1. International Business
Management
Unit - II

2. An Overview of International Business
• Charles Hills defines globalization as "The shift towards a more integrated and
interdependent world economy". Globalization has two main components - the
globalization of markets and the globalization of production.
• According to International Monetary Fund, globalization means "the growing
economic interdependence of countries worldwide through increasing volume and
variety of cross border transactions in goods and services and of international capital
flows and also through the more rapid and widespread diffusion of technology.
Interdependency and integration of individual countries of the world is also called as
globalization”.
• Globalization integrates not only economies but also societies. The globalization process
includes :
• Globalization of markets,
• Globalization of production,
• Globalization of technology,
• Globalization of investment.

3. I. Definition of International Business
• Exchange of Goods and Services across the national
boundary of a country is called “International Business”.
• International Business is the outcome of Globalisation and
Liberalisation, Privatization.
• International Business comprises of all commercial
transactions
private and governmental, sales, investments, logistics, and
transportation) that take place between two or more regions,
countries and nations beyond their political boundaries.

4. Modes of Entry
• Basic Entry Decisions.
– Which foreign market to enter?
• Size of the Market
• Wealth(purchasing power)
• Legal framework
– Example of Diebold entering china and brazil market due to increasing number of
middle class and low penetration of ATM
– Timing of entry.
• First Mover Advantage
• First Mover Disadvantage (Pioneering Cost)
– Example of KFC was first to start its operation in China but actual benefit was
taken by McDonald’s.
– Scale of entry and Strategic Commitments
• Example of ING a Dutch Company entering USA market
aggressively.

5. Modes of Entry
I. Exporting
II. Licensing
III. Franchising
IV. Turnkey Projects
V. Strategic Alliance

6. Modes of Entry - Exporting
Direct export:
The organization produces their product in their home market and then sells
them to customers overseas
Advantages
 Control over selection of foreign markets and choice of foreign
representative companies
 Good information feedback from target market
 Better protection of trademarks, patents, goodwill, and other intangible
property
 Potentially greater sales than with indirect exporting.
Disadvantages
 Higher start-up costs and higher risks as opposed to indirect exporting
 Greater information requirements
 Longer time-to-market as opposed to indirect exporting.[7]

7. Modes of Entry - Exporting
Indirect export:
The organizations sells their product to a third party who then sells
it on within the foreign market.
Advantages
 Fast market access
 Concentration of resources for production
 Little or no financial commitment. The export partner usually
covers most expenses associated with international sales
 The management team is not distracted
 No direct handle of export processes.
Disadvantages
 Higher risk than with direct exporting
 Little or no control over distribution, sales, marketing, etc. as
opposed to direct exporting
 Inability to learn how to operate overseas

8. Modes of Entry - Licensing
• Another less risky market entry method is licensing.
• Here the Licensor will grant an organization in the foreign market
a license to produce the product, use the brand name etc in return
that they will receive a royalty payment.
Advantages and reasons to use an international licensing
 Obtain extra income for technical know-how and services
 Reach new markets not accessible by export from existing
facilities
 Quickly expand without much risk and large capital investment
 Pave the way for future investments in the market

9. Modes of Entry - Licensing
Advantage
• Development cost is reduced
• Risk of new market know how is
reduced
• Good for firms lacking in capital
investment
• It is helpful in the situation where
barriers to entry are there.
• Firms does not want to produce it
on its own
– Coca – Cola given license to use its
trade mark on apparels
Disadvantage
• No tight control over the process.
• No development in terms of local
market information.
• Profit can’t be transferred to
other operating countries.
• Technical know how is sacrificed.
– RCA brand given license to
Matsushita (Panasonic) and
Sony, now these two firms are
bigger than RCA Brand(USA)
• To reduce this Equity
arrangement can be made.

10. Modes of Entry - Franchising
• Franchising is basically a specialized form of licensing in which
the franchiser not only sells the intangible property (normally a
trademark) to the franchisee, but also insists that the franchisee
agree to abide by strict rules as to how it does business.
• As with licensing, the franchiser typically receives a royalty
payment, which amounts to some percentage of the franchisee’s
revenues.
• Licensing is mostly used in manufacturing firms while
Franchising is used mostly in Service firms
– Example – Mc Donald’s.
– Menu, cooking methods, staffing policies and design and
location of a restaurant.

