Sikkim Manipal University

- MBA -

Semester: 4 - Assignment

MB0053 - International Business Management 4 Credits

(Book ID: B1315)
Assignment
Set 1
Q1. Define international business. What are the advantages of international
business?
Answer: - International Business Definition
International business includes any type of business activity whether goods or services
that crosses national boundaries. A number of definitions of international business can be
found but no single universally accepted definition exists for the term international business.
Some people define international business as an organization that buys and/or sells goods
and services across two or more countries. Some others consider it as big enterprises which
have operating units outside their home country. Still others consider it as joint ventures
with locally owned business or with foreign governments.
International business has become massive in scale and has come to exercise a major
influence over political economic and social forces because of many types of comparative
business studies and knowledge of many aspects of foreign business operations. In fact,
sometimes the foreign operations and comparative business are used as synonymous for
international business. Foreign business refers to domestic operations within a foreign
country. Comparative business, on the other hand, focuses on similarities and differences
among countries and business systems.
Scope of International Business
The distinguishing feature of international business is that international firms operate in
environments that are highly uncertain. Moreover, the rules of the game are often
ambiguous, contradictory and are changing rapidly as compared to domestic environment.
International managers have to learn the factors which are unique to the country of their
operations. Managers who are shrewd in identifying new ways of doing business that satisfy
the changing priorities of foreign governments have an obvious and major competitive
advantage over their competitors who cannot or will not adapt to these changing priorities.
An international business firm should incorporate a global perspective. The firms should
explicitly define their guiding principles in terms of an international mandate rather than
allow the firms guiding principles in terms as an incidental adjunct to its domestic activities.
Incorporating an international outlook into the firms basic statement of purpose will help
focus the attention of managers on the opportunities outside the home economy.
The dynamic factors in foreign countries have impact on all stages of evolving and
implementing business plans by an international business firm. First, it must define the
firms guiding principles for the market place. The guiding principles should, in addition to
other things, provide a long term view of what the firm is striving to become and provide
direction to divisional and subsidiary managers.
Nowadays, many large enterprises operate internationally and hence awareness of
the major issues in international business is a valuable asset for international
managers. The study of international business helps an individual to supplement his
knowledge of practices, systems, styles, problems and solutions used in the other countries.
It develops a persons sensitivity to foreign cultures, values and social norms and enables
him to adopt broader perspective and hence improve his overall managerial efficiency.

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Reg. No. 571013423

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Sikkim Manipal University

- MBA -

Semester: 4 - Assignment

Motives / Advantages of International Business

Businesses undertake international operations because of a number of benefits that arise
from international business. Motives of international business are as follows:
1. International business helps a firm in spreading the commercial risk across several
countries. When demand of a product in one country is depressed, the production may
be exported to other countries, cold weather, for instance may depress soft drink
consumption in one country but all countries do not have winter at the same time. In
fact, some countries are relatively warm throughout the year. Such markets provide
outlets for production of soft drinks even in winter.
2. International business helps a firm in increasing their overall sales and profit. Many firms
in USA have done well because of their international sale.
3. Many firms resort to international business with a motive to survive. Some firms may
not have large market in home country. There may be intense competition in the home
country. Under such a situation, the firm would look towards foreign markets.
4. International business operations explore management to new ideas and different
approaches to solving problems. This in turn will help individual executives to develop
their general management skills and personal effectiveness. They become innovative
and adopt broader horizons. All these factors can give a firm a competitive edge in the
home country.
5. Many firms conduct international business to harness the economics of scope.
Economies of scope provide benefits like unit cost reductions resulting from undertaking
range of activities using common services and inputs useful for each activity.
Q2. Discuss in brief the Absolute and comparative cost advantage theories.
Answer: - Absolute Advantage:
Adam Smith (a social philosopher and a pioneer of political economics) argued that nations
differ in their ability to manufacture goods efficiently and he saw that a country gains by
trading. If the two countries exchanged two goods at ratio of 1:1, country I gets one unit of
goods B by sacrificing only 10 units of labor, whereas it has to give up 20 units of labor if it
produced the goods itself. In the same manner country II gives up only 10 units of labour to
get one units of goods A, whereas it has to give 20 units of labour if it was made by itself.
Hence it was understood that both countries had large amount of both goods by trading.
Comparative Advantage:
Ricardo (English political economist) questioned Smiths theory stating if one country is
more productive than the other in all lines of production and if country I can produce all
goods with less labour costs, will there be a need for the countries to trade. The reply was
affirmative.
He used England and Portugal as examples in his demonstration the two goods they
produced being wine and cloth. This case is explained using following table:

Portugal
England

Labour cost of production (in hours)

1 unit of wine
1 unit of cloth
70
80
110
90

According to him Portugal has an advantage in both areas of manufacture. To demonstrate

that trade between both countries will lead to gains, the concept of opportunity cost (OC) is
introduced.

