will be a better decision to go with procurement agencies that have numerous
supplier contracts. A small-size or mid-size firm can‘t get access to appropriate suppliers across
the world. Reputed sourcing agencies have enough experience while operating in various
countries. With their assistance, companies can channelize their procurement operations.

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CHALLENGES IN PROCUREMENT .
1. Risk management
Risk is always a key concern for procurement, with the primary focus on suppliers‘ financial status,
followed by health and safety and industry practices. It‘s no longer good enough to simply engage with
your tier-one suppliers. Emphasis needs to be paid to controlling the approach taken with tier-two
suppliers, ensuring that the necessary obligations are passed down to subcontractors.
2. Reputation and brand image
It‘s not difficult to recall allegations of child labour in the overseas supply chain of certain retail brands,
or issues around modern slavery both at home and abroad. The knock-on effect can be disruption to
brand and public image and ultimately an impact on profitability. The Modern Slavery Act goes some
way towards addressing this, but issues remain around compliance.
3. CSR
Organisations are making tremendous progress in the approach to direct materials, but indirect
procurement is more complex. The level of auditing required to ensure that practice are sustainable,
including those of first and second tier suppliers, is labour-intensive and time-consuming. Consider
asking suppliers to complete detailed questionnaires and take positive action with the results. Many
organisations now issue written codes of conduct, but the key challenge is acceptance and practical
application in the supply chain.
4. Becoming a customer of choice
Innovation is often included in an RFP, but does not necessarily specify what is really needed. Supplier
innovation is more likely if you become a customer of choice. A recent CASME survey highlighted that a
simple constraint to achieving this is late payment of invoices. Innovation is a two-way process; don‘t
just write it in a contract and expect the best ideas from suppliers. The most successful approach is to
abide by agreed payment terms, and demonstrate a partnership approach by listening and responding to
suppliers‘ ideas.
5. Centres of Excellence
The trend towards a centralised organisation to support the procurement function is on the rise, with an
emphasis on provision of spend data and analysis, plus RFx e-sourcing support. What is the best
approach to organising the CoE‘s structure, work responsibilities and operation to ensure the business is
supported? A virtual CoE may be an appropriate solution; however, a complete software package, beyond
the capabilities of Microsoft Excel, is needed for centralising and recording the CoE‘s activities.

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6. Stakeholder engagement
At almost every one of CASME‘s meetings held each year, the discussion includes procurement‘s need
for achieving greater connections with stakeholders. Recent benchmarking studies show that more
CASME members are now profiling and prioritising stakeholders and their requirements, in order to plan
the right type of communication – for example, whether a particular stakeholder needs an occasional
meeting over coffee, or a formal monthly one. CRM tools can be used to track the relationship building
activities and supplier onboarding. Credibility can be gained by using the right terminology, and by
demonstrating knowledge of the category, suppliers and market trends. By aligning procurement activity
to the stakeholder‘s business objectives and selling the benefits of collaboration, the overall result can be
more valuable than cost savings alone.

Methods to overcome these Challenges

/Effective planning is needed before implementation of procurement strategies. If there are issues relating
to logistics, companies must focus on their operations and thereby, delivering the required technologies
to every location consistently. When organizations select a sourcing destination whose infrastructure and
transportation is not up to the mark, delays in supply are a common phenomenon. Sometimes, the lack of
a professional mindset among workers also leads to supply delays.
There may be other factors in the form of customs inspections, missing paperwork, and local regulatory
compliances. More often, companies fail to identify appropriate suppliers while operating in foreign
markets. Under such circumstances, organizations may resort to procurement agencies for assistance.
Global Procurement Services help business firms in formulating their sourcing strategies.
In some cases, the growth strategies of business firms also have a direct impact on their procurement
policies. There are instances when mergers and acquisitions delay the supply procedures while creating
an intricate web of vendors. It is because of mergers and acquisitions organizations are ready to accept
redundant technologies while drifting from corporate technology standards. Business firms have to pay
increased prices for products and services in some cases. They have no other option apart from doing so.
There are times when companies feel it is better to control costs rather than exploring sourcing
opportunities.

