GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY, DELHI MASTER OF BUSINESS ADMINISTRATION (MBA)
MANAGEMENT OF INTERNATIONAL BUSINESS
Objectives: The objective of this course is to enable the students to manage business when the Organizations are exposed to international business environment.
Course Contents:
1. Nature and Scope of International Management: Introduction to International Business; Concept and Definition of International Management; Reasons for Going International, International Entry Modes, Their Advantages and Disadvantages, Strategy in the Internationalization of Business, Global Challenges; Entry Barriers, India’s Attractiveness for International Business. (14 Hours)
2. Environment Facing Business: Cultural Environment facing Business, Managing Diversity within and Across Culture, Hofstede Study, Edward T Hall Study, Cultural Adaptation through Sensitivity Training, Political, Legal, Economic, Ecological and Technological Facing Business and their Management. (14 Hours)
3. Formulating Strategy for International Management: Strategy as a Concept, Implementing Global Strategy, Emerging Models of Strategic Management in International Context, Achieving and Sustaining International Competitive Advantage; International Strategic Alliances, Global Mergers and Acquisition. (14 Hours)
4. Organizing and Controlling for International Competitiveness: International Human Resource Management-concept and Dimensions, Human Resource Issues in Developing and Maintaining an Effective Work Force, Leadership Issues; Motivation; Basic Models for Organization Design in Context of Global Dimensions; Future of International Management in the East, Global Operations Management. (14 Hours)
PART I
NATURE AND SCOPE OF INTERNATIONAL
MANAGEMENT
I.
INTRODUCTION TO INTERNATIONAL BUSINESS
MEANING AND CONCEPT
• International business includes all business transactions involving two or more countries. These business relationships may be between private individuals, companies, groups of companies, non-profit organizations or government agencies. In some ways, international business is an extension of domestic business, but it is different for two reasons. The first reason is that international business objectives are likely to be different from domestic business objectives; the second and more significant is that the environmental conditions in which international business is conducted are usually of greater complexity than is the case with domestic business. These complexities arise from, amongst other things, differences in culture, currencies, legal systems and the endowment of national resources. Developments in communication and transportation technology facilitate trade worldwide, leading to the cliché that 'all business is now international business'; thus people working in maritime industries are inevitably involved in international business.
• International business can be defined as set of those business activities that involves the crossing of national boundaries. The set of activities includes:
- Import and export of commodities and manufactured goods
Investment of capital in manufacturing, extractive, agricultural, transportation and communication assets
Supervision of employees in different countries
Investment in international services like banking, advertising, tourism, retailing and construction
Transactions involving copyrights, patents, trademarks and process technology.
• International business covers all business transactions involving two or more countries.
• Vernon (1964) defined the field of international business in terms of dealing with: (1) "operating within foreign economies"; (2) "the problems of the movements of goods and capital across boundaries," and (3) "the problems of surveying and integrating from headquarters the operations of entities existing in more than one country."
EVOLUTION OF INTERNATIONAL BUSINESS
The business across the borders of the countries had been carried on since times immemorial. But, the business had been limited to the international trade until the recent past. The post World War II period witnessed an unexpected expansion of national companies into international or multinational companies. The post 1990s period has given greater fillip to international business. In fact, the term international business was not in existence before two decades. The term international business has emerged from the term international marketing, which in turn, emerged from the term ‘export marketing’.
International Trade to International Marketing: Originally, the producers used to export their products to the nearby countries and gradually extended the exports to far-off countries. Gradually, the companies extended the operations beyond trade. For example, India used to export raw cotton, raw jute and iron ore during the early 1900s. The massive industrialization in the country enabled us to export jute products, cotton garments and steel during 1960s. India, during 1980s could create markets for its products, in addition to mere exporting. The export marketing efforts include
creation of demand for Indian products like textiles, electronics, leather products, tea, coffee etc., arranging for appropriate distribution channels, attractive package, product development, pricing etc. This process is true not only with India, but also with almost all developed and developing economies.
International Marketing to International Business: The multinational companies which were producing the products in their home countries and Marketing them in various foreign countries before 1980s, started locating their plants and other manufacturing facilities in foreign/host countries. Later, they started producing in one foreign country and marketing in other foreign countries. For example, Unilever established its subsidiary company in India, i.e., Hindustan Lever Limited (HLL). HLL produces its products in India and markets them in Bangladesh, Sri Lanka, Nepal etc. Thus, the scope of the international trade is expanded into international marketing and international marketing is expanded into international business.
NATURE OF INTERNATIONAL BUSINESS
• International business houses need accurate information to make an appropriate decision. Europe was the most opportunistic market for leather goods and particularly for shoes. Bata based on the accurate data could make appropriate decision to enter various European countries.
• International business houses need not only accurate but timely information. CocaCola could enter the European market based on the timely information, whereas Pepsi entered later. Another example is the timely entrance of Indian software companies into the US market compared to those of other countries. Indian software companies also made timely decision in the case of’ Europe.
• The size of the international business should be large in order to have impact on the foreign Economies. Most of the multinational companies are significantly large in size. In fact, the Capital of some of the MNCs is more than our annual budget and GDPs of the some of the African Countries.
• Most of the international business houses segment their markets based on the geographic market segmentation. Daewoo segmented its market as North America, Europe, Africa, Indian subcontinent and Pacific markets.
