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Documente Profesional
Documente Cultură
Structure:
2.1 Introduction
Objectives
2.2 Economic Environment
National economic policies
Economic structure
Balance of payments
2.3 Political Environment
Nature of politics
Political stability
2.4 Legal Environment
Legal systems
Dispute resolution systems
2.5 Theories of International Business
Mercantilism
Absolute advantage
Comparative advantage
Product lifecycle theory
Porters diamond model
2.6 Summary
2.7 Glossary
2.8 Terminal Questions
2.9 Answers
2.10 Case-Let
2.1 Introduction
In the previous unit, you have studied about the evolution, advantages, globalisation and the
future of international business (IB). This unit covers economic, political, and legal environments
in which an IB operates and gives an insight into different theories that companies adopt while
going international.
Conducting business within your own country is different than in a global environment, where
you will be dealing with international features, prospects and challenges. It is important that
managers take an active interest in these economic, political and legal environments of a country
in order to:
analyse market conditions of different countries.
assess risk.
identify growth sectors.
make investment decisions.
In order to succeed, a company needs to gather data on national economies interpret and make
cross border comparisons using standard criteria. Knowledge of the IB environment allows
management to allocate resources so that they reap the benefits and operate with high
efficiencies in any country. For instance, garment companies use manufacturing facilities in
China and save on costs, which will be higher in the nation of origin.
Objectives:
After studying this unit you should be able to:
analyse economic environment of a country for doing business.
interpret political and legal environment.
evaluate different theories of international business.
2.2 Economic Environment
The economic environment refers to the conditions under which a business operates and takes
into account all factors that have affected it. It includes prime interest rates, legislation
concerning employment of foreigners, return of profits, safety of country, political stability and
so on.
2.2.1 National economic policies
National economic policies depend on that countrys socio-economic and cultural background.
All governments aspire to achieve four major economic objectives:
Full employment.
A high economic growth rate.
A low rate of inflation.
Absence of deficit in the countrys balance of payments.
The basic problem is that the first two objectives work against the last two. Measures such as low
interest rates, tax cuts and increase in public spending creates jobs and stimulates growth but also
causes inflation, increase in wage, and higher imports. Due to increased consumer expenditure
the countrys balance of trade worsens.
So the issue lies in balancing the effects of the policies to achieve the four given objectives.
Foreign Direct Investment (FDI) Policy
Foreign direct investment (FDI) is an investment made with an intention of establishing a long
term interest by a business enterprise in another country. It is also required that such an
enterprise holds directly or indirectly, an ownership of 10% or more of voting rights in the target
enterprise.
FDI policy, which is dictated by the Government of the host country, plays a vital role in the
economic growth of that country. Attracting FDI inflows with constructive policy is a challenge
for any nation. Developing countries offer a lot of incentives for FDI, particularly in capital
intensive sectors like power, infrastructure, transport, construction. Effective FDI policies help
the host country to portray itself as an attractive investment destination.
Main objectives of FDI policy are to provide and facilitate investor friendly business
environment, so that the foreign investors feel safe with the financial and legal framework of the
country. The Government of the host countries often formulate new or special regulatory
framework to attract FDI. The host country often needs to invest in development of domestic
infrastructure to make it investor friendly.
2.2.2 Economic structure
IB managers need to understand and assess international economic forces at work. Key variables
that need to be examined include Gross Domestic Product (GDP) per capita, regional distribution
of GDP, levels of investment, consumer expenditure, labour costs, inflation and unemployment.
Variables that are examined when assessing national economic environments include:
Economic structure The structure of a nations economy is determined by the size and rate of its
population growth, income levels and distribution of income, natural resources, agricultural,
manufacturing and services sector. Economic infrastructure is the sum of all the external
facilities and services that support the work of firms including communication, transportation,
electricity supply, banking and financial services.
Industry structure The structure of an industry is determined by factors such as:
Entry and exit barriers.
Number of competing firms.
Market share among firms in that sector.
Average size of competing units.
Market growth It is measured in terms of local currency and adjusted for inflation. Local
currency is used because conversions into other currencies are affected by exchange rate
fluctuations.
Income levels It is taken as the Gross Domestic Product (GDP) per capita and GDP is directly
proportional to the productivity of the country. Net income is another important variable and is
without tax payments from individual gross incomes.
Sector wise trends Growth activity in a country might vary significantly among certain
industries. For example, India has a vibrant software services industry.
Openness of the economy The ratio of a countrys imports and exports to its Gross National
Product (GNP) indicates its vulnerability to fluctuations in international trade. A nation with a
high foreign trade or GNP depends heavily on the economic well-being of the nations it exports
to. Conversely, closed economies have a high degree of control of the economy.
International debt - The comparison of a nations obligations to service and repay foreign debt
with its forex earnings shows its ability to remain solvent. On the other hand, a high foreign debt
servicing requirement maybe a positive indicator, suggesting that a country has borrowed heavily
to invest in its future.
Degree of urbanisation - This is an important factor because in most countries there are important
differences in incomes and lifestyles between urban and rural areas. Major dissimilarities are:
Shopping patterns - shopping frequency, average purchase value.
Nature of goods bought.
Expectations in quality and technical sophistication.
Education levels.
Ease of distribution.
2.2.3 Balance of payments
Importance - Balance of payments is a record of all transactions that occur between residents of
that country and foreigners over a specific period of time. The balance is shown monthly,
quarterly or annually. The accounts show the structure of the external trade, net position as a
lender or borrower and trends in economic relationships with the world.
The balance of payments is a good overall indicator of its economic health; the likelihood of the
countrys government imposing forex controls, import restrictions and policies such as tax
increases and interest rate hikes.
Balance of payment account - These accounts attempt to identify the reasons behind various
categories of international receipts and payments, making it possible to establish the values of
payments by domestic residents to foreigners, and vice versa, for purchase of imports, use of
services, lending, or direct foreign investment.
The account is divided into categories for long and short term financial transactions which is
initiated by the national monetary body, and involves goods and services.
Deficits and surpluses - Current account deficit, records physical imports and exports along with
international transactions in invisibles, that is non-physical items such as residents pensions,
interest and royalties from abroad, domestic firms fees for the movement of goods in other
countries, and so on. The balance of trade within the current account is the balance on physical
(visible) imports and exports.
The other major grouping is the capital account which shows the balance of transactions in
financial assets, including direct investments in foreign financial instruments, movements in
short-term assets, inter-governmental loans and changes in the countrys gold and forex reserves.
Reserves will decline if there is, for example, a current account deficit which in turn affects the
currency rate. To prevent the local currency from depreciating too far, some foreign currency
reserves will be sold, but since it is limited, this is only a temporary measure.
Self Assessment Questions
1. The two objectives of National economic policies ______ and ______.
2. FDI policy is dictated by the government of the host country. (True/False)
3. Balance of payment is an indicator of a countrys _______.
2.3 Political Environment
In the previous section, the economic environment of international business was discussed. Now,
let us focus on the political environment.
Political factors influence the economic and legal environment in which the business operates to
a larger extent, especially in contract law and rules on advertising and consumer protection. It
also affects the business practices, restrictions on market entry, tariffs charged and ability to
repatriate profits. Other factors include:
Regulatory frameworks.
Governmental control over multinational activity.
Importance of pressure groups.
Trade embargoes.
Likelihood of having insurance against losses due to political risk.
Strikes and labour unrest due to political turbulence.
Political and economic environments are often inter-related. The political environment affects the
economic environment. For example, a government which is perceived as anti-business by the
business community may lead to capital outflows resulting in the fall of the currency, lower
savings and investment and hence higher interest rates and lower economic growth.
2.3.1 Nature of politics
The nature of a government is based on the type of the government, and the policy that the
country follows.
The politics of a country are concerned with:
The direction and administration of states.
The control of aggregate social relationships.
Government is involved in the formulation and implementation of laws for a nation. The
government also has control over its territory and is the only legal representative. It can enter
into or cancel any agreements with other countries. Entire land surface on earth is controlled by
nations, except the Antarctic and Arctic regions. Thus international businesses have to deal with
nation states and are subjected to their authority.
Sovereignty - Sovereignty refers to the absolute power of the state. The two problems that
immediately arise in concern with sovereignty are:
The ability to make independent decisions since countries rely on each other for goods, markets,
economic assistance and defence.