11. Modes of Entry - Franchising
Advantage
• Cost and Risks are averted
• It helps in expanding
business
• Its legal framework helps in
controlling things
Disadvantage
• Does not allow to
understand local economy
• Quality control is a concern

12. Modes of Entry – Turnkey Projects
• The Contractor agrees to handle every detail
of the project for a foreign client, including the
training of operating personnel.
• At completion of the project, the foreign client
is handed over the “key” of a plant which is
fully operational – hence the term turnkey.
• Mostly used in chemical, petroleum refining,
metal refining industries.

13. Modes of Entry – Turnkey Projects
Advantage
• The know how of
technology creates value
and capable of creating
value to the client too.
• Less Risky
• Companies having technical
expertise may use this as an
opportunity.
• No Long term Commitment.
Disadvantage
• No long term interest but
only fee would be paid
• Creates a Competitor.
• Selling technology also
creates competitors.

14. Modes of Entry – Strategic Alliance
• Strategic Alliances refer to cooperative
agreements between potential or actual
competitors.
• Strategic alliance run the range from formal joint
ventures, in which two or more firms have equity
stakes(e.g. Fuji-Xerox) to short – term contractual
agreement, in which two companies agree to
cooperate on a particular task (new product
development).
• Toyota and suzuki.

15. Modes of Entry – Strategic Alliance
 Disadvantage
• They give the competitor a
low cost route to
technology and market.
– Strategic alliance between
Japanese and American
Companies.
Advantage
• Allow firms to share the fixed
costs(and associated risks) of
developing new products or
processes.
• Way to bring together
complementary skills
– Intel and Microsoft
– Microsoft and Toshiba
• Help the firms to set standards

16. Modes of Entry – Strategic Alliance
Types of Strategic Alliance
1. Joint venture is a strategic alliance in which two or more firms create a legally
independent company to share some of their resources and capabilities to develop a
competitive advantage.
2. Equity strategic alliance is an alliance in which two or more firms own different
percentages of the company they have formed by combining some of their resources
and capabilities to create a competitive advantage.
3. Non-equity strategic alliance is an alliance in which two or more firms develop a
contractual- relationship to share some of their unique resources and capabilities to
create a competitive advantage.
4. Global Strategic Alliances working partnerships between companies (often more
than two) across national boundaries and increasingly across industries, sometimes
formed between company and a foreign government, or among companies and
governments.

17. Stages in Globalization
Domestic
International
Multinational
Globalization
Transnational

18. Stages in Globalization - Domestic
• Market potential is limited to the home
country.
• Production and marketing facilities are located
at home only.
• It may add new product lines, serve new local
markets but whole planning is limited to
national markets only.

19. Stages in Globalization - Domestic
• Their focus remains with domestic market.
• Their productions facilities remain based in home country.
Their analysis is focused on the national market.
• They do not think globally and avoid taking risk in going
global.
• Their top management may have traditional kind of
business management competency and less global
expertise.
• They perceive that there is risk in expanding into global
market and thus they try to play safe and satisfied with
whatever gains they are getting in domestic market.
– Example : 5615 domestic companies India - 2017.
– Maharaja white line, Hind Motors.

20. Stages in Globalization - International
• International companies are the companies, who sell its
products in foreign countries by exporting it to those
countries and they might also be involved in various
importing activities. These companies do not have their
own establishments in foreign countries
• Investment: International companies do not have any
foreign direct investment (FDI) in the foreign countries
where they export to or import from their
products/services.
• Strategy: As these companies do not have any foreign set
up or branches, the key decision making functions is always
taken from the domestic country of the company

21. Stages in Globalization - International
• Products / R&D: Product development processes
are accomplished in the domestic country.
• Challenges: Legal, regulatory and customs issues
are the key bottlenecks for these companies.
Also, in cases where the taste of products in
some of the countries does not match, these
company may run the risk of failures.
• Example: Maharaja Whiteline, Dabur.