• International markets present more potentials than the domestic markets. This is due to the fact that international markets wide in scope, varied in consumer tastes, preferences and Purchasing abilities, size of the population etc. For example, the IBM’s sales are more in foreign countries than in USA. Similarly, Coca-Cola’s sales, Procter and Gamble’s sales and Satyam Computer’s sales are more in foreign countries than in their respective home countries. The population for the year 2000 indicates that: USA’s population would be 300 million, Mexico’s 126 million, Brazil’s 205 million, Indonesia’s 223 million, Pakistan’s 138 million, Nigeria’s 154 million and Bangladesh’s 146 million. The size of the population, sometimes, may not determine the size of the market. This is due to the backwardness of the economy and low purchasing power of the people, In fact, the size of Eritrea an African country is roughly equal to that of the United Kingdom in terms of land area and size of the population. But, in terms of per capita income it is one of the poorest countries in the world with estimated per capita income of US $ 150 per annum. Therefore, the international business houses should consider the consumers’ willingness to buy and also ability to buy the products In fact, most of the multinational companies, which entered Indian market after 1991, failed in this respect. They viewed that almost the entire Indian population would be the customers. Therefore, they estimated that the demand for consumer durable goods would be increasing in India after globalisation. And they entered the Indian market. The heavy inflow of these goods and decline in the size of Indian middle class resulted in a slump in the demand for consumer durable goods.
• Wider Scope : Foreign trade refers to the flow of goods across national political borders. Therefore, it refers to exporting and importing by international marketing companies plus creation of demand, promotion, pricing etc. As stated earlier, international business is much broader in scope. It involves international marketing, international investments, management of foreign exchange, procuring
international finance from IMF, IBRD, IFC, IDA etc., management of international human resources, management of cultural diversity, international marketing, management of international production and logistics, international strategic management and the like. Thus, international business is broader in scope and covers all aspects of the system.
• Inter-country Comparative Study : International business studies the business opportunities, threats, consumers’ preferences, behavior, cultures of the societies, employees, business environmental factors, manufacturing locations, management styles, inputs and human resource management practices in various countries. International business seeks to identify, classify and interpret the similarities and dissimilarities among the systems used to anticipate demand and market products’. The system presents inter-country comparison and intercontinental comparison/comparative analysis helps the management to evaluate the markets, finances, human resources, consumers etc. of various countries. The comparative study also helps the management to evaluate the market potentials of various countries. The study also indicates the degree of consumer acceptance of the product, product changes and developments in different countries. Managements of international business houses can group the countries with similar features and design the same products, fix similar price and formulate the same marketing strategies. For example, Prentice Hall grouped India, Nepal, Pakistan Bangladesh, Sri Lanka etc. into one category based on the customers’ ability to pay and designed the same quality product and sell them at the same price in all these countries. Similarly, Dr. Reddy’s Lab does the same for its products to sell in the African countries.
STAGES OF INTERNATIONALIZATION
The internationalization process generally includes five stages, viz., domestic company, international Company, multinational company, global company and transnational company. Now, we will study stage of internationalization in detail. Stage 1: Domestic Company
boundaries. These companies focus its view on the domestic market opportunities, domestic suppliers, domestic financial companies, domestic customers etc. These companies analyze the national environment of the country, formulate the strategies to exploit the opportunities offered by the environment. The domestic Companies’ unconscious motto is that, “if it’s not happening in the home country, it is not happening”. The domestic company never thinks of growing globally. If it grows, beyond its present capacity, the company selects the diversification strategy of entering into new domestic markets, new products, technology etc. The domestic company does not select the strategy of expansion/penetrating into the international markets.
Stage 2: International Company
Some of the domestic companies, which grow beyond their production and/or domestic marketing capacities, think of internationalizing their operations. Those companies who decide to exploit the opportunities outside the domestic country are the stage two companies. These companies remain ethnocentric or domestic country oriented. These companies believe that the practices adopted in domestic business, the people and products of domestic business are superior to those of other countries. The focus of these companies is domestic but extends the wings to the foreign countries. Markets and extend the same domestic operations into foreign markets. In other words, these companies extend the domestic product, domestic price, promotion and other business practices to the foreign markets. Normally internationalization process of most of the global companies starts with this stage. Most of the companies follow this strategy due to limited resources and also to learn from the foreign markets gradually before becoming a global company without much risk. The international company holds the marketing mix constant and extends the operations to new countries. Thus the international company extends the domestic country marketing mix and business model and practices to foreign countries.
Stage: 3 Multinational Company
Sooner or later, the international companies learn that the extension strategy (i.e., extending the domestic product, price and promotion to foreign markets) will not work.
This statue of multinational company is also referred to as multi-domestic. Multi-domestic company formulates different strategies for different markets; thus, the orientation shifts from ethnocentric to polycentric. Under polycentric orientation the offices /branches/subsidiaries of a multinational company work like domestic company in each country where they operate with distinct policies and strategies suitable to that country concerned. Thus they operate like a domestic company of the country concerned in each of their markets.
Philips of Netherlands was a multi-domestic company of this stage during 1960s. It used to have autonomous national organizations and formulate the strategies separately for each country. Its strategy did work effectively until the Japanese companies and Matsushita started competing with this company based oil global strategy. Global strategy was based on focusing the company resources to serve tile world market. Philips strategy was to work like a domestic company, and produce a number of models of the product consequently it increased the cost of production and price of the product. But the Matsushita’s strategy was to give the value, quality, design and low price to the customer. Philips lost its market share as Matsushita offered more value to the customer Consequently Philips changed its strategy and created “industry main groups” in Netherlands which are responsible for formulating a global strategy for producing, marketing and R & D.
Stage 4: Global Company
A global company is the one, which has either global marketing strategy or a global strategy. Global company either produces in home country or in a single country and focuses on marketing these products globally, or produces the products globally and focuses on marketing these products domestically.
Harley designs and produces super heavy weight motorcycles in USA and markets in the global market. Similarly, Dr. Reddy’s Lab designs and produces drugs in India and markets globally. Thus Harley and Dr. Reddy’s Lab are examples of global marketing focus. Gap procures products in the global countries and markets the products in its retail organization in USA. Thus gap is an example for global sourcing company. Harley Davidson designs and produces in USA and gains competitive advantage as Mercedes in Germany. The Gap understands the US consumer and got
competitive advantage.
Stage 5:Transnational Company
Transnational company produces, markets, invests and operates across the world. It is an integrated global enterprise, which links global resources with global markets at profit. There is no pure transnational corporation. However, most of the transnational companies satisfy many of the characteristics of a global corporation.
