International Business - Shiv Das (for B.Com Hons Semester 6 for Delhi University) [Latest ed.] 9389574854, 9789389574852

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SHIVA DELHI UNIVERSITY SERIES

• First mover advantage -capture demand, establish strong brand name, build sales volume, pre-empt rivals, cost advantage etc. • First mover disadvantage-pioneering costs, chance of failure due to ignorance of the foreign environment. • Late entrants-observe and learn from mistakes made by early entrants, no pioneering costs. (c) On what scale to enter • Small scale entry-learn. and gather information, less risk but difficult to build market share or to capture early mover advantage.

• Large scale entry-strategic commitment, easier to attract customers, affects competition but reduces resources available to support other expansions. Large scale entry reduces competition because it can prevent competitors to enter the market. Q. 9. Explain the various stages of internationalisation of business. Or Discuss the process of internationalisation of business. Ans. Most of the companies go through different stages of internationalisation. Some companies start their business at the international level havin.g 100 per cent exports. Even in the case of the hundred per cent export oriented companies, the development of their international business passes through different stages of evolution. A company having domesti.c operations goes through dilierent stagl>s before it becomes true.ly global.. Following are the important stages in the internationalisation of any bus.mess. 1. Domestic company. Most of the international companies have their origin as domestic companies. A purely domestic company operates domestically because it never considers the option of going international. The growing stage of the company ends when it reaches growth linuts in its primary markets. The company diversifies into new markets, products and technologies instead of focusing on international markets. Domestic market constraints, foreign market prospects, increasing competition etc. make the company reorient its strategies and may encourage it to enter into foreign markets. A domestic company can extend its products and services to foreign markets by exporting, licensing and franchising. The company can develop a more serious approach towards international business and move to the next stage of development i.e., international company. 2. Multinational company. In this stage the international company becomes multinational. In other words when a company decides to

respond to market differences, it evolves into the stage three of internationalisation process. The company adopts a multidemensional marketing strategy to operate in different countries under multinational companies. Each foreign subsidiary is managed as if it were an independent city state. The subsidiaries are part of an area structure in which each country is part of a regional organisation that reports to world headquarter. 3. Global company. The global company may have either a global

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marketing strategy or global sourcing strategy. lt will either focus on global markets and source from the home or a single country to supply these markets or it will focus on the domestic market and source from the world to supply its domestic network. Production marketing etc., however, can be global in respect of global companies. Such companies are integrated world enterprises that link global resources with global markets at a profit. Q. 10. Write a brief note on orientation in th.e context of international business. Or Explain the various stages/approaches of orientation in international business. Or Discuss the EPRG framework in the context of international business. Ans. 11,e degree and nature of involvement in international business or the international orientations vary widely. The EPRG (Ethnocentric, PolycenlTic, RegiocenlTic and Geocentric) framework is helpful in understanding the levels of involvement of firms in international business. The EPRG scheme identifies four types of attitudes or orientations towards internationalisation. These are associated with successive stages in the evolution of international operations. 1. Ethnocentric approach (Home country orientation) 2. Polycentric approach (Host coWltry orientation) 3. Geocenrric approach (World orientation) The above mentioned stages are assumed to reflect the goals and philosophies of the company followed by it in d ifferent stages of internationalisation. Under d.lfJerent stages a firm adopts different strategies, approaches and policies. 1.. Ethnocentric approach. Under this approach, foreign operations are viewed as secondary to domestic operations. 11,e management of the company views domestic techniques and personnel as far more superior to foreign markel'S. Plans for overseas markets are developed in the home office, utilising policies and procedures identical to those employed in the domestic market. Foreign marketing is usually administered by an ex-port department or international division and the marketing personnel include people primarily from the home country. Foreign market operations are conducted from a home country base and there is likely to be a strong dependence on export agents. 2. Polycenbic approach. In this stage a company starts realising the importance of overseas markets. The company starts believing that local personnel and techniques are best suitable to deal with local market conditions. Subsidiaries are established in overseas markets and each subsidiary operates independently of the others. It establishes its own marketing objectives and plans. While formulating the marketing strategy the environment of each market is taken into consideration. In this stage the company prepares its business strategies as per the local conditions. 3. Regiocentric approach. A regiocentric company views diffe.r ent regions as different markets. A particular region with certain important common marketing features is considered as a single market irrespective of