GLOBAL MARKETING
Global marketing is defined as the process of adjusting the marketing strategies of your company to adapt
to the conditions of other countries. Global marketing is more than selling your product or service

18
globally. It is the full process of planning, creating, positioning, and promoting your products in a global
market.Big Companies usually expand their markets across boundaries. Currently, with the proliferation
of the internet, even small businesses can reach consumers anywhere in the world. If a business chooses
not to extend internationally, it can face domestic competition from international companies that are
extending their international presence. The presence of this competition almost makes it a requirement
for many businesses to have an international presence.
There are many benefits of global marketing,
1. Improves the effectiveness of your product or service: This is because the more you grow, the
more you learn, and the faster you learn, you become more effective at producing new product or
service offerings.
2. Competitive advantage in the market: Second, you are able to have a strong competitive
advantage. It is easy enough for companies to be competing in the local market. But there are very
few companies who can do so on the worldwide arena. Hence, if you can compete in the
worldwide market and become a strong force in your industry.
3. Awareness of your brand : Third, you increase consumer awareness of your brand and product or
service. Through the internet, consumers can keep track of your progress in the world.
4. Reduce costs and increase your savings Finally, global marketing can reduce your costs and
increase your savings. In focusing on other markets, you can attain economies of scale and range
by standardizing your processes – not to mention the savings that you get when you leverage the
internet!
After defining global marketing (including its uses and evolution), this article will be discussing
the different aspects of global marketing: its strategies, campaign development, issues and mistakes, as
well as standout examples.
Global Marketing Strategies
Global marketing strategies are actually important parts of a global strategy.
In order to create a good global marketing strategy, you must be able to answer:
 ―What I am trying to achieve in an international market?‖
 ―What are my company‘s strengths and weaknesses for that market?‖
 ―How can I counter challenges in the market?‖
 ―That potential will I have in this market?‖

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Moreover, a good global marketing strategy incorporates all the countries from all regions of the world
and coordinates their marketing efforts accordingly.
Of course, this strategy does not always cover all the countries but should be applied for particular
regions. For example, you can break down regions like North America, Latin America, Europe and the
Middle East, Asia and the Pacific, and Africa.
Beyond its breakdown per country or region, a global marketing strategy almost always consists of
several things:
(1) uniform brand names;
(2) identical packaging;
(3) similar products;
(4) standardized advertising messages;
(5) synchronized pricing;
(6) coordinated product launches; and
(7) harmonious sales campaigns.
Global marketing strategies used by companies expanding internationally:
 Create a consistent and strong brand culture. Creating a strong and consistent brand that always
seems familiar to customers is a priority for companies growing internationally. With the ever-
more rising and expanding internet, brand structure has become more of a brand culture. To be
more specific, it has become more prevalent nowadays that the brand you support reflects your
culture. It can be damaging if you compromise your brand culture. For example, Google found out
the hard way when it launched a self-censored search engine in China, even though China subjects
its new media to government blocks. Google‘s brand has been known to make the world access
information at anytime. How can Google set up something in China against its own culture? As a
result, customer backlash versus Google was substantial.
 Market as if there were no borders. Due to the proliferation of digital platforms, brands cannot
always adopt different strategies per country. In a way, due to the internet, companies have to
adopt a marketing approach that is more or less unified.
Factor’s to considered to initiate a Global marketing campaign
In order to develop your campaign globally, there are a few things you should keep in mind. You have to
know the market, you have to create a marketing plan, you should tailor fit your approach to marketing,
and you should localize your communications.

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  Know Your Market :As soon as your company decides to extend your marketing worldwide, you
have to understand the context of where you will be working. Every region has various behaviors
and norms as it deals with marketing messages; how people would like to be contacted; and what
is appropriate for that place, and the like.You have to make sure that you research how the market
will respond to the marketing strategy you have, so you can get much leverage from your new
market.
 Create a Marketing Plan :Becoming successful worldwide is not merely altering your language.
You have to make your global marketing plan consistent with your local efforts. Yet it still needs
to be customized, according to your regional knowledge. Once you have an insight of the global
environment, draft a marketing plan that details your actions.
 Identify your objectives and goals.: As soon as that has been established, draw a map that covers
the overall strategy and techniques to attain those objectives.
 Tailor Fit Your Approach: Keep in mind that what may have worked for your local audience
may not translate as well to your foreign audience. Try to adapt your initiatives to your audience,
giving them a tailor fit experience. Definitely, what works for one country may not work for
another.
 Localize Your Communications: It is not only relevant to know the language and cultural hurdles
and adjusting your communications for every market, it is also critical to know all the cultural
references and relevant holidays and events. You need to create a more personalized experience.