Characteristics of a Transnational Company
(i)Geocentric Orientation: A transnational company is geocentric in its orientation. This company thinks globally and acts locally. This company adopts global strategy but allows value addition to the customer of a domestic country. This company allows adaptation to add value to its global offer. The assets of a transnational company are distributed throughout the world, independent and specialized. The R & D facilities of a transnational company are spread in many countries, but specialized in each Country based on the local needs and integrated in world R & D project. Similarly, the production facilities are spread but specialized and integrated. Units of the transnational corporation in different countries create and develop the knowledge in all functions and share among them. Thus knowledge and experience is shared jointly. It gains power and competitive advantage by developing and sharing knowledge and experience.
(ii) Scanning or information Acquisition: Transnational companies collect the data and information worldwide. These companies scan the environmental information regarding economic environment, political environment, social and cultural environment and technological environment. These companies collect and scan the information regardless geographical and national boundaries.
(iii) Vision and Aspirations: The vision and aspiration of transnational companies are global, global markets, global customers and grow ahead of other global/transnational companies.
(iv)Geographic Scope: The transnational companies scan the global data and information. By doing so, they analyze the global opportunities regarding the availability of resources, customers, markets, technology, research and development
etc. Similarly, they also analyze the global challenge and threats like competition from the other global companies, local companies of host countries, political uncertainties and the like. They formulate global strategy. Thus the geographic scope of a transnational company is not limited to certain countries in analyzing opportunities, threats and formulating strategies.
(v) Operating Style: Key operations of a transnational are globalize. The transnational companies globalize the functions like R & D, product development, placing key human resources, Procurement of high valued material etc. For example, the R &D activity of Proctor & Gamble, and key human resource activity of Colgate are the joint and shared activity of the units of these companies in various countries.
(vi) Adaptation: Global and transnational companies adapt their products, marketing strategic and other functional strategies to the environmental factors of the market concerned, For example, Mercedes Benz is a super luxury car in North America, luxury automobile in Germany, standard taxi in Europe.
(vii) Extensions: Some products do not require any change when they are marketed in other countries. Their market is just extension. For example, Casio calculators of Japan.
(viii) Creation through Extension: Transnational companies create the global brand through extending the product to the new market. Rothmans Cigarette extended its product to many European countries and African countries and created it as global and national basis.
(ix) Human Resource Management Policy: The transnational company’s human resource policy is not restricted by national political or legal constraints. It selects the best human resources and develops them regardless of nationality, ethnic group etc. But the international company reserves the top and key positions for nationals.
(x) Purchasing: Transnational Company procures world-class material from the best source across the globe.
INTERNATIOANL BUSINESS APPROACHES
Douglas Wind and Pelmutter advocated four approaches of international business. They are:
1. Ethnocentric Approach
The domestic companies normally formulate their strategies, their product design and their operations towards the national markets, customers and competitors. But, the excessive production more than the demand for the product, either due to competition or due to changes in customer preferences push the company to export the excessive production to foreign countries. The domestic company continues the exports to the foreign countries and views the foreign markets as an extension to the domestic markets just like a new region. The executives at the head office of the company make the decisions relating to exports and, the
marketing personnel of the domestic company
monitor the export operations with the help of an export department. The company exports the same product designed for domestic markets to foreign countries under this approach. Thus, maintenance of domestic approach towards international business is called ethnocentric approach.
Managing Director
Manager R& D
Manager
Finance ProductionManager
Manager Human Resources Manager Marketing Assistant Manager North India Assistant Manager South India Assistant Manager Exports
This approach is suitable to the companies during the early days of internationalization and also to the smaller companies.
2. Polycentric Approach
The domestic companies, which are exporting to foreign countries using the ethnocentric approach, find at the latter stage that the foreign markets need an altogether different approach. Then, the company establishes a foreign subsidiary company and decentralists all the operations and delegates decision making and policy-making authority to its executives. In fact, the company appoints executives and personnel including a chief executive who reports directly to the Managing Director of the company. Company appoints the key personnel from the home country and the people of the host country fill all other vacancies.
3. Regiocentric Approach
The company after operating successfully in a foreign country, thinks of exporting to the neighboring countries of the host country. At this stage, the foreign subsidiary considers the regions environment (for example, Asian environment like laws, culture, policies etc.) for formulating policies and strategies. However,
it markets more or less the same product designed under polycentric approach in other countries of the region, but with different market strategies.
4. Geocentric approach
Under this approach, the entire world is just like a single country for the company. They select the employees from the entire globe and operate with a number of subsidiaries. The head quarter coordinates the activities of the subsidiaries. Each subsidiary functions like an independent and autonomous company in formulating policies, strategies, product design, human resource policies, operations etc.
II.
CONCEPT AND DEFINITION OF INTERNATIONAL
MANAGEMENT
- The study of international management is gaining importance as firms expand their operations to various countries. International management deals with the processes of planning, organizing, staffing, leading and controlling organizations engaged in international business. Companies go international for various reasons: gain access to new markets, to increase profits, or to acquire products for the home market. These are called aggressive reasons for going international.
- International Management and International Business are two separate concepts. While IB is transactions devised and carried out across international borders to satisfy corporations and individuals, IM deals with managing such transactions within a boundary set by corporate strategy.
- The maintenance and development of an organization's production or market interests across national borders with either local or expatriate staff
- The process of running a multinational business made up of formerly independent organizations
- The body of skills, knowledge, and understanding required to manage cross-cultural operations
- Took and Beeman define international management as the determination and completion of actions and transactions conducted in and/or with foreign countries in support of organization policy. Czinkotra and Grosse and Kojawa define international business as transactions devised and carried out across international borders to satisfy corporations and individuals. International management by these definitions is viewed as a subset of international business. The focus of international business is on international transactions, whereas international management deals with managing such transactions with in the boundary set by corporate strategy. Thus, when a company decides to enter a foreign market, that decision incorporates planning to establish the ways by which business functions-marketing, accounting, human resource management, and so on-are to be managed in that distinct location. Managing the various functions and coordinating them with the parent’s company’s overall strategy is the task of international management.