The question of where national sovereignty lies is not clear as it may exist in the head of state,
the parliament, the prime minister, the cabinet or in the people.
National interest - National interest, as defined by the government, will depend on the cultures,
background, perceptions and experiences of the decision makers involved, which might change
over time and according to circumstances. A nations ability to define its interests depends on its
power, control over raw materials; scientific and technological knowledge; size, structure health
and education of its population; political stability and society.
2.3.2 Political stability
Political instability may arise from revolution and insurgency, involvement in foreign wars,
changes in government, bad international relations, falling national income, high inflation and
rising foreign debt, resulting in the physical destruction of a firms assets, higher taxes, import
controls and barriers on money leaving the country.
Political risk - It may emerge from social unrest due to unevenly distributed income, competing
political ideologies or ethnic groups within a nation, rise or fall of individual leaders or from
international relations. In the modern world, a countrys economic prospects depends heavily on
foreign investment and goodwill of the business community.
There are two types of political risks,namely Macro and Micro risks as explained below:
Macro risk affects all foreign firms operating in the country to an equal extent and may include
the imposition of exchange controls, special taxes, local-content rules and so on.
Micro risk applies to a particular company industry or project. For example, import restrictions
on specific products, compulsory breaking up of a firm into smaller parts, cancellation of
contracts and so on.
Self Assessment Questions
4. Political factors defines economic and legal environment in a business environment.
(True/False)
5. _______ refers to the absolute power of the state to coerce and control its citizens.
a) Sovereignty
b) National interest
c) Political stability
d) Political risk
6. The two types of political risks are _______ and _______.
2.4 Legal Environment
International businesses confront different sets of laws in various countries of operation. IB must
not only abide by the domestic laws of each nation but also by the supranational laws which
impose obligations beyond those of national legal systems. For example, the European Union.
Major disparities in national law affecting business are:
Intellectual property protection.
Consumer protection and product liability.
Competition among businesses.
Payment of bribes and other practices.
Formation and termination of contracts.
Marketing practices.
Carriage of goods.
Domestic, International and supranational law
A countrys domestic law deals with aspects of IB, and foreign citizens and firms are normally
regarded as the citizens of the country in question. Special laws are passed to guarantee the
safety of foreign investment, but in general the ordinary law of a country is applied when
conflicts arise.
International law applies to sovereign states and imposes rights and duties on nations in their
dealings with each other. It is derived from international conventions which establish rules
agreed by contesting states; from international custom accepted as law within all nations and
from internationally recognised legal principles.
An IB that is involved in a legal dispute, has to seek redressal from the national courts of the
country in which the action is heard and can not obtain relief from any international legal system.
The treaty of Rome changed everything by creating a new type of law that provided individual
persons and businesses with the right to bring cases on their own accounts to a supranational
legal body. Individuals and businesses assumed obligations extending beyond those imposed by
the national legal systems of the countries in which they functioned. That means, for example,
EU companies are subject to laws on competition established at the pan-European level, while
employees can appeal to the European Court of Justice on equal opportunities matters. Other
regional treaties of economic and political co-operation followed the European Economic
Community (EEC) in creating supranational judicial frameworks.
2.4.1 Legal systems
The legal systems of some countries are much better developed than others, particularly the
mechanisms for the administration of justice and the enforcement of court rulings. Most nations
base their legal systems on one of the following:
Common law - Common law applies throughout the english-speaking world including most
countries of the Commonwealth. These systems rely on precedent, judgements in specific cases
and on ad hoc legislation to create and interpret statutes.
Code law - Countries with Code law systems have all their laws written down in Criminal, Civil
and Commercial Codes which are used to determine all legal matters. Most continental European
countries and their former colonies have Code law systems.
Although they are quite different in principle, common law and Code law systems have
similarities in practice. A large part of the law in the common law countries derive from statutes
and legally binding regulations, while Code law relies heavily on judicial interpretations of the
meanings of the words embodied in legislative codes.
Islamic law - This is derived directly from the Koran and typically is mixed with the pre-existing
common law or civil code provisions of the country concerned. Important practical rules apply to
the conduct of business in Islamic countries, including the following:
Interest payments on financial dealings are forbidden since it is seen as improper to reward those
with excess funds while penalising those who need to borrow.
The principle of profit sharing. Islamic banks do not pay interest on deposit but give investors
profit shares that are the result of the deployment of the funds deposited.
2.4.2 Dispute resolution systems
Disputes that may occur in the course of international transactions must be resolved through
negotiation, arbitration or litigation. The issue arises when there is conflict of laws since each
nation has its set of laws, interpretations and different legal methods are applied to commercial
litigation, and conflicts between the legal systems of specific countries. Important differences
among the business laws of various countries include:
Laws concerning the circumstances, in which an offer may be withdrawn without penalty, vary
between countries.
Distinguishing between commercial and non-commercial contracts in some countries. In
commercial contracts, lower burden of proof is necessary to establish the existence of the
commercial contracts. These disputes are heard in special courts.
The intervals beyond which cases become statute barred differ. In Britain, the period for most
classes is six years whereas in France it can be up to 30 years and in Germany it depends on
whether the case concerns a commercial contract and if so, whether both parties are traders or
not.
Before suing for breach of contract in certain countries, considerations are not necessary to be
proved. Examples of such considerations are the price paid for goods, employee wages, the hire
fee paid for equipment lease and so on. Under English law, a contract cannot exist without
considerations.
National differences occurring due to the legality of exemption clauses and penalty clauses.
The necessity to protest unpaid debts prior to suing for payment. In certain countries. This means
getting a notary to ask the customer for payment or reasons for failure to do so. The latter are put
into a formal deed of protest which is then used as evidence of refusal to pay.
Nationalisation of assets - Domestic laws guarantee that foreign businesses will not be taken over
but there are no international laws in this matter. Article 2 of the United Nations Charter of
Economic Rights and Duties of States adopted by the UN General Assembly in 1974, asserts that
every state has and shall freely exercise full permanent sovereignty including possession, use and
disposal over all its wealth, natural resources and economic activity. The UN supports the
absolute right of its members to nationalise or exercise partial control over businesses operating
within its borders.
Where cases are heard - It is safe to assume that each party likes a dispute to be settled in its own
country but this is not possible when businesses from different countries are involved. Contracts
often contain jurisdictional clauses which specify that the law of a certain country will apply as
agreed by all parties to the contract. This ensures that both sides are aware of their legal rights
and obligations.
If a contract has no jurisdictional clause, then it is heard in the defendants nation, since one
cannot be compelled to attend the court abroad. Either the contract of sale will name a country or
the country with the closest connection with the contract must be chosen.
Concept of residence - Even though an MNC operates in a global environment it cannot become
an international legal entity and while its subsidiaries have to be set up through the laws of
different nations, its headquarters must be incorporated under the laws of a particular state.
Questions may arise with regard to the definition of the nationality of an MNC and this needs to
be answered adequately since the laws of the home country will govern many of its core
activities such as responsibilities and liabilities of shareholders, taxation, availability of
government grants and subsidies, and degree of employment protection for personnel. Countries
apply various legal tests when determining a companys nationality.
For example:
Place of incorporation.
Country intended to be the home nation by people forming the company.
Where decisions concerning the worldwide business are taken.
Arbitration - This refers to the process of settlement of disputes by having independent referees,
who are agreeable to both sides, adjudicate the matter.
Arbitration vs litigation
Litigation has the advantage that the rights and duties of the parties are determined by known and
definite laws and that aggrieved parties can obtain redress that is legally enforceable. There are
however a number of issues related to litigation including:
Long delays.
High costs.
Possible bad publicity from the case.
Fear of discrimination by the courts against foreigners.
Businesses may have to be suspended while the case is being heard.
Lack of business experience of the judges.
Matching words across the languages and accurately translating legal concepts are difficult tasks.
The meaning of words change during translation and the intentions of the parties may become
unclear. Hence, an important practical problem is of proper translation of documents into a
foreign language for consideration by the court.
Arbitration is faster and cheaper than litigation and cases are heard in secret so that neither party
loses public goodwill through adverse publicity. The arbitrators are themselves business people,
advised by legal experts, with practical experience of the commercial world. No problems arise
from the conflict of international laws since common sense approaches are applied to issues.