Global marketing issues and mistakes

Companies, especially their marketing teams, often face the following issues and mistakes when
expanding worldwide. These can become hurdles in achieving international success.
 Non-Specification of Countries
Companies are rarely specific about thwere they wish to expand. Companies may want to shift to
Asia or they want to increase their growth by offering their products to Europe. It is problematic
to take things too simply. By Europe do what do they mean is it European Union, Western
Europe, Eastern Europe, and so on and so forth. It is also to be remembered that consumers
identify themselves at the local level and hence marketing teams to understand each country and
its own norms, laws, payment types, and particular business practices before entering foreign
market.By being specific in the start, companies can prioritize the markets they want to get into,

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 generate a staffing plan, and allocate the budget. These are all important for a business to attain its
global objectives.
 No Focus on Internal Information
Companies need to conduct specialized and complicated market research when you are going to
create a global market entry strategy. Companies need to consider the potential opportunity in the
market, how easy or hard it would be for your business to work in that market, and how
successful you already are in the market. There are a lot of companies that concentrated on
outside data to help their decision-making, as described above. Nonetheless, you can simply use
your own internal information to get the data, on whether there is a strong fit between your
product or service and the market. Remember that data from third parties do not understand your
company or even know your consumer. Only you have the best input on this.
 Lack of Adaptation of Sales and Marketing Channels
Most Western companies think that they can go into new markets by doing the same things that
brought them success domestically. As previously mentioned, it is important to have brand
consistency, but differing markets would like particular marketing approaches. Moreover,
marketers have to consider at which channels it would be best to market, based on market
behavior. Case in point, for Brazil, marketing campaigns are more successful through Facebook
because of its popularity there. However, in Latin America, you can draw in a bigger audience
through Twitter. Hence, you may need to check which channels give you the best results through
market research.
 No Adaptation of Product Offerings
Business can only attain a fit between their product and the market one at a time. However, more
often than not, businesses attempt to launch the same products in varying markets. In essence,
they are ignoring that they are interacting with a different set of consumers. A market that is more
advanced might need additional features than what the product already has.
 Non-Usage of Local Team Leads
Perhaps one of the usual mistakes companies make in global marketing is failing to consider the
input of strong and competent employees in their foreign markets, especially when establishing
strategic decisions.These individuals are significant because they know their country and your
company. Since one of the biggest issues businesses face when including local input is

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 communication, the marketing team must have a system that guarantees that local perspectives are
gathered and distributed often.
 Lack of Knowledge on Global Logistics
Marketers often make use of software that allows them to publish website content, send email,
publish updates on social media, and accomplish other marketing-related activities. However,
these tools do not always support each market. For example, you have payment solutions only for
a couple of countries, but your customer relationship management system has many contacts
coming from a hundred countries.
 Marketers have to guarantee that they could market to customers in the countries they are
entering. They should consider how to display the local currency, how to email consumers in
particular time zones, and how to support the languages of the consumers.
GLOBAL MARKETING EXAMPLES
If you are searching for inspiration on how to market your company successfully in the international
arena, check out these examples from well known companies.
1. AIRBNB :Airbnb is for people who book and list accommodations all over the world. Generally,
it is a community marketplace that has more than a million listings in more than 34,000 cities in
the world. Airbnb became very successful globally because of social media. In 2015, Airbnb
began a social media campaign using the #OneLessStranger hashtag. This social experiment had
Airbnb asking its community to do random acts of hospitality for people they did not know and
take a photograph or video with them and share by making use of the hashtag. In only 3 weeks
after the campaign was launched, more than 3 million people created content, engaged, or talked
about the campaign.
2. Coca-Cola :Even though Coca-Cola is a big corporation, it also concentrates on programs in
small communities and infuses a lot of funds and time in small charities. Case in point, Coco-Cola
built 650 clean water installations in Beni, Suef in Egypt and sponsored meals (Ramadan) for
children in the Middle East. Moreover, the brand goes with an emotion that everyone knows —
happiness.
3. Domino’s :Domino‘s positioned menu innovation in the forefront to increase its international
awareness and interest. They have consistent items for the pizza in all markets like their sauce,
bread, and cheese, where it works anywhere.They just update the toppings for every market. If it
is Asia, they have fish and seafood, for example.

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4. Dunkin’ Donuts:Dunkin‘ Donuts China has introduced seaweed and dry pork donuts.With
thousands of stores in over 30 countries worldwide, Dunkin‘ Donuts updated its menus to satisfy
its international consumers.In Lebanon, they have the Mango Chocolate Donut; in South Korea,
they have the Grapefruit Coolatta; and in Russia, they have Dunclairs!
5. H&M :H&M almost always increases its store openings by 10 to 15 percent each year. One of the
secrets of their global expansion is maximizing their online experience.
6. Innocent Drinks :A leading smoothie company in the United Kingdom, Innocent Drinks can be
found in 13 countries all over Europe. Even with its wide reach, they still maintain consistent
branding.
7. Kentucky Fried Chicken: Kentucky Fried Chicken was able to do something quite interesting.
In Japan, they were able to connect their products with Christmas. So every Christmas, Japanese
line up at their nearest KFC for some chicken!
8. McDonald’s: Even though McDonald‘s keeps its branding consistent, McDonald‘s tries to bring
in some local flavor to particular menu items. McDonald‘s has the McArabia in the Middle
East—this is a flatbread sandwich. It also introduced France to its macaroons and included the
McSpaghetti in the Philippines. In Mexico, they have a green chili cheeseburger and in South
Korea, they have bulgogi burgers.
9. Nike : Nike has evolved his international presence by carefully selecting international
sponsorships. Even though spending for sponsorships is quite unpredictable, demand costs usually
rise sharply because of triggers such as tournaments and championships. This has captured the
attention of the international arena.
10. Red Bull : One of Red Bull‘s successful techniques is hosting extreme sports in the world. They
have the Red Bull Air Race in the U.K., the Red Bull Soapbox Race in Jordan, and the Red Bull
Indianapolis Grand Prix.
11. Starbucks : Starbucks adjusts its menu for local tastes. For Hong Kong, they have Dragon
Dumplings, for example. The company has had a wide reputation for the engagement of local
cultures.
12. Unger and Kowitt :Unger and Kowitt is a law firm that focuses on traffic tickets in Fort
Lauderdale, Florida. Although its focus is in Florida, the business knows that the U.S. has many
languages and cultures. So its website is translated to English, Portuguese, Spanish, and Creole.