III. REASONS FOR GOING INTERNATIONAL
The primary reason for going international is –there is money to be made by going abroad. U.S. giants like Mc Donald’s have made massive penetration into foreign markets. In 1994, Mc Donald’s experienced a 6% gains in its domestic sales, but its foreign sales accounted for half of its overall volume. With the recent advent of
technological innovation and the emergence of the newly industrialized countries (NICs), a convergence has occurred among nation in terms of rates and preferences, financial systems, and organization design. These convergences along with complimentary developments are forcing organizations to “borderless” terms. Their thinking revolves around the following issues:
-1. Where the value-adding activities should be performed?
2. Where are the most cost-effective markets for new capital and labor?
3. Can products be designed in one market and then be sold in other countries without adding further costs?
Reasons for Going International
Convergence in: >Tastes and Preferences >Organization Design >Financial System
Complementary Development
>NIC Purchasing Power >Developing Countries’ Ability to Purchase Good Quality Products
Removal of Trade Barriers Resulting in
Meeting Global Consumer Demands Lower Price
Better Value
I. To Achieve Higher Rate of Profits : As we have discussed in various courses/subjects like Principles and Practice of Management, Managerial Economics and Financial Management that the basic objective of the business firms is to earn profits. When the domestic markets do not promise a higher rate of profits, business firms search for foreign markets, which promise for higher rate of profits. For example, Hewlett Packard earned 85.4% of its profits from the foreign markets compared to that of domestic markets in 1994. Apple earned US $ 390 million as net profit from the foreign markets and only US $ 310 millions as net profit from its domestic market in 1994. Further in certain cases, international business can help increase the profitability of the domestic business.
II. Expanding the Production Capacities beyond the Demand of the Domestic Country: Some of the domestic companies expanded their production capacities more than the demand for the product in the domestic countries. These companies, in such cases, are forced to sell their excess production in foreign developed countries.
III. Growth Opportunities: An important reason for going international is to take advantage of the 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. Foreign markets both developed and developing countries provide enormous growth opportunities for the developing country firms too.
IV. 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 give a number of incentives and other positive support to domestic companies to export and invest in foreign countries. Similarly, several countries give a lot of importance to import development and foreign investment. Sometimes, (as was the case in India) companies may be obliged to earn foreign exchange to finance their
imports and to meet certain other foreign exchange requirements like payment of royalty dividend etc.
V. 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 even a dominant position may facilitate internationalization. Similarly, exclusive market information (which includes knowledge about foreign customers, market places, or market situations not widely shared by other firms) is another proactive stimulus.
VI. Severe Competition in the Home Country : The countries oriented towards market economies since 1960s had severe competition from other business firms in the home countries. The weak companies, which could not meet the competition of the strong companies in the domestic country, started entering the markets of the developing countries. Moreover a protected market does not normally motivate companies to seek business outside the home market. For example Indian economy was a highly protected market before liberalization in 1991. Not only the domestic producers were protected from foreign competition but also domestic competition was restricted by several policy induced entry barriers, operated by such measures as industrial licensing etc. After liberalization, competition increased from foreign as well as domestic firms. Many Indian companies are now systematically planning to go international in a big way.
VII. Limited Home Market : When the size of the home market is limited either due to the smaller size of the population or due to lower purchasing power of the people or both, the companies internationalize their operations. For example, most of the Japanese automobile and electronic firms entered US, Europe and even African markets due to the smaller size of the home market. ITC entered the European market due to the lower purchasing power of the Indians with regard to high quality cigarettes. Similarly, the mere six million population of Switzerland is the reason for Ciba Geigy to internationalize its operations. In fact, this
company was forced to concentrate on global market and establish manufacturing facilities in foreign countries.
VIII. Political Stability vs. Political Instability : Political stability does not simply mean that continuation of the same party in power, but it does mean the continuation of the same policies of the Government for a quite longer period. It is viewed that USA is a politically stable country. Similarly, UK, France, Germany, Italy and Japan are also politically stable countries. Most of the African countries and some of the Asian countries like Malaysia, Indonesia, Pakistan and India are politically instable countries. Business firms prefer to enter the politically stable countries and are restrained from locating their business operations in politically instable countries. In fact, business firms shift their operations from politically instable countries into politically stable countries. IX. Availability of Technology and Managerial Competence: Availability of
advanced technology and managerial competence in some countries act as pulling factors for business firms from the home country. The developed countries due to these reasons attract companies from the developing world. In fact, American companies, in recent years, depend on Japanese companies for technology and management expertise.
X. High Cost of Transportation : Initially companies enter foreign countries through their marketing operations. At this stage, the companies realize the challenge from the domestic companies. Added to this, the home companies enjoy higher profit margins whereas the foreign firms suffer from lower profit margins. The major factor for this situation is the cost of transportation of the products. Under such conditions, the foreign companies are inclined to increase their profit margin by locating -their manufacturing facilities in foreign countries where there is enough demand either in one country or in a group of neighboring countries. XI. Nearness to Raw Materials : The source of highly qualitative raw materials and
bulk raw materials is a major factor for attracting the companies from various foreign countries. Most of the US based and European based companies located their manufacturing facilities in Saudi Arabia, Bahrain, Qatar, Oman, Iran and
other Middle East countries due to the availability of petroleum. These companies, thus, reduced the cost of transportation.
XII. Availability of Quality Human Resources at Less Cost : This is a major factor, in recent times, for software, high technology and telecommunication companies to locate their operations in India. India is a major source for high quality and low cost human resources unlike USA, developed European countries and Japan. Importing human resources from India by these firms is costly rather than locating their operations in India. Hence these companies started their operations in India and other similar countries.