22. Stages in Globalization - Multinational
• Operations & Trading: Any Company, which is
having operations and trading in two or more
countries across the globe is called as a
multinational Company. Generally, the number of
countries in this cases, would be in the medium
range - from two to ten.
• Investment: Multinational companies may have
foreign direct investment (FDI) in very few of the
foreign countries where they operate in.

23. Stages in Globalization -Multinational
• Products / R&D: Just like the global companies, in
case of multinational companies the Products
development processes are generally taken up
by the Parent company and then distributed to
various subsidiary companies at foreign
countries for further trading.
• Challenges: In addition to the international legal
issues, these companies also face various IPR
(Intellectual Property Rights) issues like product
ideas copying, etc.
• Example: General Motors, Intuit.

24. Stages in Globalization - Global
• Operations & Trading: Any Company, which is having
operations and trading in many countries across the world
is called as a Global Company. Generally, the number of
countries in these cases, would be quite high, lets say
atleast around 15-20+ countries.
• Investment: Global companies mostly have foreign direct
investment (FDI) in some or all of the foreign countries
where they operate in. organization structure and key
decisions making functions have a "Centralized" approach
i.e the major decisions on the organizational approaches
/changes are taken from the headquarter. of the company.
These major decisions are like merger and amalgamation,
new products launching, etc.

25. Stages in Globalization - Global
• Products / R&D: Products development processes are
generally initiated and also completed by the Parent
company and then distributed to the subsidiary companies
at other countries for further trading. Subsidiary companies
at other countries may be allowed to take part in product
idea evolvement process, but the final development takes
place at the headquarter of the Parent company's country.
• Challenges: As these companies have investment in many
countries, they face regulatory and legal issues in those
countries often. Also, as these companies follow uniform
product type across all countries, they miss the local touch
in it and this sometimes lowers the demand in some
countries.
• Example: Lenovo, Kellogg, Shell, Coca-cola, Microsoft.

26. Stages in Globalization - Transnational
• Operations & Trading: These type of companies can be considered
as a mixture of the global, multinational and international
companies, as it combines many of the features of these 3 types of
companies. Here, the structure of the company is a little complex
type and also versatile - considering many of aspects vital for global
trade. These companies are pretty flexible companies in terms of
operating across the global by adopting the local cultures and
consumer behaviors and the ultimate marketing strategy based on
it.
• Investment: Transnational companies mostly have foreign direct
investment (FDI) in many of the foreign countries where they
operate in.
• Strategy: Transnational companies prefer to have a "Decentralized"
organization structure and key decisions making functions wherein
each of their international establishments are responsible to take
their own key decisions as suitable for the local region they are in.

27. Stages in Globalization - Transnational
• Products / R&D: Here, subsidiary companies at
different countries are also given the rights to develop
products on their own based on the local needs and
demands, though the final approval for launching may
come from Parent company's side. Products of multi
domestic companies vary from country to country, as
products are developed in line with the local taste and
customs.
• Challenges: Due to varied organization structure and
culture, transnational companies mainly face internal
manpower issues, and organizational problems, etc.
• Example: FEDEX, BMW, Nokia, Ford Motor Company.

28. Approaches of IB
• Ethnocentric
• Polycentric
• Regiocentric
• Geocentric

29. Ethnocentric approach
• Under this approach, target market is own
country , Excessive production will export due
to change in customer taste, preferences.

30. Polycentric Approach
• Under this approach, the companies
customizes the marketing mix to meet the
taste, performance and needs of the
customers of each international market.

31. Regiocentric approach
• Under this approach, the company operating
successfully in a foreign country thinks of
exporting other neighboring countries of the
host country.
• At this stage, the concerned subsidiary considers
the regional environment ( such as laws, culture,
policies etc.) for formulating the policies &
strategies.

32. Geocentric approach
• Under this approach, the company analyses the
tastes, preference and needs of the customers in
all foreign markets and then adopts a
standardized marketing mix for all the foreign
markets.