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 13. World Wildlife Foundation: The World Wildlife Foundation or the WWF is known for its Earth
Hour initiative and moved it to the mobile audience of Norway. Earth Hour is an international
voluntary event wherein participants turn their lights off for 1 hour to show the ease of fighting
climate change. Since Norway experiences long daylight hours, it is a great candidate for WWF‘s
initiative.By using Mobiento, a digital agency, the WWF positioned their Blackout Banner on the
top media sites of Norway. When someone would finger swipe on the black screen, it would
gradually show the countdown for Earth Hour. This banner got around a million impressions. The
campaign also received marketing awards for its ingenuity.

HUMAN RESOURCE MANAGEMENT IN THE GLOBAL WORLD

International human resource management (IHRM) is the process of procuring, allocating, and effectively
utilizing human resources in a multinational corporation
International human resource management bears both functional and strategic resemblance to human
resource management. Functionally it performs almost the same set of activities as human resource
management – recruitment, selection, performance management, compensation, training, industrial
relations, career management etc. Strategically international HRM is closely linked to the business
strategy of the organization.
International human resource management deals with at least three types of employees based on
their country of origin:
1. Parent-Country Nationals (PCNs) – Employees belonging to the country where a company‘s
headquarters are located are called as parent-country nationals or home country nationals.
2. Host-Country Nationals (HCNs) – Employees belonging to country where the company has set up
a subsidiary or a manufacturing facility are called host- country nationals
3. Third-Country Nationals (TCNs) – Employees who work in the home or host country facility of
the company but are not nationals of either are called third- country nationals.
International HRM also means dealing with issues related to different countries, expatriation, repatriation,
cross-cultural issues etc.there are four major contextual variables because of which HRM activities in a
global firm differ from a domestic firm, hence the need for international HRM. These are cultural
diversity, workforce diversity, language diversity, and economic diversity. Let us go through these
variables and see how they affect HRM practices.

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I. Cultural Diversity:
Culture of a country is one of the key factors which affect people-oriented processes, and HRM is a
people-oriented process. Therefore, culture of a country has very significant impact on HRM practices.
When we consider global perspective of HRM, we find cultural diversity along the globe, that is, cultures
of two countries are not alike. Cultural diversity exists on five dimensions- individualism versus
collectivism, power orientation, uncertainty avoidance, masculinity versus femininity, and time
orientation. Let us see how these dimensions affect human behaviour and, consequently, work practices.
II. Workforce Diversity:
Workforce diversity is increasingly becoming common for large organizations even for domestic ones.
However, in a global firm, additional workforce diversity emerges because of hiring personnel from
different countries. A typical global firm may draw its employees from three types of countries — home
country , host country , and third country. In a global firm, workforce diversity can also be seen in the
context of employee mobility from one country to another country for performing jobs.

On this basis, an employee can be put in one of the following categories:

1. Expatriate — a parent country national sent on a long-term assignment to the host country operations.
2. Inpatriate — a host country national or third country national assigned to the home country of the
company where it is headquartered.
3. Repatriate — an expatriate coming back to the home country at the end of a foreign assignment.
III. Language Diversity:
Language is a medium of expression but employees coming from different countries have different
languages. Though English is a very common language, it does not serve the purpose adequately as it does
not cover the entire world. While employees coming from different countries may be encouraged to learn
the language of the host country for better dissemination of the information, it does not become feasible in
many cases. An alternative to this is to send multilingual communications. It implies that anything
transmitted to employees should appear in more than one language to help the message get through. While
there are no hard- and-fast rules in sending such messages, it appears safe to say that such a message
should be transmitted in the languages the employees understand to ensure adequate coverage.
IV. Economic Diversity:
Economic diversity is expressed in terms of per capita income of different countries where a global
company operates. Economic diversity is directly related to compensation management, that is, paying