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international boundaries. Strategy integration, organisational approach and product policy tend to be implemented at regional h eadquarters on the one hand between regional headquarters and indiv idual subsidiaries on the other. 4. Geocentric approach. Under this approach, a company views the entire world as a single market lt develops standarised marketing mix, projecting a uniform image of the company and its products for the global market. The business of a company following this approach is usually characterised by sufficiently distinctive national :markets where the ethnocentric approach is unworkable. Thus this approach views the entire globe as a single market. National environmental constraints can restrict multinational operations and can make this approach unfeasible for certain companies. Q. 11. What are the different modes of entry into international business? Give their advantages and disadvantages. Or Discuss the contractual entry modes used by firms to enter international business. Ans. Contractual entry modes are used in case of intangible products such as technology, patents, etc. When a company develops a particular technology through its own research and development programme, it likes to recover the cost of research and development Therefore, it sells the technology either to a domestic firm or to a foreign firm. But in this case, the privacy of technology is not secured and the firm's ownership advantage is always at stake. Thus, in order to maintain the ownership advantage, the £inn passes on the technology only to its own subsidiary located abroad. 1n case, the host country's government does not permit any foreign investment, the subsidiary of the firm in that host country cannot exist and therefore transfer of technology through contractual deals is the only way out. Different types of Entry modes in international 811siness. Foreign market entry modes differ in terms of risk, control and commitment of resources they require and the return on investment. There are two major types of entry modes. Equity and Non-equity modes. (1) Equity mode includes Joint Ventures and W1rolly owned s11bsidiaries. (ii) Non-equity mode includes E:,;porl and Contractual agreements. E:>:port. It refers to selling of goods produced in one's own country for use or resale in other countries. It may be in the foi:m of merchandise export. For exnmple, export of clothing, raw materials, computers, etc., Or Export of services, F11r example, tourism, banking, insurance, engineering, management sen,ices, etc. Exports may be direct or indirect. Advantages of Export: • It avoids substantial costs of establishing manufacturing operations in the host country. • It is less risky and less costly.

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• It gives flexibility to enter in a large number of markets outside the producer's country. Disadvantages of Export: • Fluctuations in exchange rate may cause losses to the Exporting £inn. • Less control over marketing and sale of product. • Transportation cost is an important factor. If it is very high, it may wipe out profits. Contractual agreements. Licensing, Franchising, Turnkey projects. 1. Lice11si11g. A lice11sing agreeme11t allows foreign firms, either exclusively or non-exclusively, to manufacture a proprietor's (Exporter's) product for a fixed term in a specific market. Advantages of Licensing: • Obtain extra income for technical know-how and services. • Quickly expand without much risk and large capital investment. • Pave the way for future investments in the market. • Political risk is minimized as the Licensee is usually 100% local. • ls highly attractive for companies that are new in International Business. Disadvantages of Licensing: • Lower income than in other entry modes. • Loss of control over the licensee manufacturer and his marketing operations and practices leading to loss of quality. • Risk of having trademark and reputation rained by an incompetent partner. 2. Franclrising. A firm in one country (the franchiser) authorizes a firm in a another country (the franchisee) to utilize its operating system as well as its brand names, trademarks and logos etc. The franchi~or receives royalty payments which amounts to some percentage of the franchisee's revenues. Advantages of Franchising: • Low political risk • Low cost • Simultaneous expansion into different regions of the world. • Well selected partners bring financial investment as well as managerial capabilities to the operation. Disadvantages of Franchising: • Franchisees may tum into future competitors. • A wrong franchisee may ruin the company's name and reputation in the market. 3. Tiimkey prujects. A turnkey project refers to a project when clients pay contractors to design and construct new facilities and train personnel. It is a way for a foreign company to export its process and technology. Advantages of Turnkey projects: Possibility for a company to establish a plant and earn profits in a foreign country where FDI opportunities are limited and lack of expertise in a specific area.