Vinay K. Singh

Reg. No. 571013423

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Sikkim Manipal University

- MBA -

Semester: 4 - Assignment

Q3. How is culture an integral part of international business. What are its
elements?
Answer: - Culture is defined as the art and other signs or demonstrations of human
customs, civilization, and the way of life of a specific society or group. Culture determines
every aspect that is from birth to death and everything in between it. It is the duty of
people to respect other cultures, other than their culture. Research shows that national
cultures generally characterize the dominant groups values and practices in society, and
not of the marginalized groups, even though the marginalized groups represent a majority
or a minority in the society. Culture is very important to understand international business.
Culture is the part of environment, which human has created, it is the total sum of
knowledge, arts, beliefs, laws, morals, customs, and other abilities and habits gained by
people as part of society.
Culture is an important factor for practicing international business. Culture affects all the
business functions ranging from accounting to finance and from production to service. This
shows a close relation between culture and international business.
Cultural elements that relate business
The most important cultural components of a country which relate business transactions
are:
Language.
Religion.
Conflicting attitudes.
Cross cultural management is defined as the development and application of knowledge
about cultures in the practice of international management, when people involved have
diverse cultural identities.
International managers in senior positions do not have direct interaction that is face-to-face
with other culture workforce, but several home based managers handle immigrant groups
adjusted into a workforce that offers domestic markets.
The factors to be considered in cross cultural management are:
Cross cultural management skills
The ability to demonstrate a series of behavior is called skill. It is functionally linked to
achieving a performance goal.
The most important aspect to qualify as a manager for positions of international
responsibility is communication skills. The managers must adapt to other culture and have
the ability to lead its members.
The managers cannot expect to force members of other culture to fit into their cultural
customs, which is the main assumption of cross cultural skills learning. Any organization
that tries to enforce its behavioral customs on unwilling workers from another culture faces
conflict. The manager has to possess the skills linked with the following:
Providing inspiration and appraisal systems.
Establishing and applying formal structures.
Identifying the importance of informal structures.
Formulating and applying plans for modification.
Identifying and solving disagreements.
Handling cultural diversity
Cultural diversity in a work group offers opportunities and difficulties. Economy is benefited
when the work groups are managed successfully. The organizations capability to draw,

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Reg. No. 571013423

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Sikkim Manipal University

- MBA -

Semester: 4 - Assignment

save, and inspire people from diverse cultures can give the organization spirited advantages
in structures of cost, creativity, problem solving, and adjusting to change Cultural diversity
offers key chances for joint work and co-operative action. Group work is a joint venture
where, the production of two or more individuals or groups working in cooperation is larger
than the combined production of their individual work.
Q4. What is country risk analysis? Describe the tools and methods of country risk
analysis.
Answer: - Country risk analysis is the evaluation of possible risks and rewards from
business experiences in a country. It is used to survey countries where the firm is engaged
in international business, and avoids countries with excessive risk. With globalization,
country risk analysis has become essential for the international creditors and investors.
Country Risk Analysis (CRA) identifies imbalances that increase the risks in a cross-border
investment. CRA represents the potentially adverse impact of a countrys environment on
the multinational corporations cash flows and is the probability of loss due to exposure to
the political, economic, and social upheavals in a foreign country. All business dealings
involve risks. An increasing number of companies involving in external trade indicate huge
business opportunities and promising markets.
Methods of Country risk Analysis:
Fully qualitative method The fully qualitative method involves a detailed analysis of a
country. It includes general discussion of a countrys economic, political, and social
conditions and prediction. Fully qualitative method can be adapted to the unique strengths
and problems of the country undergoing evaluation.
Structured qualitative method The structured method uses a uniform format with
predetermined scope. In structured qualitative method, it is easier to make comparisons
between countries as it follows a specific format across countries. This technique was the
most popular among the banks during the late seventies.
Checklist method The checklist method involves scoring the country based on specific
variables that can be either quantitative, in which the scoring does not need personal
judgment of the country being scored or qualitative, in which the scoring needs subjective
determinations.
Delphi technique The technique involves a set of independent opinions without group
discussion. As applied to country risk analysis, the MNC can assess definite employees who
have the capability to evaluate the risk characteristics of a particular country.
Inspection visits Involves travelling to a country and conducting meeting with
government officials, business executives, and consumers. These meetings clarify any vague
opinions the firm has about the country.
Other quantitative methods The quantitative models used in statistical studies of
country risk analysis can be classified as discriminate analysis, principal component
analysis, and logic analysis and classification and regression tree method.
Tools of country risk analysis:
The risk management demands a regular follow up regarding governmental policies,
external and internal environment, outlook provided by rating agencies, and so on.
Following are the tools recommended:
Chain of value Includes the main countries that sustain trade relationships with the
nation, broken by sectors and products.

