IB CHAPTER chapter one for post gradute .ppt
- 2. Dimensions of International Trade • Definition of International Business – It is all business transactions- private and governmental – that involve two or more countries – International business consists of transactions that are devised and carried out across national borders to satisfy the objectives of individuals and organizations. – These transactions take on various forms, which are often interrelated. – Primary types of international business are • Export-import trade and • Direct foreign investment
- 3. • The latter is carried out in varied forms, including wholly owned subsidiaries and joint ventures. • Additional types of international business are – Licensing – Franchising – And management contracts As the definition indicates, and as for any kind of domestic business, “satisfaction” remains a key tenet of international business. The fact that the transactions are across national borders highlights the difference between domestic and international business.
- 4. • The international executive is subject to a new set of macro environmental factors, to different constraints, and to quite frequent conflicts resulting from different laws, cultures, and societies. • The basic principles of business still apply, but their application, complexity and intensity may vary substantially. • international business is as much an art as a science. • Yet success in the art of business depends on a firm grounding in its scientific aspects.
- 5. QUESTION: If you are to do international business what issues will come to your mind that demands consideration before execution of the idea? • Individual consumers, policy makers and business executives with an understanding of both aspects will be able to incorporate international business considerations into their thinking and planning.
- 6. • They will be able to consider international issues and consequences and make decisions related to questions such as these – How will our idea, good or service fit into the international market? – Should we enter the market through trade or through investment? – What product adjustments are necessary to be responsive to local conditions? – What threats from global competition should be expected? – How can these threats be counteracted?
- 7. • When management integrates these issues into each decision, international markets can provide growth, profit, and needs satisfaction not available to firms that limit their activities to the domestic market place. Question • Why do firms go for international business ? • The Need for International Business • There are several answers to the question “why firms go international?” • the factors which motivate or provoke firms to go international may be broadly divided in to two groups, viz., 1. Pull factors and 2. Push factors
- 8. 1. The pull factors: most of which are proactive reasons, are those forces of attraction which pull the business to the foreign markets. • In other words, companies are motivated to internationalize because of the attractiveness of the foreign market. • Such attractiveness include, broadly, the relative profitability and growth prospects. 2. The push factors: refer to the compulsions of the domestic market, like saturation of the market, which prompt companies to internationalise. • Most of the push factors are reactive reasons
- 9. Why Firms go International / Reasons for International Marketing 1. Increasing the share of the market 2. Extending the Product Life Cycle 3. Supporting International Specialization 4. Helping Reduce Investment Pay-Back Periods 5. Reducing Stock-holding Costs 6. Risk Diversification 7. Foreign Market Opportunities 8. Small Domestic Market 9. Unique Product/ Technology Competence
- 10. Important reasons for going international • Important reasons for going international are described below. 1. Profit advantage 2. Growth opportunities 3. Domestic market constraints 4. Competition 5. Government policies and regulations 6. Monopoly power 7. Spin off benefits 8. Strategic vision
- 11. 1. Profit advantage • An important incentive for international business is the profit advantage. • International business could be more profitable than the domestic. • One of the important motivations for foreign investment is to reduce the cost of production (by taking advantage of the cheap labour, for example). • While in some cases, the whole manufacturing process of a product may be carried out in foreign locations, in some cases only certain of it are done abroad. • Almost 20% of the merchandise imported into United States is manufactured by foreign branches of American companies.
- 12. 2. Growth opportunities • To take advantage of the business opportunities in other countries. • MNCs are getting increasingly interested in a number of developing countries as the income and population are rapidly rising in these countries. • Of the one billion people estimated to be added to the world population between 1999 and 2014, only about three percent was in the high income economies.
- 13. –Many companies could achieve the growth they realised only because of the foreign markets. –Foreign markets both in the developed country and developing country, provide enormous growth opportunities for firms of the developing country too. –For example, in recent years, a number of Indian pharmaceutical firms have achieved a much faster growth of their foreign business than the domestic.
- 14. 3. Domestic market constraints – Drive many companies towards expanding the market beyond the national border. – The market for a number of products tend to saturate or decline in the advanced countries. – This often happens when the market potential has been almost fully tapped. – In the United States, for example, the stock of several consumer durables like cars, TVs, etc. – exceed the total number of households. – It is estimated that in the first quarter of the 21st century, the population in some of the advanced economies would saturate or would grow very negligibly, and in some others there would be a decline. – Such demographic trends have very adverse effect on certain line of business. – For example, the fall in the birth rate implies contraction of market for several baby products.