Cases are heard on neutral ground and not in the national courts of one of the parties. However,
arbitration lacks legal precision and still costs time and money.
Arbitration bodies - The main arbitration bodies are the International Chamber of Commerce, the
American Arbitration Association, the London Court of Arbitration and the International Centre
for the Settlement of Investment Disputes (ICSID). The ICSID, based in Paris is the most
preferred, and offers arbitration facilities to members and non-member companies alike.
The International Court of Justice (ICJ), based at The Hague, is a UN body that adjudcates
between states and only states that have agreed to accept the courts jurisdiction can participate in
cases.
Self Assessment Questions
7. Three of the most used legal systems are _____, _____ and ______
8. Settlement of disputes by having independent referees is called ______.
a) Litigation
b) Arbitration
c) Arbitration bodies
d) International Court of Justice
9. Two of the international arbitration bodies are ________ and _______.
Activity 1
Interpret the business environment of Sri Lanka by analysing the economic, political and legal
environments of that country.
Hint: Refer section 2.4
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. The OC for good X is the amount of other goods that have to be given up in order to
produce one additional unit of X.
A country has a comparative advantage in producing goods if the OC is lower at home than in
the other country. The table shows that Portugal has the lower OC of the 2 countries in wine-
making while England has the lower OC in making cloth. Thus Portugal has the comparative
advantage in the production of wine whereas England has one one in the production of cloth.
2.5.4 Product lifecycle theory
This theory was proposed by Raymond Vernon in the mid-1960s and was based on the observation that
from most of the 20th century, a very large proportion of the worlds new products were developed by
American firms and sold there first. He argued that the wealth and size of the market gave American firms
a strong incentive to develop new consumer products and in addition, the high cost of labor was an
incentive to develop cost-saving innovations.
He did not agree with earlier theories and he placed emphasis on information, risk, and economies of
scale, rather than on cost. He focused on the lifecycle of the product and came up with his theory which
identified three distinct stages:
New product stage - The need for a new product, in the domestic market, is identified and it is developed,
manufactured and marketed in limited numbers. It is not exported, not in sizeable quantities, at any rate,
since it is primarily for the national market.
Maturing product stage - Once the product has become popular in the domestic market, foreign demand
increases and manufacturing facilites abroad may be set up to meet demand there. After success in the
foreign markets and towards the end of the product maturity stage, the manufacturers try and produce it in
the developing countries.
Standardised product stage - In the last stage of the life-cycle theory, the product becomes a commodity,
the price becomes optimised and the makers look for countries where it can be made with the least
production costs. One of the results of this is the product being imported into the firms home country.
Dell manufactures hardware in Asia, which is then transported to the US, its country of origin.
The government of Japan has honoured MSIL with a METI award for promotion of Japanese brand
in India. Maruti Suzuki is one of the six companies , and one of the two companies outside Japan, to
have received this award.
Discussion Questions
1. Which business theory will you associate with this case? (Hint: Porters diamond model)
2. What kind of approach did SMC adopt to make an entry into Indian market? (Hint: SMC utilised
technology to make low-cost cars in large numbers taking advantage of the low cost manufacturing
in India).
Source: http://www.marutisuzuki.com Retrieved on 20th September 2010
3.3.2 Comparative study on country cultures of Japan, China, Brazil, France, and USA
People who want to do business in other nations must know everything about that particular
nations business environment. Every country in its business environment has its own style of
communication, the way they treat women and their dressing style. Let us now discuss the
business culture followed by different nations with respect to communication styles, women in
business, and dress code. The table 3.1 shows how the business cultures differ from one nation to
another nation.
Table 3.1: Comparison of Cultures in Different Nations
Country Women in
culture Communication style Business dress code
Country business
The French have great Women are gaining high With position, dress
love and respect for the position in French business codes differ within the
use of language. The life, particularly with strong company, industrial
logical exposition of representation in retail and sector, and region in
France well-defined ideas is France. People in
service industries. The
admired by the French. requirement for success is higher position within
The comment given by to have a suitable level of a larger organisation
them clearly states their education for women. follow a very formal
mind. It is important that dress code. In
southern region the
anything sent in writing is
business dress code is
thoroughly checked.
informal.
Basis of
Approach toBusiness Management
Country Team Work
Corporate Structure Style
Culture
Information flows
from the bottom of
the company to the Consensus-building
Hierarchically top. process is used to
structured based Implementation of define an agreement
Relationship must on harmony and decisions has been before a formal
Japan come before co-operation, with actively involved in meeting to avoid any
business. individuals aware the modelling of conflict. People are
of their position policy. Individual expected be modest
within a group. personality is not and self-promotion is
seen as the not encouraged.
requisites for
effective leadership.
Consensus-oriented
despite being
Use operational hierarchical in
Subordinates are
structures, chains approach. The
not allowed to
Based on of command that importance is on
China question the
Confucian values. are hierarchical in group orientation with
decisions of
a Confucian individual
superiors.
society. requirements being
directed to the greater
good of the whole.
A managers
personal style is
Organise
considered to be Team members
hierarchical lines
importance. The understand their role
Offers business with information
key importance is and responsibilities
opportunities to flowing in a
relationship. The within the team.
Brazil future structured way.
manager and Every team member
international All important
subordinates work expects to see a chain
investors. decisions are
hard to nurture a of command within
made at senior
relationship based the team.
levels.
on trust and respect
for personal dignity.
The company is
an entity in its
Management style
own right and Groups of individuals
is individualistic in
survives are brought together
approach; managers
independently to complete a given
are responsible for
from its workers. task. During that
the decisions made
Senior period the group is
within their regions
Every aspect of management is together, everybody is
of responsibility.
commercial life is more rooted in the committed to the
USA Important decisions
studied and personality at the common goals, and
are discussed in
analysed. top. Americans work with dedication
open environment
like to know to assure that the
and the
where exactly goals are
responsibility for
they are, what are accomplished. Teams
the concerns of the
their are assumed to be
decision lies with
responsibilities temporary in nature.
the manager.
and to whom they
report.
Activity 2
Assume that you are the manager of Company manufacturing cellular phones. You have
to design a new model that suits the requirements of users in the country of the secondary
branch Country Q.
There is local sales-force which knows about local needs, market segments which can
buy the product, the amount that the users will pay and advertising channels which can be
used to interact with consumers. But the local sales-force do not understand modern
research methods and the main branch resources for designing new products. The
marketers of the headquarters have access to the technology and can account on research
and development carried out elsewhere, but the marketers are not local expertise and have
no contacts. The expert team of your company lay out the specifications for a phone
designed to fulfil the requirements of the budding youth market in Country Q.
How will you handle this case to expand the business in Country Q?
Hint: Cultural diversity.
3.5 Summary
Let us summarise the salient points covered in this unit on culture and international business:
Culture is an important factor for practising international business. Culture affects all the
business functions ranging from accounting to finance and from production to service.
It is important for an individual to have knowledge of the impact of cultural differences when
working in the global commercial environment.
According to Professor Hofstede, the following are five dimensions used to differentiate culture:
Power distance index (PDI).
Individualism.
Masculinity.
Uncertainty avoidance index (UAI).
Long term orientation (LTO).
The following are the cultural elements which affect business transactions:
Language.
Religion.
Conflicting attitudes.
Every country in its business environment has its own style of communication, the way they treat
women and their dressing style.
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.
Companies can build international competencies by improving levels of cultural awareness and
help individuals to become globally profound.
3.6 Glossary
Biscapal: People who are adept in more than one culture, and are able to view a situation through
more than one mindscape
CEO: Abbreviation for chief executive officer who is the highest ranking officer in a company
Confucianism: Political morality taught by Confucius that is the basis of Chinese jurisdiction
Consensus: An opinion or position reached by a group as a whole
Globalisation: Integration of regional economies, cultures, and societies through a worldwide
network
Homogeneous: Part or elements that are all of the same kind; opposite of heterogeneous
Individualistic: Attribute that has a markedly independent course in action or thought
Marginalise: To make unimportant in a social standing
Stereotypes: Generalisations about a specific group, such as people that share common attributes
or characteristics
3.7 Terminal Questions
1. What is the need to understand to understand cultural differences?
2. Explain Hofstedes cultural dimensions.
3. Explain the three important cultural elements.
4. Differentiate the communication styles of Japan, China, Brazil, France, and USA.
5. What is cross cultural management? Explain the cross cultural management factors.
3.8 Answers
Self Assessment Questions
1. Culture
2. False
3. (a) 3, (b) 4, (c) 5, (d) 1, (e) 2
4. Language, religion, conflicting attitudes
5. True
6. c) USA
7. Skill
8. False
9. Cross cultural management.
Terminal Questions
1. Cultural differences affect the success or failure of multinational firms in many ways. Refer to
sub-section 3.2.1 of this unit for details.