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• the agreement generally prohibits the originating firm from exploiting the assets in particular .foreign markets. • does not give firm tight control over manufacturing, marketing and strategy to realize experience curve and economies of scale. • firm can lose control over the competitive advantage of their technological know-how. Q. 13. \Vhat is a Transnational Corporation (TNC)? Explain its characteristic features. Ans. A Transnational Corporation is an enterprise that manages production or delivers services in more than one country. A 1NC is a corporation that has its headquarters in one country, known as the home country and operates in several other countries, known as host countries. Examples ofTNCs. Royal Dutch Shell Group (Netherlands/United Kingdom); Daimler Ouysler AG (Germany/USA), Unilever (Netherlands/United Kingdom); Rio Tinto Pk (Australia/United Kingdom). The growth in the number and size of transnational corporations since the 1950s has generated controversy because of their economic and political power and the mobility and complexity of their operations. Feature~Characteristics of Transnation11l corporations: (t) Transnational compa.nies operate in two or more countries, including in its country of origin. Its business, such as sales, extraction or manufacturing and spans multiple countries. Its management system focuses on a global or regional outlook. (i1) Transnational companies tend to adapt their services or goods to the local preferences of the host countries. (iii) 11,ey also strive to craft a business model that suits the particular regions in which they operate by blending their strategies wiili the development policies of the host countries. (iv) There is often an emphasis on green and sustainable development in ilie local region as a result of studying and responding to the local ecological envirorunent' s needs. (v) Transnational companies emphasize their own global strategies that ensure ilieir continued thriving in ilie international scene and ilieir longterm development and expansion. The main advantages of Transnational corporations: (1) 11le investment level, employment level, and income level of the host country increases due to the operation of TNCs. (i1) The industries of the host country get latest technology from foreign countries through TNCs. (iit) The host country's business also gets management expertise from 1NCs. (iv) The domestic traders and market intermediaries of the host country get inc~sed business from the operation of 1NCs. (v) 1NCs break protectionism, curb local monopolies, create competition among domestic companies and thus enhance their competitiveness. (m) Domestic ind.u stries can rnake use of R and D outcomes of TNCs. (vit) 11le host country can reduce imports and increase exports due to goods

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produced by TNCs in the host country. This helps to improve balance of payment (uiir) Level of industrial and economic development increases due to the growth of TNCs in the host country. The limitations of Transnational Corporations. Some critics argue that transnational corporations exhibit no loyalty to the countries in which they are incorporated but act solely in their own best interests. Transnational corporations with headquarters in the United States have played an increasingly dominant role in the world economy. This dominance is most pronounced in the developing countries that rely primarily on a narrow range of

exports, usually primary goods. A transnationals corporation has the ability to disrupt traditional economies, impose monopolistic pra.ctices, and assert a political and economic agenda on a country. The basic difference between a m11lti11ational and a transnational lies in the fact that transnational company is borderless, as it does not consider any particular country as its base, home or headquarters. Multinationals have branches in other countries, whereas transnational have subsidiaries.

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International

Business

Environment:

National and foreign environments and their components - Physical, Economic, Demographic, cultural and political-legal environments; Global trading environment; Recent Trends in World Trade in goods and Services; Trends in India's foreign trade.

Q. 1. \'Vhat do you understand by Busin.e ss Environment? Ans. The business environment is the set of forces surrouncling an organisation that has the potential to affect the way it operates and has access to resources. It may be visualiz.ed in temlS of three layers surrouncling the organisation from the General environment to Specific environment and to Domain, beginning with the immediate internal environment of the organisation, to the general environment. The environment influences the organisation, i.e., its strategy, structure and operations. T11e General environment. It includes those sectors that might not have direct impact on the daily operations of the firm but will influence it. It is less overt and indirect but creates major opportunities and threats to all industries and to all organisations in a given industry, but in different ways which may be favourable or unfavourable in varying degrees. It consists of several sectors or dimensions such as - economic, political legal, technological, cultural and social. Each sector has its own structural, regulatory and ethical practices. T11e Specific e11viron111ent. lt consist of forces of stakeholde.r groups that directly affect an organisation's capacity to attract resoun:es. lt entails suppliers, customers, shareholders, unions and distributors, etc. with whom the organisation interacts on regular basis and on whose support depends its survival and growth. An organisation's strategy and achievement of goals largely depend on how much it satisfies them. Govemmtnt and intm111tiona/ forces prevail

both in general as we.II as specific environment. Tl1e Organisational Do,nain. It refers to the particular range of goods and services that the organisation produces, the customets and other stakeholders and market it serves. Earlier these environmental forces were seen as centred on the home country of the business, but the environmental horizon of business has now widened and grown to many countries requiring consideration of internal forces along with global forces.

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