- 15. – Another type of domestic market constraint arises from the scale economies. – The technological advances have increased the size of the optimum scale of operation substantially in many industries making it necessary to have foreign market, in addition to the domestic market, to take advantage of the scale economies. – It is the thrust given to exports that enabled certain countries like South Korea to set up economic size plants. – In the absence of foreign markets, domestic market constraint comes in the way of benefiting from the economies of scale in some industries. – For example, for a certain chemical product, the minimum economic size of the plant is 35000 tonnes but the demand for it in India by the end of the century was expected to be less than 10,000 tonnes.
- 16. • Particularly, when the domestic market is very small, internationalization is the only way to achieve significant growth. • For example, Nestle derives only about two percent of its total sales from its home market, Switzerland. • Domestic recession often provokes companies to explore foreign markets. • One of the factors which prompted the Hindustan Machine Tools Ltd (HMT) to take up exports very seriously was the recession in the home market in the late 1960s the recession of the automobile in the early 1990s, similarly, encouraged several Indian auto component manufacturers to explore or give a thrust to foreign markets.
- 17. • Even when the domestic market presents good growth prospects, foreign markets may be more attractive. • For example, a number of Indian pharmaceutical firms have been deriving major part of their growth from abroad
- 18. 4. Competition • Competition may become a driving force behind internationalization. • A protected market does not normally motivate companies to seek business outside. • Until the liberalization which started in July 1991, the Indian economy was a highly protected market. • Not only that the domestic producers were protected from foreign competitors but also domestic competition was restricted by several policy induced entry barriers, operated by such measures as industrial licensing, etc
- 19. • The economic liberalization, ushered in India since 1991, which has increased competition from foreign firms as well as from those within the country have, however, significantly changed the scene. • Many Indian companies are now systematically planning to go international in a big way. • Many companies also take an offensive international competitive strategy by way of counter-competition • The strategy of counter – competition is to penetrate the home market of the potential foreign competitor as to diminish its competitive strength and to protect the domestic market share from foreign penetration.
- 20. • “Effective counter competition has a destabilizing impact on the foreign company’s cash flows, product related competitiveness and decision making about integration. • Direct market penetration can drain vital cash flows from the foreign company’s domestic operations. • This drain can result in lost opportunities, reduced income, and limited production, impairing the competitor’s ability to make overseas thrusts.”
- 21. 5. Government Policies and Regulations • Government policies and regulations may also motivate internationalization. • There are both positive and negative factors which could cause internationalization. • Many governments offer a number of incentives and other positive support to domestic companies to export and to invest in foreign countries. • Similarly, several countries give and encourage import development and foreign investment. • For example, in some countries, companies may be obliged to earn foreign exchange to finance their imports and to meet certain other foreign exchange requirements like payments of royalty, dividend, etc.
- 22. • Countries may require to enter certain industries by foreign large companies to specific export obligation • Some companies also move to foreign countries because of certain regulations, like the environmental laws in advanced countries. • Government policies which limit the scope of business in the home country may also provoke companies to move to other countries. • That is one of the most important motivations behind foreign direct investment which is the desire to escape the constraining effects of a government.
- 23. 6. Monopoly Power • In some cases international business is a corollary of the monopoly power which a firm enjoys internationally. • Monopoly power may arise from such factors as monopolization of certain resources, patent rights, technological advantage, product differentiation, etc. • Such monopoly power need not necessarily be an absolute one but a dominant position that may facilitate internationalization. • This includes knowledge about foreign customers, market places, or market situations not widely shared by other firms. • Such special knowledge may result from particular insights by a firm based on international research, special contacts a firm may have or simply being in the right place at the right time (for example, recognizing a good business situation during a vacation). • Although such monopoly element may give an initial advantage competitors could be expected to catch up soon.
- 24. 7. Spin-off Benefits • International business has certain spin-off benefits too. • International business may help the company to improve its domestic business; by doing so it helps improve the image of the company. • International business, thus, becomes a means of gaining better market share domestically. • Further, exports may have pay-offs for the internal market too by giving the domestic market better products • Further, the foreign exchange earnings may enable a company to import capital goods, technology, etc
- 25. 8. Strategic Vision • The systematic and growing internationalization of many companies is essentially a part of their business policy or strategic management. • The stimulus for internationalization comes from the urge to grow, the need to become more competitive, the need to diversify and to gain strategic advantages of internationalization. • There are a number of corporations which are truly global. • Planning of manufacturing facilities, logistical systems, financial flows and marketing policies in such corporations are done considering the entire world as its, and a single, market – a borderless world.