2. The five cultural dimensions of Hofstede. Refer to sub-section 3.2.2 of this unit for details.
3. The most important cultural components of a country which relate business transactions are
language, religion, and conflicting attitudes. Refer to sub-section 3.3.1 of this unit for details.
4. Refer to sub-section 3.3.2 of this unit for details.
5. 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. Refer to sub-section 3.4.1 of this unit for details.
3.9 Case-Let
References
Paul, Justin. (2008). International Business. PHI Learning Private Limited.
Mitchell, Charles. (2000). A Short Course in International Business Culture. World Trade Press.
Mead, Richard. (2005). International Management: Cross-Cultural Dimensions. Blackwell
Publishing Ltd.
Nakata, Cheryl. (2009), Beyond Hofstede, Culture Frameworks for Global Marketing and
Management. Palgrave MacMillan.
E-References
http://www.worldbusinessculture.com/
- Retrieved on 3rd November, 2010
Objectives:
After studying this unit you should be able to:
explain business ethics.
evaluate the importance in an international context across cultures.
describe the national differences in ethics.
analyse the corporate governance of an international business.
4.2 Business Ethics Factors
During the mid 1960s and 1970s, social awareness movements raised expectations of businesses
to use their financial and social influence to address social issues such as poverty, literacy,
women rights, public health, and environmental protection. It was argued that these businesses
used community resources and profits generated by public participation to address social issues.
Hence, there arose a need for managers to take up the responsibility to understand and address
social issues guided by high ethical standards.
In this unit, let us learn the different factors that influence the ethics of a business and its
managers. Managers are influenced by three factors affecting ethical values. These factors have
unique value systems that have varying degrees of control over managers.
Religion Religion is one of the oldest factors affecting ethics. Despite the differences in religious
teachings, religions agree on the fundamental principles and ethics. All major religions preach
the need for high ethical standards, an orderly social system, and stress on social responsibility as
contributing factors to general well-being.
Culture Culture refers to a set of values and standards that defines acceptable behaviour passed
on to generations. These values and standards are important because the code of conduct of
people reflects on the culture they belong to. Civilisation is the collective experience that people
have passed on through three distinct phases: the hunting and gathering phase, agriculture phase,
and the industrial phase. These phases reflect the changing economic and social arrangements in
human history.
Law Law refers to the rules of conduct, approved by the legal system of a country or state that
guides human behaviour. Laws change and evolve with emerging and changing issues. Every
organisation is expected to abide the law, but in the pursuit of profit, laws are frequently violated.
The most common breach of law in business is tax evasion, producing inferior quality goods, and
disregard for environmental protection laws.
4.2.1 Importance of Business Ethics
Ethics is significant in all areas of business and plays an important role in ensuring a successful
business. The role of business ethics is evident from the conception of an idea to the sale of a
product. In an organisation, every division such as sales and marketing, customer service,
finance, and accounting and taxation has to follow certain ethics.
Public image In order to gain public confidence and respect, organisations must ascertain that
they are honest in their transactions. The services or products of a business affect the lives of
thousands of people. It is important for the top management to impart high ethical standards to
their employees, who develop these services or products.
A company that is ethically and socially responsible has a better public image. People tend to
favour the products and services of such organisations. Investors trust is just as important as
public image for any business. A company that practices good ethical creates a positive
impression among its stakeholders.
Managements credibility with employees Common goals and values are developed when
employees feel that the management is ethical and genuine. Managements credibility with
employees and the public are intertwined. Employees feel proud to be a part of an organisation
that is respected by the public. Generous compensations and effective business strategies do not
always guarantee employee loyalty; organisation ethics is equally significant. Thus, companies
benefit from being ethical because they attract and retain good and loyal employees.
Better decision-making Decisions made by an ethical management are in the best interests of the
organisation, its employees, and the public. Ethical decisions take into account various social,
economic and ethical factors.
Profit maximisation - Companies that emphasise on ethical conduct are successful in the long
run, even though they lose money in the short run. Hence, a business that is inspired by ethics is
a profitable business. Costs of audit and investigation are lower in an ethical company.
Protection of society In the absence of proper enforcement, organisations are responsible to
practice ethics and ensure mechanisms to prevent unlawful events. Thus, by propagating ethical
values, a business organisation can save government resources and protect the society from
exploitation.
Self Assessment Questions
1. The three factors governing ethical values are ____________, ___________, and
____________.
2. _______________ is the collective experience that people have passed on through the hunting
and gathering phase, agriculture phase, and the industrial phase.
3. A company can maximise its profits by being ethical. (True/False)
4.3 International Business and Ethics
In the previous section, you learned about ethics and its importance in business. Now let us
discuss the effects of ethics in international business.
Most countries have similar ethical values, but are practiced differently. This section deals with
the way individuals in different countries approach ethical issues, and their ethically acceptable
behaviour. With the rise in global firms, issues related to ethical values and traditions become
more common. These ethical issues create complications to Multi-National Companies (MNCs)
while dealing with other countries for business. Hence, many companies have formulated well-
designed codes of conduct to help their employees.
Two of the most prominent issues that managers in MNCs operating in foreign countries face are
bribery and corruption and worker compensation.
Bribery and corruption Bribery can be defined as the act of offering, accepting, or soliciting
something of value for the purpose of influencing the action of officials in the discharge of their
duties. Corruption is the abuse of public office for personal gain. The issue arises when there are
differences in perception in different countries. For example, in the Middle East, it is perfectly
acceptable to offer an official a gift. In Britain it is considered as an attempt to bribe the official,
and hence, considered unlawful.
Worker compensation Businesses invest in production facilities abroad because of the
availability of low-cost labour, which enables them to offer goods and services at a lower price
than their competitors. The issue arises when workers are exploited and are underpaid compared
to the workers in the parent country who are paid more for the same job. The disparity arises due
to the differences in the regulatory standards in the two countries.
4.3.1 Managing ethics
Earlier, we believed that ethics is a prerogative of individuals, but now this perception has
immensely changed. Many companies use management techniques to encourage ethical
behaviour at an organisational level. Various techniques of managing ethics like practicing ethics
at the top level management, special training on ethics, forming committees to oversee ethical
issues, and defining and implementing code of ethics are illustrated in figure 4.1.
Independent
Yes No Yes Yes Yes
auditors
Executive pay
on
Advisory No Yes Yes No
shareholders
approval
Nomination of
independent
No No Yes Yes No
directors by
shareholders
Majority of
independent Recomm- Recomm-
No No Yes
directors onended ended
the Board
4.6 Summary
Now let us summarise the salient features in this unit on ethics in international business:
Ethics is significant in all areas of business and plays an important role in ensuring a successful business. People
tend to favour the products and services of a company that is ethically and socially responsible. The different factors
that influence the ethics of a business and its management are religion, culture, and law.
With the rise in global firms, issues related to ethical values and traditions become more common. Bribery,
corruption, and worker compensation related issues are the most common ethical issues that MNCs face.
Negotiations across countries include the linear model where the principles are first agreed up on, then the various
positions are negotiated and details of the agreement are finalised, followed by the process of implementation. The
other model for negotiations is the encompassing model, which is more descriptive and includes the same stages as
the linear model, but focuses on the extent to which each stage is presented.
Four approaches that help managers make ethical decision include utilitarian, moral rights, universalism, and cost
benefit approaches. The code of conduct for MNCs, refer to a set of rules that guides corporate behaviour. These
rules prescribe the duties and limitations of a manager.
Organisations following corporate social strategies like treating customers in the home and foreign country in the
same way, recognising potential issues, and abiding by the host government regulations are better equipped to react
to global challenges and corporate responsibilities.