Vinay K. Singh

Reg. No. 571013423

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Sikkim Manipal University

- MBA -

Semester: 4 - Assignment

Strength and weakness chart Focus the key aspects that warn the country.
Table of financial markets performance Follow up the behavior of bonds and stocks
already issued and to be issued.
Table of macroeconomic variables Provides alert signals when the behavior of any
ratio presents a relevant change.
Q5. Write short notes on Foreign exchange market.
Answer: - The foreign exchange market (forex, FX, or currency market) is a form
of exchange for the global decentralized trading of international currencies.
Financial centers around the world function as anchors of trading between a wide range of
different types of buyers and sellers around the clock, with the exception of weekends. The
foreign exchange market determines the relative values of different currencies.
The foreign exchange market assists international trade and investment by enabling
currency conversion. For example, it permits a business in the United States to import
goods from the European Union member states especially Eurozone members and pay
Euros, even though its income is in United States dollars. It also supports direct speculation
in the value of currencies, and the carry trade, speculation based on the interest rate
differential between two currencies.
In a typical foreign exchange transaction, a party purchases a quantity of one currency by
paying a quantity of another currency. The modern foreign exchange market began forming
during the 1970s after three decades of government restrictions on foreign exchange
transactions (the Bretton Woods system of monetary management established the rules for
commercial and financial relations among the world's major industrial states after World War
II), when countries gradually switched to floating exchange rates from the previous
exchange rate regime, which remained fixed as per the Bretton Woods system.
The foreign exchange market is unique because of:
its huge trading volume representing the largest asset class in the world leading to
high liquidity;
its geographical dispersion;
its continuous operation: 24 hours a day except weekends, i.e. trading from
20:15 GMT on Sunday until 22:00 GMT Friday;
the variety of factors that affect exchange rates;
the low margins of relative profit compared with other markets of fixed income; and
the use of leverage to enhance profit and loss margins and with respect to account
size.
As such, it has been referred to as the market closest to the ideal of perfect competition,
notwithstanding currency intervention by central banks. According to the Bank for
International Settlements, as of April 2010, average daily turnover in global foreign
exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the
$3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange
market had put the average daily turnover in excess of US$4 trillion.
The $3.98 trillion break-down is as follows:
$1.490 trillion in spot transactions
$475 billion in outright forwards
$1.765 trillion in foreign exchange swaps
$43 billion currency swaps

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Sikkim Manipal University

- MBA -

Semester: 4 - Assignment

$207 billion in options and other products

Q6. Discuss the importance of transfer pricing for MNCs.

Answer: - Transfer pricing is the process of setting a price that will be charged by a
subsidiary (unit) of a multi-unit firm to another unit for goods and services, which are sold
between such related units.
Transfer pricing is a critical issue for a firm operating internationally. Transfer pricing is
determined in three ways: market based pricing, transfer at cost and cost-plus pricing. The
Arms Length pricing rule is used to establish the price to be charged to the subsidiary.
Transfer pricing can also be defined as the rates or prices that are utilized when selling
goods or services between a parent company divisions and departments that may be across
many countries. The price that is set for the exchange in the process of transfer pricing may
be a rate that is reduced due to internal depreciation or the original purchase price of the
goods in question. When properly used, transfer pricing helps to efficiently manage the ratio
of profit and loss within the company. Transfer pricing is a relatively simple method of
moving goods and services among the overall corporate family.
Many managers consider transfer pricing as non-market based. The reason for transfer
pricing may be internal or external. Internal transfer pricing include motivating managers
and monitoring performance. External factors include taxes, tariffs, and other charges.
Transfer Pricing Manipulation (TPM) is used to overcome these reasons.
Governments usually discourage TPM since it is against transfer pricing, where transfer
pricing is the act of pricing commodity or services. However, in common terminology,
transfer pricing generally refers TPM.
TPM assists in saving the organizations tax by shifting accounting profits from high tax to
low tax jurisdictions. It also enables to fix transfer price on a non-market basis and thus
enables to save tax. This method facilitates in moving the tax revenues of one country to
another. A similar trend can be observed in domestic markets where different states try to
attract investment by reducing the Sales tax rate, and this leads in an outflow from one
state to another. Therefore, the Government is trying to implement a taxing system in order
to curb tax evasion.

Vinay K. Singh

Reg. No. 571013423

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