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wages/salaries and other financial compensation to employees located in different countries.One of the
basic principles of paying to employees is that ―there should be equity in paying to employees.‖ However,
putting this principle in practice is difficult for a global company because its operations are located in
different countries having different economic status. In such a situation, some kind of parity should be
established based on the cost of living of host countries.Diversity of various types in a global firm
suggests that HRM practices have to be tailor- made to suit the local conditions.
International Human Resource Management –Morgan’s Model
1. The wide spectrum of HR activities particularly with reference to the added responsibilities of the
international HR managers in terms of managing cultural diversity and developing international
executives.
2. The National/Country specific people and cultural categories involved in IHR activities and lastly
3. Types of international employees deployed in various international organizations.
1. HR Activities:
The HR activities on an International perspective can be broadly depicted as those of procurement,
allocation and utilization of human resources in the organization. These activities include international
human resource planning, staffing (recruitment, selection, induction and placement), performance
management, training and development, compensation and reward management and managing
international employee relations and industrial relations.
These HR activities with respect to an international scenario have a broad spectrum mainly in terms of the
complexity created by country differences, level of control, cultural differences and so many factors
influencing the international business environment.
2. Country Categories Involved in IHRM:
The model further depicts that in an international perspective three types of country categories may be
involved, namely-
a. The host country where the subsidiary could be located or be operating.
b. The home country where the MNC/International firm could be headquartered.
c. The ―third-country‖ from where employees, capital and other resources like technology or logistics
could be availed or procured by the organization.
3. Employee Categories Involved in IHRM:
Depending on the above country categories, the employees in an international perspective could be
broadly classified as under:

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a. Host Country Nationals (HCNs) representing the employees hired from the host country.
b. Parent Country Nationals (PCNs) representing the employees expatriated to the foreign subsidiary from
the home country of the MNC.
c. Third Country Nationals (TCNs) representing the employees deployed from third/other countries other
than that of the home country of the MNC.
Recruitment Policy
Companies operating outside their home countries, essentially, follow three ways of hiring
executives:
1. Ethnocentrism:
It is a cultural attitude marked by the tendency to regard one‘s own culture as superior to others. Sending
home country executives abroad – thinking that they will be able to deliver the goods – may be an
appropriate strategy in the initial stages of expanding company operations worldwide as these officials
know what to do immediately. At Royal Dutch Shell, for instance virtually all financial controllers around
the world are Dutch nationals.
Often the other reasons advanced for ethnocentric staffing policies include- lack of qualified host country
managerial talent, a desire to have a unified corporate culture, tight control and the keenness to transfer the
parent company‘s core competencies (say, a specialised design skill) to a foreign subsidiary more
expeditiously.
However, a policy of ethnocentrism is too narrow in its focus and may evoke strong negative reactions
from local executives whose upward mobility is blocked.
There is also no guarantee that the expats will win over the hearts of local employees and offer positive
contributions. In fact, failures of US expats range from 10% to 15%. European and Japanese expat failures
are equally alarming, the costs of each such failure running to several thousands of dollars.
Too often expats are selected on the strength of their domestic track record. They are posted abroad
without requisite cross-cultural training. The family factors stand completely discounted in the selection
process. The rate of failures could be drastically reduced if these issues are properly addressed.
2. Polycentrism:
In the polycentric corporation, there is a conscious belief that only host country managers can ever really
understand the culture and behaviour of the host country market; therefore, the foreign subsidiary should
be managed by local people. The home-office headquarters, of course, is staffed by parent-country
nationals.

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Hiring nationals has many advantages. It eliminates language barriers, expensive training periods, cross-
cultural adjustment problems of managers and their families.It also permits the firms to attract talented
locals by offering an attractive compensation package. Many western MNCs have found that the key to
success on foreign soil is to employ local people.
Analog Devices Inc. has achieved global success in a highly technical field by picking up local managers,
training them extensively and then empowering them to hire and manage more local talent. Likewise,
global sales of Bausch & Lomb improved dramatically after putting the local managerial talent to good
use.
3. Geocentrism:
Geocentrism assumes that management candidates must be searched on a global basis, without favouring
anyone. The best manager for any specific position anywhere on the globe may be found in any of the
countries in which the firm operates. Such a staffing policy seeks the best people for important jobs
throughout the organisation, regardless of nationality. It helps to build a stronger and more consistent
culture and set of values among the entire global management team.
‗Team members here are always interacting, networking and building bonds with each other, as they move
from assignment to assignment, around the globe and participate in global development activities‘.
Colgate-Palmolive is an example of a company that hires the best person for the job regardless of
nationality. It has been operating globally for more than 55 years, and its products are household names in
more than 175 countries.
Fully 60 per cent of the company‘s expatriates are from countries other than the Unites States and two of
its last four CEOs were not US nationals. Moreover, all the top executives speak at least two languages
and important meetings routinely take place all over the globe.
International HRM can be a challenging exercise because of fairly obvious reasons:
I. Integration Issues:
It is difficult to push the right button at the right time, especially when managers operate from
headquarters separated by distance. Controlling operations of subsidiary companies in different parts of
the globe through remote control can be really taxing — especially in coordinating effort and put the same
on track in sync with the established policies of a company.
II. Heterogeneous Functions:
International HRM can be very challenging when one takes a look at what international HR managers are
supposed to handle in terms of variety and complexity — including issues relating to international hiring,