4.7 Glossary
Articulate: Express oneself easily in clear and effective language.
Bribery: The financial inducement offered to persuade someone to act improperly in favour of the person offering the bribe.
Whistle-blowing: The act of reporting a wrongdoing by a current or former employee of a company.
4.8 Terminal Questions
1. Discuss the business ethic factors.
2. Explain the importance of business ethics.
3. Describe different techniques for managing ethics.
4. Analyse different models of negotiating.
5. Explain various steps involved in the ethical decision making process of an MNC.
4.9 Answers
Self Assessment Questions
1. Law, religion, and culture
2. Civilisation
3. True
4. Xerox
5. Bribery and corruption and worker compensation
6. Competition
7. True
8. Linear and encompassing model
9. Ethical convergence
10. Ethical decision making
11. True
12. False
13. Governance
Terminal Questions
1. Ethics is the system of moral values and principles of human conduct and its application in life. Religion, culture
and law are the main factors governing business ethics. These are explained in sub-section 4.2.1 of this unit. Refer
the same for details.
2. Business ethics is important to an organisation because it leads to better public image, increased credibility of
management, helps in better decision making, and profit maximisation. These are explained in sub-section 4.2.1 of
this unit. Refer the same for details.
3. The techniques that can be used for managing ethics at a work place include formation of ethics committee,
implementation of code of ethics, setting up an ethics hotline and training programs on ethics and so on. These are
explained in sub-section 4.3.1 of this unit. Refer the same for details.
4. There are two types of negotiation that is widely used in business, linear and encompassing model. These are
explained in sub-section 4.4.1 of this unit. Refer the same for details.
5. Legal aspects are considered in the first step of decision making followed by a companies ethical code, cultural
analysis and a personal moral judgement. These are explained in sub-section 4.5.1 of this unit. Refer the same for
details.
4.10 Case-Let
Satyam Computer Services Ltd.
In December 2008, Satyam announced acquisition of two companies - Maytas Properties and Maytas Infrastructure owned by
the family members of Satyam's founder and Chairman Ramalinga Raju. Within a day of the announcement, the deal was
withdrawn because of the adverse reaction from institutional investors and the stock markets. Issues were raised on the
corporate governance practices of Satyam, with investors seeking answers from the Board about the acquisition because the
transaction was evidently made within the promoters family.
After the deal was aborted, four of the prominent independent directors resigned from the board of the company. In early
January 2009, Ramalinga Raju confessed that the revenue and profit figures of Satyam had been inflated for past several years.
The revelation further deepened concerns about poor corporate governance practices in the company.
After this debacle, questions were raised about the corporate governance structure in Satyam, its code of conduct, roles and
responsibilities of different committees under the Board, whistle blower policy and so on. Several industry bodies questioned
the role played by the independent directors of Satyam in approving the Maytas deal.
The events that unfolded after Mr. Rajus confessions to his illegal activities placed the future of thousands of employees and
the well-being of their dependents at risk, jeopardised projects worth millions of dollars, and portrayed Indian companies
inherently corrupted. Regulators and several Indian corporate companies acted quickly to persuade clients and the business
community to prove Satyams case was an isolated event. People with vast experience and knowledge of Indian business
processes were brought in to assist in preventing a total collapse of Satyam Computers, which was later bought by Tech
Mahindra.
Discussion Questions
1. Analyse the instances where the ethics system failed in preventing the fraud. (Hint: Auditing)
2. Formulate a sample code of conduct for Satyam Computers. (Hint: Refer discussions in section 4.4 of this unit)
References
Bhalla V. K. and Shiva Ramu S. (2008). International Business Environment and Management, Anmol Publications.
Bhatia SK. (2004). Business Ethics and Corporate Governance, Deep and Deep Publications Ltd.
Chauhan PL, KakkadRatish, Patel Rupal H. (2006). International Business, ShanthiPrakashan.
Cherunilam Francis. (2010). International Business Environment, Himalaya Publishing House.
K. Aswathappa. (2010). International Business, Tata McGraw-Hill Publications Co Ltd.
McDonald Frank and Burton Fred. (2002) International Business, International Thomson Computer Press.
Weiss Joseph. (2009). Business Ethics Concepts and Cases, Cengage Delmar learning India Pvt. Ltd.
E-References : www.managementhelp.org/ethics/ethics.htm - Retrieved on 3rd October 2010
Version: 1.0, Build: 1 | Copyright 2011, Sikkim
Unit-05- Country Risk Analysis
Structure:
5.1 Introduction
Objectives
5.2 Overview of Country Risk Analysis
History
Rating agencies
5.3 Purpose of Country Risk Analysis
5.4 Methodology
Data sourcing
Tools
5.5 Contents of Analysis
Country history
Corporate risk
Dependency level
External environment
Domestic financial system
Ratios for economic risk evaluation
Strength and weakness chart
5.6 Risk Premium
5.7 Summary
5.8 Glossary
5.9 Terminal Questions
5.10 Answers
5.11 Case-Let
5.1 Introduction
In the previous unit you studied about the importance of ethics at the workplace and its
application in a global business environment. Work ethics involves a set of moral values and
certain standards of behaviour. Ethics is important in all aspects of life as it forms the basis of a
cultured society.
This unit deals with the concept of country risk analysis and its purpose. 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 globalisation, country risk analysis has become essential for the
international creditors and investors.
In this unit, you will learn about the purpose, importance and various methodologies to analyse a
countrys risk profile. You will also be introduced to the concepts of contents of analysis and the
risk premium.
Objectives:
After studying this unit you should be able to:
explain country risk analysis.
discuss the importance of analysing a countrys risk.
interpret the methodologies involved in country risk analysis.
analyse a countrys risk profile.
5.2 Overview of Country Risk Analysis
Country Risk Analysis (CRA) identifies imbalances that increase the risks in a cross-border
investment. CRA represents the potentially adverse impact of a country's environment on the
multinational corporation's 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. Since the 1980s, the financial markets are being refined
with the introduction of new products.
When business transactions occur across international borders, they bring additional risks
compared to those in domestic transactions. These additional risks are called country risks which
include risks arising from national differences in socio-political institutions, economic structures,
policies, currencies, and geography. The CRA monitors the potential for these risks to decrease
the expected return of a cross-border investment. For example, a multinational enterprise (MNE)
that sets up a plant in a foreign country faces different risks compared to bank lending to a
foreign government. The MNE must consider the risks from a broader spectrum of country
characteristics. Some categories relevant to a plant investment contain a much higher degree of
risk because the MNE remains exposed to risk for a longer period of time.
Analysts have categorised country risk into following groups:
Economic risk This type of risk is the important change in the economic structure that produces a
change in the expected return of an investment. Risk arises from the negative changes in
fundamental economic policy goals (fiscal, monetary, international, or wealth distribution or
creation).
Transfer risk Transfer risk arises from a decision by a foreign government to restrict capital
movements. It is analysed as a function of a country's ability to earn foreign currency. Therefore,
it implies that effort in earning foreign currency increases the possibility of capital controls.
Exchange risk This risk occurs due to an unfavourable movement in the exchange rate. Exchange
risk can be defined as a form of risk that arises from the change in price of one currency against
another. Whenever investors or companies have assets or business operations across national
borders, they face currency risk if their positions are not hedged.
Location risk This type of risk is also referred to as neighborhood risk. It includes effects caused
by problems in a region or in countries with similar characteristics. Location risk includes effects
caused by troubles in a region, in trading partner of a country, or in countries with similar
perceived characteristics.
Sovereign risk This risk is based on a governments inability to meet its loan obligations.
Sovereign risk is closely linked to transfer risk in which a government may run out of foreign
exchange due to adverse developments in its balance of payments. It also relates to political risk
in which a government may decide not to honor its commitments for political reasons.
Political risk This is the risk of loss that is caused due to change in the political structure or in the
politics of country where the investment is made. For example, tax laws, expropriation of assets,
tariffs, or restriction in repatriation of profits, war, corruption and bureaucracy also contribute to
the element of political risk.