XIII. To Avoid Tariffs and Import Quotas : It was quite common before globalization that governments imposed tariffs or duty on imports to protect the domestic company. Sometimes Government also fixes import quotas in order to reduce the competition to the domestic companies from the competent foreign companies. These practices are prevalent not only in developing countries but also in advanced countries. For example, Japanese companies are competent competitors to the US companies. USA imposed tariffs and quotas regarding import of automobiles and electronics from Japan. Harley Davidson of USA sought and got five years of tariffs protection from Japanese imports. Similarly, Japan places high tariffs on imports of rice and other agricultural goods from USA. To avoid high tariffs and quotas, companies prefer direct investment to go globally. For example, companies like Sony, Honda and Toyota preferred direct investment in various countries by establishing subsidiaries or through joint ventures in various foreign countries including USA and India. Xerox, Canon, Phillips, Unilever, Lucky Gold Star, South Korean Electronics Company, Pepsi, Coca Cola, Shell, Mobil etc. established manufacturing facilities in various foreign countries in order to avoid tariffs, import duties and quotas.
IV.
ENTRY BARRIERS
Tariff Barriers
• Customs duties enforced on imported products (final products or intermediate products)
• Different tariff rates for different countries and different products
• May be adjusted by political influence from trade associations Non-Tariff Barriers
Non-tariff barriers to trade are trade barriers that restrict imports but are not in the usual form of a tariff. These include all other entry barriers, e.g., transportation costs, slow customs procedures, etc.
They are criticized as a means to evade free trade rules such as those of the World Trade Organization (WTO), the European Union (EU), or North American Free Trade Agreement (NAFTA) that restrict tariffs. Some of the common examples are
anti-dumping measures and countervailing duties, which, although they are called "non-tariff" barriers, have the effect of tariffs but are only imposed under certain conditions. Their use has risen sharply after the WTO rules led to a very significant reduction in tariff use.
Non-tariff barriers may also be in the form of manufacturing or production requirements of goods, such as how an animal is caught or a plant is grown, with an import ban imposed on products that don't meet the requirements. Examples are the European Union restrictions on genetically-modified organisms or beef treated with growth hormones.
Some non-tariff trade barriers are expressly permitted in very limited circumstances, when they are deemed necessary to protect health, safety, or sanitation, or to protect diminishing natural resources.
Non-tariff barriers to trade can be:
• State subsidies, procurement, trading, state ownership
• National regulations on health, safety, employment
• Product classification
• Quota shares
• Foreign exchange controls and multiplicity
• Over-elaborate or inadequate infrastructure
• "Buy national" policy.
• Intellectual property laws (patents, copyrights)
• Bribery and corruption
• Unfair customs procedures
• Restrictive licenses
• Import bans
• Seasonal import regimes Natural Entry Barriers
• Intense competition among several differentiated brands
• Pro-domestic sentiment favoring local brands Artificial Entry Barriers
• Limited distribution access
• Bureaucratic inertia
• Government regulations
• Limited access to technology
• Local monopolies
• Tariffs
Barriers to entry are designed to block potential entrants from entering a market profitably. They seek to protect the monopoly power of existing (incumbent) firms in an industry and therefore maintain supernormal (monopoly) profits in the long run. Barriers to entry have the effect of making a market less contestable
The economist Joseph Stigler defined an entry barrier as "A cost of producing (at some or every rate of output) which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry". This emphasizes the asymmetry in costs between the incumbent firm (already inside the market) and the potential entrant. If the existing businesses have managed to exploit some of the economies of scale that are available to firms in a particular industry, they have developed a cost advantage over potential entrants. They might use this advantage to cut prices if and when new suppliers enter the market, moving away from short run profit maximization objectives - but designed to inflict losses on new firms and protect their market position in the long run.
Examples of barriers to entry
Patents: Giving the firm the legal protection to produce a patented product for a number of years.
Limit Pricing: Firms may adopt predatory pricing policies by lowering prices to a level that would force any new entrants to operate at a loss.
Cost advantages: Lower costs, perhaps through experience of being in the market for some time, allows the existing monopolist to cut prices and win price wars
Advertising and marketing: Developing consumer loyalty by establishing branded products can make successful entry into the market by new firms much more expensive. This is particularly important in markets such as cosmetics, confectionery and the car industry.
Research and Development expenditure: Heavy spending on research and development can act as a strong deterrent to potential entrants to an industry. Clearly much R&D spending goes on developing new products but there are also important spill-over effects which allow firms to improve their production processes and reduce unit costs. This makes the existing firms more competitive in the market and gives them a structural advantage over potential rival firms.
Presence of sunk costs: Some industries have very high start-up costs or a high ratio of fixed to variable costs. Some of these costs might be unrecoverable if an entrant opts to leave the market. This acts as a disincentive to enter the industry.
International trade restrictions: Trade restrictions such as tariffs and quotas should also be considered as a barrier to the entry of international competition in protected domestic markets.
Sunk Costs: Sunk Costs are costs that cannot be recovered if a businesses decides to leave an industry Examples include: " Capital inputs that are specific to a particular industry and which have little or no resale value " Money spent on advertising / marketing / research which cannot be carried forward into another market or industry When sunk costs are high, a market becomes less contestable. High sunk costs (including exit costs) act as a barrier to entry of new firms (they risk making huge losses if they decide to leave a market).
A good example of substantial sunk costs occurred in 2001 when British Telecom announced it was scrapping its loss-making joint venture with US telecoms firm AT&T. The closure was estimated to lead to the loss of 2,300 jobs - almost 40% of Concert's workforce. And, it will cost BT $2bn (£1.4bn) in impairment charges and restructuring costs, and AT&T $5.3bn.
V.
INDIA’S ATTRACTIVENESS FOR INTERNATIONAL
BUSINESS
VI.
INTERNATIONAL ENTRY MODES
• Companies deciding to enter the foreign markets, face the dilemma while deciding the method of entry into a given overseas location. Analyzing the following decision factors can reduce this dilemma:
-1. Ownership Advantages: Ownership advantages are those designed by a company by owning resources. These benefits provide competitive advantage to the company over its competitors.
Toronto-based Inco. Ltd., of rich, nickel-bearing ores allowed the company, to dominate the production of both primary nickel and nickel-based metal alloys.' Similarly,, Tata Iron and Steel Company (TISCO) Ltd., owned its iron ore mines and coal mines. This ownership grants the advantage of low cost producer to the company.