- 26. International Orientations • The degree and nature of involvement in international business or the international orientations of companies vary very widely. • The analysis provided by Wind, Douglas and Perlmutter from the frame work of the modified EPRG scheme is helpful in understanding the levels of involvement of firms in international business. • The EPRG framework identifies four types of attitudes or orientations towards internationalization that are associated with successive stages in the evolution of international operations. • These four orientations are: 1. Ethnocentrism (home country orientation) 2. Polycentrism (host country orientation) 3. Regiocentrism (regional orientation) 4. Geocentrism (world orientation)
- 27. • These stages are assumed to reflect the goals and philosophies of the company in so far as international operations are concerned and lead to different management strategies and planning procedures for international operations.
- 28. Ethnocentric Orientation • In the ethnocentric company, overseas operations are viewed as secondary to domestic operations and primarily as a means of disposing of “surplus” domestic production. • The top management views domestic techniques and personnel as superior to foreign and as the most effective in overseas markets. • Plans for overseas markets are developed in the home office, utilizing policies and procedures identical to those employed in the domestic market. • Overseas marketing is most commonly administered by an export department or international division, and the marketing personnel is composed primarily of nationals or home country.
- 29. • Overseas operations are conducted from a home country base, and there is likely to be a strong reliance on export agents. • There is a tendency to employ the domestic product mix without major modifications for the overseas market. • In short, under ethnocentrism, the international marketing is normally characterized by the extension strategy. • Some companies with the ethnocentric orientation tend to neglect the opportunities outside the home country. • “Such companies are sometimes called domestic companies. • Ethnocentric companies doing business outside the home country can be described as international companies; they adhere to the notion that the products that succeed in the home country are superior and, therefore, can be sold anywhere without adaptation.
- 30. • The ethnocentric position appears to be appropriate for a small company just entering international operations, or for companies with minimal international commitments • Because this approach entails a minimal risk and commitment to overseas markets – no international investment is required, and no additional selling costs incurred, with the possible exception of higher distribution costs. • This approach may be inappropriate for a company which wants to expand its international business significantly. • According to Keegan, “fifty years ago, most business enterprises – and especially those located in a large country such as the United States – could operate quite successfully with an ethnocentric orientation. • Today, however, ethnocentrism is one of the biggest internal threats a company faces.
- 31. Polycentric Orientation • As the company begins to recognize the importance of inherent differences in overseas markets, a polycentric attitude emerges. • The prevalent philosophy at this stage is that local personnel and techniques are best suited to deal with local market conditions. • Subsidiaries are established in overseas markets, and each subsidiary operates independently of the others and establishes its own marketing objectives and plans. • The environment of each market is considered while formulating the marketing strategy. • There is always a market segmentation, at least on a country basis
- 32. • “Emphasis is put on local laws, custom and culture and great care is taken to understand the local way of doing business. • This usually results in the maximum degree of geographic decentralization as local managers are recognized as being psychologically close to markets, environments and customers.” • Under polycentrism, marketing is normally characterized by the adaptation strategy . • Polycentrism, thus, is the opposite of ethnocentrism.
- 33. Regiocentric and Geocentric Orientations • A regiocentric company views different regions as different markets. • A particular region with certain important common marketing characteristics is regarded as a single market, ignoring national boundaries. • “Strategy integration, organizational approach and product policy tend to be implemented at regional level. • Objectives are set by negotiation between headquarters and regional HQ on the one hand and between regional HQ and individual subsidiaries on the other”
- 34. • A geocentric company views the entire world as a single market and develops standardized marketing mix, projecting a uniform image of the company and its products, for the global market. • The business of the geocentric multinational is usually characterized by sufficiently distinctive national markets that • the ethnocentric approach is unworkable, and where the importance of learning curve effects in marketing, production technology, and management makes the polycentric philosophy substantially sub-optimal.
- 35. Means of Engaging in International Business • When a company conducts international business, it must choose from among different operational forms, or means of conducting business. • In making its choice, a company should consider its objectives as well as the environment in which it will operate. • One of the most important decisions in international business is the mode of entering the foreign market.
- 36. Stages of International Marketing Involvement 1. No Direct Foreign Marketing It does not actively cultivate customers outside national boundaries; however, this company’s products may reach foreign markets. Sales may be made to trading companies as well as other foreign customers who come directly to the firm. Or products reach foreign markets via domestic wholesalers or distributors who sell abroad on their own without explicit encouragement or even knowledge of the producer.