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placement, culture-specific training, compensation relating problems, administrative services to
expatriates, carrying out appraisals from time to time, offering growth opportunities to the talented ones,
putting out fires with labour, resolving conflicts and maintaining health labour-management relations, etc.
The employees sent abroad on an assignment need to be taken care of in a special way. Their families too
need to be taken care of including medical, educational, insurance, transportation benefits, etc. HR issues
relating to the above are going to be impacted by a variety of factors which demand a closer examination.
International Human Resource Management – Issues
Some of the more basic issues involved in pertinent areas of global human resource management are
explained below:
1. Staffing, Recruitment and Selection:
There are basically three ways to meet the requirements of manpower in foreign ventures.
 First, a foreign company may send persons of its home country to manage its affairs in the host
country.
 Second, it can hire people of the host countries to meet its human resource requirements there.
 Third, it can also utilise the services of third country nationals.
International HRM is now accepted as the key source of competitive advantage for international business.
In all cases, there have emerged certain norms regarding basic characteristics in international staffing.
These are as follows –
 cultural adaptability,
 strong communication skills,
 technical competence,
 professional expertise,
 global experience,
 inter-personal skills,
 family flexibility and
 country or region specific considerations.
Most of the multinational companies vie with each other to recruit candidates for technical and
managerial positions from highly reputed technical and management institutes offering them lucrative
compensation packages and try to retain the services of the most talented ones.

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Some of the advantages of staffing from the home country nationals are as follows –
 greater control over activities of the organisation,
 acquisition of experience in local markets;
 greater efficiency in implementing business strategy and
 adequate understanding of culture of the host country.
The disadvantages include the following –
 difficulty in adoption to the foreign environment,
 problems of family adjustability and
 friction resulting from language barriers.
The major advantages of staffing from amongst the host country nationals are as follows –
 elimination or reduction of language barriers;
 better understanding of host country‘s laws and regulations;
 reduction of hiring cost and (iv) reduced compensation package.
The disadvantages include-
 poor understanding of business objectives of host-country organisation and
 possibility of biases and favouritism in appointments.
The advantages of third country nationals in staffing are as follows –
 better equipped with the use of international perspectives and
 possibility of low cost of hiring. Disadvantages are as follows
 poor understanding of political situations and national hostilities and
 resistance from the government and local people and functionaries in the organisation.
In India, major requirements of various categories of manpower needed by foreign companies are met by
the people of the country itself. India has a bountiful of software engineers and analysts, technical and
managerial personnel with adequate expertise and specialisation, skilled and unskilled workers.
Most of the foreign MNCs operating in India utilise the services of the local people to manage their
businesses in the country.
The use of information technology, Internet and the services of specialised and professional organisations
have considerably made the task of hiring easy and convenient. Only in the case of top positions, the
foreign companies generally prefer to fill them by personnel of their home countries.

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2. Training and Development (T&D):
Training and Development is an important area which calls for special attention in international human
resource management. Although a sufficient number of qualified people with requisite academic
background is available in India, they need suitable training to develop skills and capabilities
commensurate with requirements of jobs assigned to them.It is the task of training and development
programmes to ensure that employees at all levels of organisational hierarchy are effectively trained and
developed keeping organisation‘s objective at the forefront.
Some more notable areas of T&D programmes in international businesses comprise the following –
1. language efficiency,
2. understanding of the social and political environment of the host countries;
3. awareness of the cultural and social environment;
4. adaptability to changing situations;
5. efficiency in the use of the computers, Internet and other electronic devices and
6. the needs of employees‘ career development.
3. Compensation:
In international human resource management, compensation issues are of vital importance. Companies
engaged in foreign businesses must offer lucrative compensation packages to all categories of employees
in order to attract and retain talented and competent personnel. It must also be emphasised that labour cost
has increasingly become an important component of the total cost of business operations. Although the
use of improved technology in various areas of business activities has tended to replace manpower by
electronic and other devices, the total expenditure on wages and salaries has continued to rise.
While formulating compensation policies and determining compensation packages, it is necessary to give
due consideration to
 The standard of living, prevailing rates of remuneration,
 Statutory regulation of wages and fringes benefits,
 Cost of medical care and income tax laws of the host countries.
 People of various countries prefer to work in gulf countries as their emoluments are income-tax
free.
 Labour laws of many countries also lay down minimum standards related to paid holidays,
vacation time pay, maximum daily and weekly hours, minimum rates of wages statutorily fixed,
liability of the employers in regard to social security benefits and payment of gratuity and bonus.