2. Location Advantages
Certain location factors grant benefit to the company when the manufacturing facilities are located in the host country rather than in the home country. These location factors include:
Customer Needs, Preferences and Tastes Logistic Requirements
Cheap Land Acquisition Cost Cheap Labor
Political Stability
Low Cost Raw Materials Climatic Conditions.
If the company has location advantages, it enters foreign markets through direct investment. If the location of manufacturing facilities in home country is advantageous in the host country, the company enters foreign markets through exporting.
3. Internationalization Advantages
Internationalization advantages are those benefits that a company gets by manufacturing goods or rendering services in the host country by itself rather than through contract arrangements with the companies in the host country.
Sometimes the cost of negotiating, monitoring and enforcing an agreement with the host country's company would be difficult and costly. In such cases the company enters the international markets through direct investment. Otherwise, if the company thinks that the transaction costs are low, and the local companies in the host country can produce efficiently without jeopardising the interest, the company can enter the foreign markets through contract manufacturing, franchising or licensing.
Toyota enters foreign markets through direct investment and joint-ventures us the local companies in foreign countries cannot produce as efficiently as Toyota.
Companies with low cash reserves normally prefer licensing mode rather than foreign direct investment (FDI)• Merck entered Israel by issuing license to Teva Pharmaceutical an Israel company in order to save the expenses of establishing in Israel. /n contrast, cash rich firms may prefer FDI. Firms also enter through FDI in order to take the advantage of economies of scale, and synergies between their domestic and international operations.
However, the software companies prefer licensing and franchising mode as they have to respond quickly to the market needs. For example Microsoft and Compaq. Thus, different firms select different modes based on the nature of the industry.
• The entry mode employed should be consistent with the firm's objectives and the choice will often involve a trade-off among objectives.
• The factors which influence the choice of entry mode are: o Legal considerations
o The nature of the competition o Political factors
o Economic risk
o The nature of the assets to be employed o The firm's experience.
• Firms may use different entry modes in different countries and for different products. As diversity increases, the task of coordinating the foreign operations becomes more complex.
• Firms usually want complete ownership of foreign operations to guarantee control and prevent loss of profit. However, host countries usually want a share of the action and the resources that the MNE will bring into the host country.
• Joint ventures are often motivated by the complementary resources firms have at their disposal, and just as often by governmental preferences.
• Turnkey projects usually require high level negotiation skills to deal with host country government officials.
• Management contracts are a means of securing income with little capital outlay. They are usually used for expropriated properties in LDCs, for new operations, and for facilities with operating problems. Management contracts involve the sale of technical or managerial expertise, and one of the responsibilities of the hired manager is to train local nationals so they will be able to run the business when the contact expires.
• Contracting foreign business does not negate management's responsibility to ensure that company resources are being optimally employed. This involves constantly assessing the work of the outsiders such as contract managers and evaluating new options for their employment.
MODES OF ENTRY
I. EXPORTINGExporting is the simplest and widely used mode of entering foreign markets. It is the marketing and selling of domestically produced goods in another country. It is a traditional and well established method of reaching foreign markets. Since it does not require that the goods be produced in the target country, no investment in foreign facilities is required. Most of the costs associated with exporting take form of marketing expenses.
The advantages of exporting include:
a. Need for Limited Finance : If the company selects a company in the host country to distribute, the company can enter international market with no or less financial resources. Alternatively, if the company chooses to distribute on its own, it needs to invest financial resources, but this amount would be quite less compared to that would be necessary under other modes.
b. Less Risk: Exporting involves less risk as the company understands the culture, customer and the market of the host country gradually. The company can enter the host country on a lull scale, if the product is accepted by the host country's market. British company selected this mode to export jams to Japan.
c. Motivation for Exporting: Motivations for exporting are proactive and
reactive. Proactive motivations are opportunities available in the host
country. San Antonio's Pace, Inc., producing Tex-Mex food products
exported its products to Mexico as Mexicans relished the taste of its products. Reactive motivations are those efforts taken by the company to
export the product to a foreign country due to the decline in demand for its product in the home country. Toto Ltd., of Japan started exporting its
products, i.e., Porcelain bathroom fixtures to China when the Japanese economy started slowing down in 1990s.
FORMS OF EXPORTING Forms of exporting include:
-1. Indirect Exporting: Indirect exporting is exporting the products either in their original form or in the modified form to a foreign country through another domestic company. Various publishers ill India including Himalaya
Publishing House, sell their products, i.e., books to UBS publishers of India, which in turn exports these books to various foreign countries.
2. Direct Exporting: Direct exporting is selling the products in a foreign country directly through its distribution arrangements or through a host country's company. Baskin Robbins initially exported its ice-cream to Russia in 1990 and later opened 74 outlets with Russian partners. Finally in 1995 it established its ice cream plant in Moscow."
3. Intracorporate Transfers: Intracorporate transfers are selling of products by a company to its affiliated company in host country (another country). Selling of products by Hindustan Lever in India to Unilever in USA. This transaction is treated as exports in India and imports in USA.
FACTORS TO BE CONSIDERED: The company, while exporting, should consider the following factors:
Government policies like export policies, import policies, export financing, foreign exchange etc.
Marketing factors like image, distribution networks, responsiveness to the customer, customer awareness and customer preferences.
Logistical consideration: These factors include physical distribution costs,
warehousing costs, packaging, transporting, inventory carrying costs.
Distribution Issues: These include own distribution networks, networks of host
county's companies. Japanese companies like Sony, Minolta and Hitachi rely On the distribution networks Of' their subsidiaries in the host country.
Export Intermediaries: Export intermediaries perform a variety of functions and enable tile small companies to export their goods to foreign countries. Their
functions include: handling transportation, documentation, taking ownership of foreign-bound goods, assuming total responsibility for exporting and financing. Types of export intermediaries include:
Export management companies act as export department of the exporting firm (its
client).