- 37. 2. Infrequent Foreign Marketing • Temporary surpluses caused by variations in production levels or demand may result in infrequent marketing overseas. • The surpluses are characterized by their temporary nature; therefore, sales to foreign markets are made, as goods are available, with little or no intention of maintaining continuous market representation. • As domestic demand increases and absorbs surpluses, foreign sales activity is withdrawn. • In this stage, there is little or no change in company organization or product lines.
- 38. 3. Regular Foreign Marketing • At this level, the firm has permanent productive capacity devoted to the production of goods to be marketed on a continuing basis in foreign markets. • A firm may employ foreign or domestic overseas middlemen or it may have its own sales force or sales subsidiaries in important foreign markets.
- 39. 4. International Marketing • Companies at this stage are fully committed and involved in international marketing activities. • Such companies seek markets all over the world and sell products that are a result of planned production for markets in various countries. • This generally entails not only the marketing but also the production of goods outside the home market. • At this point the company becomes an international or multinational marketing firm.
- 40. 5. Global Marketing • At the global marketing level, the most profound change is the orientation of the company toward markets and its planning. • At this stage, companies treat the world, including their home market, as one market.
- 41. • Important foreign market entry strategies are the following 1. Exporting 2. Licensing/franchising 3. Contract manufacturing 4. Management contract 5. Assembly operations 6. Fully owned manufacturing facilities 7. Joint venturing 8. Counter trade 9. Mergers and acquisitions 10. Strategic alliance 11. Third country location
- 42. 1. Exporting • Most traditional mode of entering is appropriate when: 1. The volume of foreign business is not large enough to justify 2. Cost of production in the foreign market is high 3. Foreign market is characterized by production bottlenecks like infrastructural problems, etc 4. There are political or other risks of investment in the foreign country 5. Foreign investment is not favoured by the foreign country concerned 6. Licensing or contract manufacturing is not a better alternative 7. The company has no permanent interest in the foreign country
- 43. 2. Licensing and franchising • Involve minimal commitment of resources and effort on the part of the international marketer • A firm of one country (the licensor) permits a firm in another country (the licensee) to use its intellectual property such as – Patents, – Trade marks, – Copy rights – Technology, – Technical know-how, – Marketing skill, etc
- 44. 3. Contract Manufacturing • A company contracts with firms in foreign countries to manufacture or assemble the products while retaining the responsibility of marketing the product • It has the following advantages: – The co. does not have to commit resources for setting up production facilities – It frees the co. from the risks of investing in foreign countries – etc
- 45. 4. Management Contracting • The firm providing the management know-how may not have any equity stake in the enterprise being managed. 5. Turnkey Contracts: Is an agreement by the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyers personnel, who will be trained by the seller. It is special part of management Agreement 6. Fully Owned Manufacturing Facilities • Refers to the establishment of manufacturing facilities in other countries • Demands sufficient financial and managerial resources on the part of the company • Fully owned enterprises may not be allowed or favoured in some countries
- 46. 7. Assembly operations • A manufacturer who wants many of the advantages that are associated with overseas manufacturing facilities and yet does not want to go that far may find it desirable to establish overseas assembly facilities in selected markets. 8. Joint Ventures • Refers to sharing of ownership and management between foreign firm and local firm • Licensing /franchising agreement • Contract manufacturing • Management contracts • Has some advantages – Local firm be in a better position to deal with the government – Would not be much public hostility when there is a local partner – Can have a major impact on firm’s competitiveness – etc
- 47. 9. Third Country Location • When there is no commercial transactions between two nations because of political reasons or when direct transactions between two nations are difficult due to political reasons or the like, a firm in one of these nations which wants to enter the other market will have to operate from a third country base • For example, Taiwanese entrepreneurs found it easy to enter People’s Republic of China through bases in Hong Kong
- 48. 10. Mergers and Acquisitions • Have certain advantages: – Provides instant access to markets and distribution net work – New access to technology or a patent right – Reducing the competition – Etc 11. Strategic Alliance – To enhance the long term competitive advantage of the firm by forming alliance with its competitors, existing or potential in critical areas, instead of competing with each other.
- 49. 12. Counter Trade • Gives a way to finance an export deal when other means are not available.
- 50. International Business Environment IB CHAPTER ONE: ENVIRONMENT ASSIGNMENTS • Environment of international business and its significance • Economic environment • Social/cultural environment • Religion • Language • Demographic environment • Political environment • Regulatory environment • Natural environment • Technological environment • Globalization