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 As there are wide variations in practices in different countries of the world, international human
resource management must take into account the implications of these variations.
 Other pertinent aspects that deserve particular attention in international compensation
management, especially in regard to higher positions, include the following – remuneration paid by
competing firms; consistency with international standards; need for career development of
employees; simplicity in administration; and stability in the retention of talents with a view to
maintain the services of talented and indispensable executives. Many MNCs have started offering
stock ownership and equity-based compensation, long-term incentives, profit-sharing and team-
based remuneration to them.
4. Performance Appraisal:
Regular performance appraisal of various categories of functionaries in foreign business is also important
in international human resource management. It is rather very difficult for the home- country management
to evaluate performance of employees working abroad. The task of performance appraisal of such
employees may be entrusted to competent appraisers of the host country.
However, the home-country management may formulate guidelines and lay down the standards for key
jobs. Certain guidelines for appraisal may be related to objectives of assignment, emphasis on quantifiable
measurement for the assignment, converting qualitative behaviour into quantifiable measurements,
evaluating employees‘ performance on these measurements and making calculations of return on
investment (ROI).
It is always desirable to provide feedback which can be helpful in making appraisal objective and
transparent. Foreign companies sometimes have to face the problem of biases and prejudices by host-
country appraisers, impact of unforeseen situations and also group-pressures. Many foreign companies
have started increasing adoption of 360° appraisal. Email has generally been helpful in making both the
appraiser and appraisee aware of the relevant issues in performance appraisal.
EXPATRIATION AND REPARTRIATION
Expatriation
An expatriate is an employee who has left his native land and is working and temporarily residing
in a foreign country. An expatriate can also be a citizen who has relinquished citizenship in their home
country to become the citizen of another country. The term originates from the Latin words, ex (out of)
and patria (fatherland) .A firm‘s employees who are transferred out of their home base into some other
area of the firm‘s international operations are referred to as expatriates. The practice of global mobility of

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a company‘s workforce helps in building competitive advantages. All expatriate employees are entitled to
receive an expatriate premium while working in a foreign country. This includes monetary benefits and
non-monetary incentives like housing and education. When the initiative for expatriation comes from
individuals rather than employers, it is called self-initiated expatriation (SIE).
Expatriate are the person who goes to the foreign country on the international assignment. When a MNC
open its new subsidiary in the new country, then it might not find the local person who has the specific
skills that are required by the company, so, it send an employee from the host country to that new
subsidiary. Approaches to select an expatriate,
 Ethnocentric approach which means parent company makes the important decisions, employees
from the parent company hold key position & the subsidiaries follow all the culture and practices
of the parent company
 Geocentric approach. The organisation that applies the worldwide incorporated business strategy,
manages and recurit employees on a global basis
Since the expatriate is more familiar with the business and the working culture of the parent company,
hence he can assure the better job performance and follow the organisation‘s policy that are used in every
subsidiary.
Advantages of Expats
 Companies appoint the expatriate as he is likely to have tacit knowledge of global operations and
help the local employees to identify and meet the company‘s objectives.
 They are the means of applying the strategic control over the subsidiary Management style.
 Expatriate help the subsidiary to follow the same management style with that of Home Company.
 They will make the local employee to follow the same culture.
 Control and Coordinate. Posting an expatriate in the subsidiary, help the MNEs and gives them
the opportunity to control and coordinate the new subsidiary. Since, the host company has may
have the people with different attitude and behaviour with that to home company.
 Expatriate helps in improving the business performance in the host country. They help in
breakdown the barrier between the parent company and subsidiaries. They are helpful in reducing
risks, technical problems. Moreover, they are very helpful in developing good relation with the
suppliers. Expatriates are not only used for coordination but also for the knowledge transfer,
improving business relation to dominate the international market (Dowling, 2008).