These companies act as commission agents for exports or they take tittle to the goods.
Cooperative Society: The domestic companies desire to export the goods form a
cooperative society, which undertakes the exporting operations of its members. International Trading Company: This company is engaged in directly exporting
and importing. It buys the goods from the domestic companies and exports. Therefore, the companies can export their goods by selling them to the international trading company.
Manufacturers' Agents: They work on a commission basis. They solicit domestic orders for foreign manufacturers.
Manufacturers' Export Agents: These agents also work on a commission basis.
They sell the domestic manufacturers' products in the foreign markets and act as their foreign sales department.
Export and Import Brokers: The brokers bridge the gap between exporters and
importers and bring these two parties together.
Freight Forwarders: Freight forwarders help the domestic manufacturers in
exporting their goods by performing various functions like physical transportation of goods, arranging customs documents and arranging transportation services.
II. LICENSING
In this mode of entry, the domestic manufacturer leases the right to use its intellectual property, i.e., technology, work methods, patents, copy rights, brand names, trademarks etc. to a manufacturer in a foreign country for a fee." Here the manufacturer in the domestic country is called 'licensor' and the manufacturer in the foreign country is called `licensee.'
Licensing is a popular method of entering foreign markets. The cost of entering foreign markets through this mode is less costly. The domestic company need not invest any capital as it has already developed intellectual property. As such, the domestic company earns revenue without additional investment. Hence, most of the companies prefer this mode of foreign entry.
The domestic company can choose any international location and enjoy the advantages without -incurring any obligations and responsibilities of ownership, managerial, investment etc. Kirin Brewery - Japan's largest beer producer entered Canada by granting license to Molson and British market by granting license to Charles Wells Brewery.
BASIC ISSUES IN INTERNATIONAL LICENSING:
Companies should consider various factors in deciding negotiations. Each international licensing is unique and has to be decided separately. However,there are certain common factors which affect most of the international licenses. They are:
-o B-oundaries -of the Agreements: The companies should clearly define the boundaries of agreements. They determine which rights and privileges are being conveyed in the agreement. Pepsi-Cola granted license to Heineken of
Netherlands with exclusive rights of producing and selling Pepsi-Cola in Netherlands. Under this agreement the boundaries are (i) Heineken should not export Pepsi-Cola to any other country, (ii) Pepsi supplies concentrated cola syrupand Heineken adds carbonated water to produce beverage and (iii) Pepsi can grnatclicence, to other companies in Netherlands to produce other products of' Pepsi like Potatochips.
o Determination of Royalty : The most important factor in deciding the license is the amount of royalty. It is needless to mention that the licensor expects high rate of royalty while licensee would be unwilling to par much royalty. However, both the parties negotiate for a fair royalty for both the sides in order to implement the contract more
o Determining; Rights, Privileges and Constraints : Another important factor, in granting license is determining clearly and specifically the rights, privileges and constraints. For example, if the Indian licensee of Aiwa TV uses interior input in order to reduce price, boost up sales and profit, the image of the Japanese licensor would be damaged.
o Dispute Settlement Mechanism : The licensee and licensor should clearly mention the mechanism to settle the disputes as disputes are hound to crop up. This is because, settlement of disputes in courts is costly, time consuming and hinders business interests.
o Agreement Duration: The two parties of the agreement specify the duration of the agreement. Licensing cannot he a short-term strategy. Hence, the duration of the licensing should not be of the short-term. It would always be appropriate to have long duration of the licensing. Tokyo Disneyland demanded on a 100-year licensing agreement With The Walt Disney Company.
ADVANTAGES AND DISADVANTAGES OF LICENSING Advantages
Licensing mode carries relatively low investment on the part of licensor Licensing mode carries low financial risk to the licensor.
Licensor can investigate the foreign market without much efforts on his part.
Licensee gets the benefits with less investment on research and development.
Licensee escapes himself from the risk of product failure. For example, Nintendo game designers have the relatively safety of knowing millions of game system units.
Disadvantages
Licensing agreements reduce the market opportunities for both the licensor and licensee.
Pepsi-cola cannot enter Netherlands and Heineken cannot sell Coca-cola. Both the parties have the responsibilities to maintain the product quality and promoting the product. Therefore, one party can affect the other through their improper acts.
Costly and tedious litigation may crop up and hurt both the parties and the market.
There is scope for misunderstanding between the parties despite the effectiveness of the agreement. The best example is Oleg Cassini and Jovan. There is a problem of leakage of the trade secrets of the licensor.
The licensee may develop his reputation.
The licensee may sell the product outside the agreed territory and after the expiry of the contract.
III. FRANCHISING
Franchising is a form of licensing. The franchisor can exercise more control over the franchised compared to that in licensing. International franchising is growing at a fast rate. Under franchising, an independent organization called the franchisee operates the business under the name of another company called the franchisor. Under this agreement the franchisee pays fee to t e franchisor. The franchisor provides the following services to the franchisee:
Trade marks Operating systems Product reputations
Continuous support systems like advertising, employee training, reservation services, and quality assurance programmes etc.
BASIC ISSUES IN FRANCHISING
The franchisor has been successful in his home country. McDonnell was successful in USA due to the popular menu and fast and efficient services. The factors for the success of the McDonald are later transferred to other
countries.
The franchiser may have the experience in franchising in the home country before going for international franchising.
Foreign investors should come forward for introducing the product on franchising basis.
FRANCHISING AGREEMENTS: The franchising agreement should contain important items as follows:
- Franchisee has to pay a fixed amount and royalty based on the sales to the franchisor.
Franchisee should agree to adhere to follow the franchisor's requirements like appearance, financial reporting, operating procedures, customer service etc."
Franchisor helps the franchisee in establishing the manufacturing facilities, services facilities. provides expertise, advertising, corporate image etc.
Franchisor allows the franchisee some degree of flexibility in order to meet the local taste-, and preferences. McDonald restaurants in Germany sell
beer also and McDonald restaurants in France sell wine also.