33. Theories of International Business
1.Theory of AbsoluteAdvantage
2.Theory of Comparative Advantage
3.Theory of Competitive Advantage
4.Heckscher-Ohlin Theory
5.Product Life Cycle Theory
6.Theory of Mercantilism
7.New Trade Theory

34. Theory of Absolute Advantage
•According to Adam Smith, who is regarded as the father of modern economics, countries
should only produce goods in which they have an absolute advantage.
•An individual, business, or country is said to have an absolute advantage if it can produce a
good at a lower cost than another individual, business, or country.
•Furthermore, when a producer has an absolute advantage, it also means that fewer
resources and less time are needed to provide the same amount of goods as compared to
the other producer.

35. Theory of Absolute Advantage
•This greater overall efficiency in production creates an absolute advantage, which allows for
beneficial trade—this is because producers are able to specialize and then, through trade,
benefit from other producers’ specialization.
Assumptions Underlying the Theory of Absolute Advantage

36. Theory of Absolute Advantage
Absolute Advantage Example
•The Blue country has an Absolute Advantage
in the production of Good A (2 hours).
•Blue county has an absolute advantage
because it takes fewer hours to produce a unit
of Good A than Red country, which takes 10
hours.
•Red Country takes fewer hours to produce
Good B (4 hours).
•Therefore Red Country has an Absolute
Advantage in the production of Good B.
•As a result, Blue Country will be better off if it
specializes in the production of Good A.
•Red Country will be better off if it specializes in
Good B.

37. Theory of Comparative Advantage
• Comparative advantage is where a nation is able to produce a product at a lower
opportunity cost.
• In other words, a nation sacrifices less of Good A to produce Good B than other nations.
• This is in sharp contrast to absolute advantage because a nation can have a comparative
advantage but not actually be more efficient than other countries.
• The law of comparative advantage was originally introduced by David Ricardo back in
1817.
• He defined it as a state by which one nation was more efficient at producing a certain good
than another. However, unlike absolute advantage, comparative advantage
considers opportunity cost.

38. Theory of Comparative Advantage
Comparative Advantage Example
• In this example, the US makes 30 million cars and 10
million trucks, whilst Japan produces 25 million cars and
2.5 million trucks.
• The US has an absolute advantage in producing both
cars and trucks. However, it has a comparative advantage
in trucks. This is because it is better at producing them.
• Although it is 1.2 times better than Japan in producing
cars, it is 4 times better at producing trucks.
“Japan has a comparative
advantage in producing
cars as it has to give up
fewer trucks than the US to
do so.”
• To explain, Japan could either produce 25 million cars or 2.5
million trucks.
• It may be reasonable to assume that it should produce cars
because it can make more of them.
• However, it has a comparative advantage in the production of
cars.
• This is because it is comparatively less efficient at producing
trucks.
• So the opportunity cost is far greater.
• In other words, Japan is better at producing cars than trucks
when compared to the US.

39. Theory of Competitive Advantage
• A competitive advantage is where one business is superior to another.
• This may be one aspect of the business, or many aspects. It is what makes
the business stand out from other competitors in the market.
• Examples include brand image, technological expertise, customer service,
or a distribution network.
• By having a competitive advantage, it makes the business more attractive
to the consumer.
• This may be because it can offer lower prices, offers a better-quality
product, or superior customer service.
• In economics, this is known as the value proposition.

40. Theory of Competitive Advantage
• The value proposition is simply the various factors that consumers consider
when placing a value on how much they are willing to pay for a good.
• For example, when buying a car, the consumer may consider acceleration,
colour choice, reliability, and price – thereby making up the value
proposition.
• A business has a competitive advantage when it is able to offer a superior
option to customers among one of these value propositions.
• For instance, one car manufacturer may offer a 20-year warranty as it is
highly reliable.
• By contrast, other cars may only offer a 2-year warranty, thereby providing
the consumer with a greater value proposition and demonstrating its
competitive advantage.

41. Theory of Competitive Advantage
•There are three generic types of competitive advantage that Michael Porter set out is Cost
Leadership, Differentiation Leadership, and Focus, which is divided into Cost and
Differentiation Focus.