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Disadvantages of Expats
There are many disadvantages associated with the expatriates, such as,
 They can misunderstand the political situation which can give rise to the political risk and can
heavily cost the company. Misunderstanding of the political situation in the host country can even
lead to the ban of the company in the host country.
 Expatriate has to look for the local market to build up the relation and increase the business for
the company, but neither he does not have command over the local language nor he has much
experience to manage and work with the local staff (Mendenhall et. al, 1995).
 The training and rewarding of an expatriate is highly costly. The extraordinary awards for an
expatriate can lead to ill – feeling in the local employees and can work as a de-motivational factor
for them.
Reasons on why expatiates fail to adjust with host countries
OFFICIAL REASONS PERSONAL REASONS
Managers inability to adjust Inability of spouse to adjust
Inability to cope with larger overseas Family problems
responsibilities Inability to cope with new environment
Lack of technical skills Emotional problems
Lack of confidence

REPATRIATION
Repatriation is a process of returning back from a international assignment to a home country after
completing the assignment or some other issues. Repatriation is the last step in the expatriation cycle and
it involves readjustment and re-entry of international managers and their families back to their home
country.
The Importance of Repatriates
The employee of any organization who adjust well in a HCN in an international assignment and
performed effectively there would be highly imported.
The repatriate perspective, here are some of the reasons why repatriated employees are important:

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  There are a many successful international assignments which are very important to the employee
career as well as for the company‘s growth. So many companies send expatriate to other countries
for doing business internationally.
 The employees who are send to abroad for international assignment are expatriates those
employees who learned many things that would be useful to those who will be sent to that same
country if some means could be identified as to how they might be mentors to future expatriate
employees.
 Expatriates can bring new and unusual approaches to cultural environment, information gathering,
analysis of data, and problem-solving as a result of having work cross-culturally in an effective
manner.
 Expatriates may have been more flexible, or less rigid, in changing circumstances. In that different
approaches have been tried in other contexts, they may be able to bring insights and innovation to
the planning process that may not have been considered previously.
 The repatriate who have performed at a high level in a HCN may bring a dimension of confidence
and competence that will enhance his or her value to the company as it competes in a changing
world market.
 Expatriates who are work outside the culture of the company and the country, the repatriated
employee may well have insights that can effect needed change. That perspective ought to be
valued and given a voice within the company.
 The repatriated employees would likely to bring motivated by some factors to encourage them for
the sharing of their experience.
 The effective international employees may well have gained insights in how to affect a more
coordinated group effort than encouraging individual achievement.

Repatriation Process
Preparation: before 3-4 months of expatriate return
 Developing plans for future and info about new position
 Checklist of items before leaving (closure of bank a/c, bills etc.)

Physical Relocation
 Removal of personal belongings , breaking ties with friends, colleagues before returning

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  Re-entry training for home country‘s update, socio-cultural contrast orientation, psychological
aspects etc.
3. Transition:
 Finding accommodations, school for children, opening bank A/c etc. for comfortable living.
 Relocation consultants used.
4. Readjustment
 Coping with aspects as company changes , reverse culture shock and career demands
 Eg. Repatriate returning from country where power distance is large as Thailand may experience
stress on returning to small power distance countries like Denmark.
Repatriation of Expatriates

 Repatriation
 Return to one‘s home country from an overseas management assignment
 Reasons for returning
 Formally agreed-on tour of duty is over
 Expats want their children educated in the home country
 Unhappiness with foreign assignment
 Failure to perform well
 Major concerns of expatriates
 Cultural Re-entry
 Financial Implications
 Nature of job assignment

Multinational responses to repatriation

1. Staff availability: current and future needs

 If repatriate promoted ,International assignments as a positive career move

 If repatriate demoted or given pink slips so vice versa.
2. Return on investment (ROI)

 Expatriates are expensive

 Accomplishing assignment objectives at the expected cost

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3. Knowledge Transfer

 Cross-fertilization of ideas and practices that assist in developing competitive advantage.

 Build upon international experience of repatriates
 Designing a Repatriation Program

1. Mentor programs (Pairing expat with a member of home office senior mgmt):

 Maintaining contact with the expatriate throughout the assignment

 Ensuring that expatriates are kept up- to-date with developments in home country
 Assisting expatriates in repatriation process

2. Inviting repatriates in developing repatriation program

Steps suggested for smooth transition

 Arrange an event to welcome & recognize the employee & family

 Establish support to facilitate family reintegration
 Offer repatriation counseling or workshops to ease the adjustment
 Assist the spouse with job counseling, resume writing & interviewing techniques
 Provide educational counseling for the children
 Provide employees with thorough debriefing to identify new knowledge, insights & skills to
provide a forum to showcase new competencies
 Offer international outplacement to the employee if no positions are possible
 Arrange an interview with the expatriate & spouse to review their view of the assignment &
address any repatriation issues

Advantages
 Repatriates return with highly-relevant global knowledge, new networks that significantly enhance
their ability to get things done and connect domestic to foreign workers, a more global mindset,
and new perspectives and competencies that should make the home company more competitive.

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