ADVANTAGES AND DISADVANTAGES OF FRANCHISING ADVANTAGES For franchisors
1. Expansion: Franchising is one of the only means available to access investment capital without the need to give up control in the process. After their brand and
formula are carefully designed and properly executed, franchisors are able to expand rapidly across countries and continents using the capital and resources of their franchisees, and can earn profits commensurate with their contribution to those societies. Additionally, the franchisor may choose to leverage the franchisee to build a distribution network.
2. Legal considerations: The franchisor is relieved of many of the mundane duties necessary to start a new outlet, such as obtaining the necessary licenses and permits. In some jurisdictions, certain permits (especially liquor licenses) are more easily obtained by locally based, owner-operator type applicants while companies based outside the jurisdiction (and especially if they originate in another country) find it difficult if not impossible to get such licenses issued to them directly. For this reason, hotel and restaurant chains that sell liquor often have no viable option but to franchise if they wish to expand to another state or province.
3. Operational considerations: Franchisees are said to have a greater incentive than direct employees to operate their businesses successfully because they have a direct stake in the operation. The need of franchisors to closely scrutinize the day to day operations of franchisees (compared to directly-owned outlets) is greatly reduced.
For franchisees
1. Quick start: As practiced in retailing, franchising offers franchisees the advantage of starting up a new business quickly based on a proven trademark and formula of doing business, as opposed to having to build a new business and brand from scratch (often in the face of aggressive competition from franchise operators). A well run franchise would offer a turnkey business: from site selection to lease negotiation, training, mentoring and ongoing support as well as statutory requirements and troubleshooting.
2. Expansion: With the help of the expertise provided by the franchisers the franchisees are able to take their franchise business to that level which they wouldn't have had been able to without the expert guidance of their franchisors.
3. Training: Franchisors often offer franchisees significant training, which is not available for free to individuals starting their own business. Although training is not free for franchisees, it is both supported through the traditional franchise fee that the franchisor collects and tailored to the business that is being started.
DISADVANTAGES f or Franchisors
1. Limited pool of viable franchisees: In any city or region there will be only a limited pool of people who have both the resources and the desire to set up a franchise in a certain industry, compared to the pool of individuals who would be able to competently manage a directly-owned outlet.
2. Control: Successful franchising necessitates a much more careful vetting process when evaluating the limited number of potential franchisees than would be required to hire a direct employee. An incompetent manager of a directly-owned outlet can easily be replaced, while regardless of the local laws and agreements in place removing an incompetent franchisee is much more difficult. Incompetent franchisees can easily damage the public's goodwill towards the franchisor's brand by providing inferior goods and services. If a franchisee is cited for legal violations, she will probably face the legal consequences alone but the franchisor's reputation could still be damaged.
For franchisees
1. Control: For franchisees, the main disadvantage of franchising is a loss of control. While they gain the use of a system, trademarks, assistance, training, marketing, the franchisee is required to follow the system and get approval for changes from the franchisor. For these reasons, franchisees and entrepreneurs are very different. The United States Office of Advocacy of the SBA indicates that a franchisee "is merely a temporary business investment where he may be one of several investors during the lifetime of the franchise. In other words, he is "renting or leasing" the opportunity, not "buying a business for the purpose of true ownership." Additionally, a franchise purchase consists of both intrinsic value and time value. A franchise is a wasting asset due to the finite term, unless the franchisor chooses to contractually obligate itself it is under no obligation to renew the franchise.
2. Price: Starting and operating a franchise business carries expenses. In choosing to adopt the standards set by the franchisor, the franchisee often has no further choice as to signage, shop fitting, uniforms etc. The franchisee may not be allowed to source less expensive alternatives. Added to that is the franchise fee and ongoing royalties and advertising contributions. The contract may also bind the franchisee to such alterations as demanded by the franchisor from time to time. (As required to be disclosed in the state disclosure document and the franchise agreement under the FTC Franchise Rule)
3. Conflicts: The franchisor/franchisee relationship can easily cause conflict if either side is incompetent (or acting in bad faith). An incompetent franchisor can destroy its franchisees by failing to promote the brand properly or by squeezing them too aggressively for profits. Franchise agreements are unilateral contracts or contracts of adhesion wherein the contract terms generally are advantageous to the franchisor when there is conflict in the relationship.
OTHER ADVANTAGES
Franchisor can enter global markets with low investment and low risks. Franchisor can get the information regarding the markets, culture, customs and environment of the host country.
Franchisor learns more lessons from the experiences of the franchisees. McDonald benefited from the world wide learning phenomenon. McDonald is convinced to open a restaurant in inner-city office building in Japan. This location has become a more successful one. Based on this lesson, McDonald opened its restaurants in downtown locations in various countries.
Franchisee can early start a business with low risk as he selects an established and proven product and operating system,
Franchise gets the benefits of R & D with low cost. Franchisee escapes form the risk of product failure.
International franchising may be more complicated than domestic franchising.
McDonald taught the Russian farmers the methods of growing potatoes to meet its standards.
It is difficult to control the international franchisee. As one of the French investor did not maintain the stores as per the standards, McDonald did revoke the franchise.
Franchising agents reduce the market opportunities for both the franchisor and franchisee.
Both the parties have the responsibilities to maintain product quality and product promotion.
There is scope for misunderstanding between the parties. There is a problem of leakage of trade secrets.
SPECIAL MODES
Some companies cannot make long-term investments or long-term contracts to enter markets. Therefore, they may use specialized strategies. These specialized strategies include:
-a. Contract Manufacturing
Some companies outsource their part of or entire production and concentrate on marketing operations. This practice is called the contract manufacturing or outsourcing.
Nike has contracted with a number of factories in south-east Asia to produce its athletic footware and it concentrates on marketing. Bata also contracted with a number of cobblers in India to produce its footware and concentrate on marketing. Mega Toys - a Los Angeles based company contracts with Chinese plants to produce Toys and Mega Toys concentrates on marketing.
Advantages
International business can focus on the part of the value chain where it has distinctive -competence.