Risk assessment requires analysis of many factors, including the decision-making process in the
government, relationships of various groups in a country and the history of the country. Country
risk is due to unpredicted events in a foreign country affecting the value of international assets,
investment projects and their cash flows. The analysis of country risks distinguishes between the
ability to pay and the willingness to pay. It is essential to analyse the sustainable amount of funds
a country can borrow. Country risk is determined by the costs and benefits of a countrys
repayment and default strategies. The ways of evaluating country risks by different firms and
financial institutions differ from each other. The international trade growth and the financial
programs development demand periodical improvement of risk methodology and analysis of
country risks.
5.2.1 History
Earlier, the cross-border business risk was an issue that affected those who had transactions or
assets to receive from foreign customers. In the 1970s, the financial institutions were not well
equipped to deal with country risk. However, to improve the business; they enhanced their
exposure in foreign markets which required capital. In many cases, the loans were contracted
without regular notice to credit dealings of both the borrower and the country.
Since the 1980s, problems concerning the payback of those credits started affecting countries
such as Mexico, Poland, and Brazil, whose defaults caused heavy losses for the international
banks. As a result, this caused huge loss for investors and shareholders. So, the financial
institutions started adopting new analytical ways, maximum risk policies and strong credit
procedures, all those supported by reliable data.
5.2.2 Rating agencies
The rating agencies use country credit risk ratings and provide a periodical and organised skill of
data. It deals with a cross-border analysis. There are several agencies like Standard and Poors,
Moodys, Economist Intelligence Unit, Euro money, Institutional Investor, Political Risk
Services, Business Control Risks Information Services, Environmental Risk Intelligence,
international banks in general and others institutions. The rating agencies provide information
and analysis of economic sectors, companies, and operations assigning its related ratings.
The credit rating agencies issue credit ratings based in the European Union and are used by
investors, borrowers, issuers, and public administrations to help them make investment and
financial decisions. These ratings are used as a reference for calculating their capital
requirements for calculating risks in their investment activity.
The Standard and Poors, and Moodys rating approach divide countries in categories and the four
first levels of each one are considered as investment grades (better quality of the asset in risk
terms). Based on their assessment of a bond issue, the agencies give their view in the form of
letter grades, which are published for use by investors. For the typical investor, risk is judged not
by an instinctively formulated probability distribution of possible returns but by the credit rating
assigned to the bond by investment agencies. In their ratings, the agencies rank issues according
to the probability of default. Both agencies have a Credit Watch list that makes aware the
investors when the agency considers a change in rating for a particular borrower.
Investing agencies credit rating
Let us now study credit rating by various investing agencies.
Moodys
The table 5.1 represents Moodys credit rating.
Table 5.1: Moodys Credit Rating
Rating Description
Aa High quality
Rating Description
D In payment default
Source: http://www.gwu.edu/~ibi/minerva/spring2001/renato.ribeiro.pdf
This section analysed the concept of country risk analysis and credit rating by investing agencies.
The next section discusses the purpose of country risk analysis.
Self Assessment Questions
1. The ___________ provide information and analysis of economic sectors, companies, and
operations assigning its related ratings.
2. __________ arises from a decision by a foreign government to restrict capital movements.
a) Transfer risk
b) Political risk
c) Location risk
d) Economic risk
3. The rating agencies have come up with country credit risk ratings and provide a periodical and
organised skill of data. (True/False)
5.3 Purpose of Country Risk Analysis
Let us now understand the purpose of country risk analysis.
Risk arises because of uncertainty and uncertainty occurs due to the lack of reliable information.
Country risk is composed of all the uncertainty that defines the risk of country exposure. The
assessment of country risk is used to incorporate country risk in capital budgeting and modify the
discount rate.
CRA regulates the estimated cash flows and explores the main techniques used to measure a
countrys overall riskiness. It is mainly used by MNCs, in order to avoid countries with excessive
risk. It can be used to monitor countries where the MNC is engaged in international business.
Analysing the country risk helps in evaluating the risk for a planned project considered for a
foreign country and assesses gain and loss possibility outcomes of cross-border investment or
export strategy.
Activity 1
Discuss on how monitoring of credit rating activities are carried out.
Hint: Refer these links for guidance
http://europa.eu/legislation_summaries/internal_market/single_market_services/financial_service
s_transactions_in_securities/mi0009_en.htm
http://www.prnfunding.com/factoring-process
5.4 Methodology
Country detailed risk refers to the unpredictability of returns on international business
transactions in view of information associated with a particular country. The techniques used by
the banks and other agencies for country risk analysis can be classified as qualitative or
quantitative. Many agencies merge both qualitative and quantitative information into a single
rating. A survey conducted by the US EXIM bank classified the various methods of country risk
assessment used by the banks into four types. They are:
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. All
items are scaled from the lowest to the highest score. The sum of scores is then used to determine
the country risk.
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. The MNC gets responses
from its evaluation and then may determine some opinions about the risk of the 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 discriminant analysis, principal component analysis, logit analysis
and classification and regression tree method.
Note: Refer this link for examples and detailed description of country risk assessment methods
tps://www.shsu.edu/~eco_hkn/CRISK_revised04.pdf
5.4.1 Data sourcing
The basic data is important to analyse a country. The economic, financial and currency risk
components are based on the variables (quantitative and qualitative variables). The variables
must consider the particularities of each country and the needs of the model used. The standard
variables are used to maintain the regular analysis comparable with similar works of other
countries. Therefore, the first step is to make sure that the historical series of official data are
reliable, consistent and comparable. The standard economic variables that are found mainly in
the varied approach adopted by financial institutions and rating agencies, are associated with the
countrys real ability to repay its commitments. The balance of payments (summary account of
economic transactions among a country and the others nations of the world, during a period) and
its evolution through the years means a strong source of data. The exchange rate (currency risk)
is another important variable considered, as it balances the transactions (balances the prices of
goods, services, and capital) between residents and non-residents. The analysis must consider the
historical behavior of the exchange rate and the policy which made clear whether the country
follows a rational economics approach or it uses the exchange rate as a tool to maintain a forced
macroeconomic equilibrium.
Apart from the macroeconomic variables which deal with the external sector of the economy,
there are some other relevant variables such as the interest rate, level of investments, public debt
and its service, internal savings, consumption, GDP or GNP, money supply, inflation rate and so
on.
The analysis must be accomplished with qualitative variables, which consider social aspects as
population, life expectancy, rate of birthday, rate of unemployment, level of literacy and so on.
The social-political aspects are necessary for all kind of analysis as they describe the whole
setting of the running economy.
5.4.2 Tools
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.
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.
Self Assessment Questions
4. _____________ explores the main techniques used to measure a countrys overall riskiness.
5. Which of the following methods involve a detailed analysis of a country and includes general
discussion of a countrys economic, political and social conditions and prediction?
a) Structured qualitative method
b) Checklist method
c) Fully qualitative method
d) Regression tree method
6. The standard variables must be used to maintain the analysis regular and comparable with
similar works about other countries. (True/False)
7. The __________ method involves scoring the country based on specific variables that can be
either quantitative or qualitative.
5.5 Contents of Analysis
The content of country risk analysis mainly involves country history, corporate risk, dependency
level, external environment, domestic financial system, ratios for economic risk evaluation and
strength and weakness chart.
5.5.1 Country history
The historical brief helps to identify aspects that interfere in the future behavior of the country,
reducing the ability to payback any external commitment. The main historical data provides a
good understanding of the key factors which draw the behaviour of the society, the government,
the private sector, the legal environment, the economical, political, and the relationships to
neighbour nations and the world as a whole.
The organisation of the government and its features like political and administrative organisation
are also relevant aspects to be approached. The political forces which act in the country, their
representatives and the main national issues must be focused. The other considerations include
social aspects and their key-indicators like population growth rate, unemployment ratio, infant
mortality rate, composition of the population and life expectancy. The geographic positioning
and its related strengths and weaknesses are also critical aspects.
5.5.2 Corporate risk
Both country risk studies and business risk analysis enhances wealth from the available
resources, in terms of capital, natural resources, technology and labour forces. This clarifies that
those kind of analysis procures extensive knowledge from the business approach for companies,
including financial theory.
5.5.3 Dependency level
The next step after the history in brief, is a clear definition about how the country is positioned in
the world in terms of its wide relationships, economic block in which it belongs to, importance of
international trade and so on. All these aspects are significant to identify the dependency level of
the country. The financial dependency to meet the needs of a country is also a strong concern for
the analyst. In this case, the maturity of debts (internal and external) and the available sources of
financing also help to measure the freedom grades of the country.