42. Theory of Competitive Advantage
•Cost Leadership - Cost leadership is where companies focus purely on the price in order
to become the lowest-cost producer in the market.
•Differentiation Leadership - A firm providing a unique or high-quality product. It can
charge a premium price, which means it usually has a higher profit margin. An excellent
example of this is Apple. The iPod was innovative because it allowed users to play whatever
music they wanted, in any order.
•Focus, which is divided into Cost and Differentiation Focus - Focus means the
company's leaders understand and service their target market better than anyone else. For
example, community banks target local small businesses or high net worth individuals.
Their target audience enjoys the personal touch that big banks may not be able to give, and
customers are willing to pay a little more in fees for this service. These banks are using a
differentiation form of the focus strategy.

43. Heckscher-Ohlin Theory
•In the early 1900s an international trade theory called Factor Proportions theory emerged
by two Swedish economists, Eli Heckscher and Bertil Ohlin.
•This theory is also called the Heckscher-Ohlin theory.
•The Heckscher-Ohlin theory stresses that countries should produce and export goods that
require resources (factors) that are abundant and import goods that require resources in
short supply.
•This theory differs from the theories of comparative advantage and absolute advantage
since these theory focuses on the productivity of the production process for a particular
good.
•On the contrary, the Heckscher-Ohlin theory states that a country should specialise
production and export using the factors that are most abundant, and thus the cheapest.
Not produce, as earlier theories stated, the goods it produces most efficiently.

44. Product Life Cycle Theory
• Raymond Vernon, a Harvard Business School professor, developed the product life cycle
theory in the 1960s.
• Products come into the market and steadily depart all over again.
• According to Raymond Vernon, each manufactured goods has a definite life cycle that begins
with its expansion and ends with its decline.
• Product Life Cycle is defined as, “the sequence through which every product goes through
from introduction to removal or ultimate downfall.”
•The theory, originating in the field of marketing, stated that a Product life cycle has 3 distinct
stages:
• New product,
• A maturing product, and
• Standardized product.

45. Theory of Mercantilism
• Mercantilism is an economic policy whereby a nation aims to maximize exports and minimize
the imports.
• Originally adopted by European nations between 1500 and 1800, mercantilist nations
implemented policies such as tariffs and subsidies in order to boost exports and make
international imports more expensive.
• Mercantilism originates from the term ‘mercantile’, which refers to merchants and trade.
• By extension, mercantilism is the philosophy and belief that trade with other nations should be
regulated through what is now known as ‘protectionism’.

46. Theory of Mercantilism
• Mercantilism is an economic theory where the government seeks to regulate the economy
and trade in order to promote domestic industry – often at the expense of other countries.
• Mercantilism is associated with policies which restrict imports, increase stocks of gold and
protect domestic industries.
• Example:
• Under the British Empire, India was restricted in buying from domestic industries and were
forced to import salt from the UK. Protests against this salt tax led to the ‘Salt tax revolt’ led by
Gandhi.

47. New Trade Theory (NTT)
• Paul Krugman developed New Trade Theory in 1970.
• This theory argues that increasing returns to scale, especially economies of scale, are
an important factor in some industries for superior international performance.
• For eg. Commercial aircraft has very high fixed cost; necessitate high volume sales to
achieve profitability.
• Specialization on ht production of such goods; productivity increases; lowers the cost;
providing significant benefit to local economy.
• National market relatively small; to achieve economies of scale they can engage in
exporting.
• Thus trade is beneficial even for countries that produce only a limited variety of goods.

48. New Trade Theory (NTT)
• NTT came about to help us understand why countries are trade partners when they are
trading similar goods and services.
• This is especially true in key economic sectors like electronics, food, and automotive.
• We have cars made in the United States, yet we purchase many cars made in other
countries.
• Tablets are a perfect example. The United States both produces them and also imports
them.
• NTT argues that, because of substantial economies of scale and network effects, it export
tablets to sell in another country. Those countries with the advantages will dominate the
market, and the market takes the form of monopolistic competition.