In case of output spread throughout the economy, the analyst can break the GDP`s economic
sector, evaluate its composition in terms of values of participation of each one and the level of
regional concentration. It is similar to corporate approach when analysing the income structure.
The same approach can be made in case of the international trade where the analyst must break
up each part of the trade balance in sectors, countries and economic blocks, goods, identifying its
composition and level of concentration (percent and value). It would be convenient to get the
ratio between the trade balance and the GDP (sum of imports and exports over the GDP).
Financial issues also must be clarified, as how much is been supported by domestic or external
savings. At this moment, the conclusions can be listed to point out the parts that remain
significant for the understanding about dependency level of the country and its freedom levels.
The conclusions about the approach towards the dependency level and the level of concentration
in producing and trading goods are the key factors to understand the economys trend.
5.5.4 External environment
The external trade is an important factor to the development of societies. Globalisation has
brought international business to the center of the discussions and the external environment has
become vital for all countries.
Thus, a complete vision on economic trends, the behavior of financial markets, the forecasts for
conflicts among nations, the improvement of the economic blocks, the level of openness of the
world economy, financial crisis and international liquidity is a framework over which the
analysis must start.
The analyst must select the issues that are closely related to the country dealt with, to figure out
the impact of the most likely situation and to apply over the country`s economic variables. The
dependency level, external landscape, its trends and the ratio between GDP and external trade
will provide useful information to connect the external sector to the domestic sector in order to
identify opportunities and threatens.
5.5.5 Domestic financial system
The banking sector has implemented many actions to avoid losses, after the international crisis.
Basel Committee has defined some strong measures to be followed by the financial houses and
Central Banks are trying to monitor their jurisdictions. Apart from those procedures, recently
Asia and Turkey crisis have shown that the inspection is not enough to keep the reliability of
some domestic system. The international banks had developed many tools to deal with
international crisis. When domestic banks do not have a consistent risk management policies and
adequate provisions to theirs credits, the country risk happens to be the worst. Therefore, the
analysis must consider the health of the domestic financial system, by evaluating information
provided by the Central Banks and, from the principal banks of the country. Accessing Centrals
Bank policies and supervising procedures also help to evaluate the health of the financial system.
5.5.6 Ratios for economic risk evaluation
Cross-border economic risk analysis evaluates the probable macroeconomic ratios among some
variables. They can be separated into two groups such as domestic and external. The figures must
be presented in historic series (at least five years) to provide information about its progress,
which can be real values, percentages, or relations. The mainly used ratios and variables in case
of domestic economy are the following:
Gross domestic product (GDP) - The real value must be broken up by sector (agriculture,
construction, services and manufacturing), by private and public sector and by principal goods
and services.
GDP per capita - Its growth determines the country`s productivity. Many rating systems use this
ratio because it helps to clarify the efficiency of the countrys growth rate.
GDP growth rate - The annual rate can be also broken up in the same way, to mention the sectors
or products that have a specific behavior for better understanding of the economy`s trend.
Unemployment rate - It deals among several aspects, with the labor factor and give details on
performance of the whole economy, conditions presented by the internal market and the political
environment. This ratio, combined with growth rate data, the analysis reveal strategic issues that
the economic policy must approach.
Internal savings or GDP - This ratio work with the tendency of saving of the whole economy.
Gross domestic savings can be broken by economic agents (householders, firms and
government).
Investment or GDP - This percentage reveals how strong could be the economy in the future as it
gives a potential rate of capital improvement, named the gross fixed capital formation. It is
important to break this information up in sectors to understand about the growth of economy.
Gross domestic fixed investment or variation of GDP - The ratio assesses the quality of the
previous (since around five years before) investment decisions in terms of its efficiency in
growing the GDP.
Gini Index - It estimates the income distribution among different groups in society. This ratio,
combined with the development of GDP per capita, it reveals about the strength of internal
market.
Growth domestic fixed investment or gross domestic savings - The ratio that describes the
domestic savings maintains the investment made at the economy. This ratio, combined with
domestic fixed investments and net capital imports, specifies the dependency of the economy on
foreign resources.
We discussed on macroeconomic variables that deals with the amount or quality of the product
provided by the economy, in a certain period of time. But, the fiscal side is also important
because it helps to understand the role of the government and its significance in the entire
economy. Thus, the following ratios are considered:
Budget deficit or GDP - The growth of this ratio denotes how the dissavings increase the
resource gap. A solution must be found to balance the outcome and to straighten the economic
fundamentals.
Internal debt or GDP - This ratio combined with the budget deficit and GDP ratio, reveals about
how much the public sector uses the savings of the country.
The monetary policy is essential as it deals with the price stability. An economy which presents
less instability in its prices of goods and services, provides huge facilities to decision makers
based on their predictions to expected returns of investments and a firm social, economical and
political environment. All these aspects request a systematic approach over price indicators such
as the following:
Real interest rate - This is a dominant measure about the assurance of economic agents, which
deals with their prospect on the future of the economy. The price of the currency has an inverse
relation with the investment and when it rises, the whole economy shows a decline on its
performance. The advancement of the rate must be measured after extracting the effects of the
inflation during the period.
Percentage increase in the money supply - This reveals how policy makers deal with the
variations on the stock of currency that is considered during the analysis of the government
budget to identify whether the public sector forces the supply of currency in order to support
current shortfalls.
The mainly used ratios and variables in case of external economy are the following:
External debt or GDP - This ratio represents the whole external debt importance to one year flow
of production. If the ratio is lower, the external financial position of the economy will be
improved.
Short term debts and reserves - This ratio shows how much the reserves are committed by
amortisations in the short run. The debts maturity is essential to identify whether a country have
problems to repay its liabilities.
Exchange currency rate - This is a well-known type of country risk. The exact price of the
currency in market terms is necessary for the economic stability and the growth of the country.
The exchange rate contributes to a profitable allocation of resources in the whole economy apart
from preventing artificial losses or gains of competitiveness and their impacts in the trade
balance. Many countries are implementing a flexible exchange rate system in order to better set
the price of their currencies. Thus, the exchange rate forms an essential part of country risk
analysis and must be strictly followed to make out any unusual behavior.
External debt services and exports - The developing markets find their main source of funds to
produce strong foreign currency to support amortisations from the external debts. The exports
must be large enough to pay interest and principal on the exceptional foreign debt. The foreign
currency will not be available to meet payments, if the exports are not large. This financial ratio
brings a sensible application of the countrys ability to pay, similar to a cash flow coverage ratio.
5.5.7 Strength and weakness chart
In order to explain the significant aspects provided by the analysis, the strength and weakness
chart can be used to merge each strength and weakness with the related scenario. The below
given tables 5.3 and 5.4, contain some variables that are put up from combined experiences about
an imaginary country. It is a model of relationships among several variables (quantitative and
qualitative) to show their interdependency and the complexity of analysis.
Table 5.3: Strength Chart
Budget equilibrium on the short run No more pressures over interest rates
Source: http://www.gwu.edu/~ibi/minerva/spring2001/renato.ribeiro.pdf
The depicted charts stress the risks shown during the analysis and it must be assessed in terms of
the observed macroeconomic performance provided by the ratios mentioned earlier.
5.6 Risk Premium
Several restrictions exist to build econometric models to deal with country risk analysis as a
whole. The most familiar models are used for capital market investment, where the prices of the
assets and theirs related instabilities helps to follow the behavior of securities. However,
managing credit risk demands a score to distinguish different sorts of risk among nations. In this
case, after receiving the outcomes from the macroeconomic and social ratios, it is possible to
make a rating to block those countries that show similar behavior.
Peer analysis splits the countries according to the observed performance and an automatic rating
system can be applied to similar countries. The approach remains essential to confirm the
recognised scores. Thus, the analyst contributes to define the final risk level. Depending on the
uses of the analysis, an exposure limit can also be defined. Its value is obtained from a strategic
definition provided by the in charge of this issue and must be consistent with the attributed
country ratings when defining each exposure limit.
Activity 2
Discuss on how country risk must be built in for valuations in emerging markets.
Hint: Refer this link for guidance
- http://gcg.universia.net/pdfs_revistas/articulo_104_1227718800862.pdf
Self Assessment Questions
8. Which among the following is a dominant measure about the assurance of economic agents,
which deals with their prospect on the future of the economy?
a) Real interest rate
b) Exchange currency rate
c) GDP growth rate
d) Unemployment rate
9. Gross domestic fixed investment estimates the income distribution among different groups in
society. (True/False)
10. The growth of __________ ratio denotes how the dissavings increase the resource gap.
5.7 Summary
Let us summarise what we have learnt in this unit on country risk analysis:
Country risk analysis (CRA) identifies imbalances that increase the risks in a cross-border investment.
Country risk is composed of all the uncertainty that defines the risk of country exposure. The assessment of country
risk is used to incorporate country risk in capital budgeting and modify the discount rate.
Country detailed risk refers to the unpredictability of returns on international business transactions in view of
information associated with a particular country.
The content of country risk analysis mainly involves country history, corporate risk, dependency level, external
environment, domestic financial system, ratios for economic risk evaluation and strength and weakness chart.
Managing the credit risk demands a score to distinguish different sorts of risk among nations.
5.8 Glossary
Capital budgeting: The process in which a business determines whether projects such as building a new plant or
investing in a long-term venture are worth pursuing.
Deficit: Excess of expenses over income or liabilities over assets.
Expropriation: Legally The act of removing property from an owner.
Macroeconomics: The branch of economics which deals with aggregates such as capital and labour, and their
interactions in an economy as a whole.
5.9 Terminal Questions
1. Explain country risk analysis.
2. Discuss the importance of analysing a countrys risk.
3. Describe the methodologies involved in country risk analysis.
4. Interpret contents of analysis.
5. Analyse a countrys risk profile.
5.10 Answers
Self Assessment Questions
1. Rating agencies
2. a) Transfer risk
3. True
4. Country risk analysis
5. c) Fully qualitative
6. True
7. Checklist
8. a) Real interest rate
9. False
10. Budget deficit or GDP
Terminal Questions
1. When business transactions occur across international borders, they bring additional risks compared to risks in domestic
transactions. Refer to section 5.2 of this unit for more information.
2. Country risk analysis regulates the estimated cash flows and identifies the relevance of country risk analysis. Refer to section
5.3 of this unit for more details on importance of country risk analysis.
3. Many agencies merge both qualitative and quantitative information into a single rating. Refer to section 5.4 for details.
4. The content of country risk analysis mainly involves country history, corporate risk, dependency level, external environment
and so on. Refer to section 5.5 of this unit.
5. The most familiar models are used for capital market investment, where the prices of the assets and theirs related instabilities
helps to follow the behavior of securities. Refer to section 5.6 for details.
5.11 Case-Let
Enterprise Risk Management: ABC Life Insurance Company
ABC Life Insurance Company, a privately held company, was well aware of its insurance risks, but it needed a perfect view
of the probable impact of major risks on its overall assessment. The company wanted to build an Enterprise Risk
Management (ERM) plan to enhance rating agency discussions on ERM, confirm recent risk easing decisions and apply this
agenda to its other business units. ABC Life Insurance's actuaries,
functioning with their chief financial officer, corporate management, life operations senior management and disaster
recovery team, established a framework to determine the worst-case scenarios involving insurance, operational and
reputational risks that could decrease its stakeholder value.
Problem
During their risk analysis, the team found out a worst-case scenario of largest decrease in the enterprise value of the
company. In addition, other major events included an attack on the computer network and issues with non-guaranteed
insurance elements affecting the company severely.
Solution
The ERM framework provided a measure to estimate the company's enterprise risk value and better understand the impact of
severe risks on stakeholder value. As a result, the company developed new processes on managing the situation. The
immediate results in implementing the ERM framework also helped ABC Life to confirm the efficacy of its recent ERM
easing efforts.
Result
ABC Life Insurance team is now expanding the well-known ERM framework to its property and casualty branch and the
overall corporation. The framework helped assess the risk tolerance level for the company's senior leadership in making
strategic decisions to navigate future risks.
Discussion Questions
1. Why ABC Life Insurance Company established an ERM framework?
(Hint: ABC Life Insurance wanted to build an ERM plan to enhance rating agency discussions on ERM. Refer to the section,
Enterprise Risk Management: ABC Life Insurance Company for more details.)
2. Identify the role of ERM framework in handling the issues of worst-case scenario.
(Hint: The ERM framework provided a measure to estimate the company's enterprise risk value. Refer to the section,
Solution for more details.)
Source: http:// www. soa. org/ news and publications/newsroom/ erm/country -life.aspx
References
Michael Frenkel, Alexander Karmann, Bert Scholtens, L.J.R Scholtens (2004). Bank Sovereign risk and financial crisis: Springer
Publications.
Jeff Madura (2008): International Financial Management, 9th edition: Thomson South-Western Publications.
E-References
http://www.gwu.edu/~ibi/minerva/spring2001/renato.ribeiro.pdf
http://findarticles.com/p/articles/mi_m1094/is_1_35/ai_59964458/- Retrieved on 1st October, 2010
References
Sharan, Vyuptakesh. (1998). International Financial Management, Fifth edition. PHI learning
Private Limited.
Kevin. (2009). Fundamentals of International Financial Management. Pearson Publications.
Gary Shoup.(1998).The International Guide to Foreign Currency Management.
E-References
http://www. brainmass.com
http://finance.mapsofworld.com/foreign-exchange-market/ - Retrieved on 1st November 2010
Unit-08-International Marketing
Structure:
8.1 Introduction
Objectives
8.2 Overview of International Marketing
Domestic vs. International marketing
Nature of international marketing
8.3 Global Marketing Strategies
Segmentation
Market positioning
International product policy
International pricing decisions
International advertising
International promotion and distribution
8.4 Branding for International Markets
Valuation of brands
Challenges of international branding
8.5 Summary
8.6 Glossary
8.7 Terminal Questions
8.8 Answers
8.9 Case-Let
8.1 Introduction
In the previous unit you learned about finance management at an international level. We learnt
the differences between domestic and international financing. The unit also familiarised us with
the components of international financial management and the scope of these components.
International marketing refers to marketing of goods and products by companies overseas or
across national borderlines. The techniques used while dealing overseas is an extension of the
techniques used in the home country by the company.
In this unit you will cover all the aspects of international marketing like strategies, policies,
valuation of brands and the different ways of circumventing the difficulties and challenges.
Objectives:
After studying this unit you should be able to:
describe international marketing process.
distinguish between domestic and international marketing.
discuss global marketing strategies.
explain branding for international markets.
discuss the challenges of international branding.
8.2 Overview of International Marketing
Selling usually centres on the needs of the seller whereas marketing focuses on the needs of the
customer (buyer). The aim of business is to attract and retain a customer, which can be done
through price competition and product differentiation.
International marketing can be defined as marketing of goods and services outside the firms
home country. International marketing has the following two forms of marketing:
Multinational marketing.
Global marketing.
Multinational marketing is very complex as a firm engages in marketing operations in many
countries. In multinational marketing, a firm visualises different countries as one market and
build their brand or service according to the business environment of the foreign countries. A
regiocentric approach is taken to plan a product and consolidate the manufacturing processes.
Therefore, international marketing is beneficial in preparing a firm to deal globally as it
establishes a business stronghold on various foreign markets. Global marketing indicates the
integrated and coordinated marketing activities across many different markets.
8.1.1 Domestic vs. International marketing
Domestic marketing refers to the practice of marketing within a firms home country. Whereas
International or foreign marketing is the practice of marketing in a foreign country; the
marketing is for the domestic operations of the firm in that country.
Domestic marketing finds the "how" and "why" a product succeeds or fails within the firms
home country and how the marketing activity affects the outcome. Whereas, foreign marketing
deals with these questions and tries to find answers according to the foreign market conditions
and it provides a micro view of the market at the firms level.
In domestic marketing a firm has insight of the marketing practices, culture, customer
preferences, climate and so on of its home country, while it is not totally aware of the policies
and the market conditions of the foreign country.
The stages that have led to achieve global marketing are:
Domestic marketing - Firms manufacture and sell products within the country. Hence, there is no
international phenomenon.
Export marketing - Firms start exporting products to other countries. This is a very basic stage of
global marketing. Here, the products are developed based on the companys domestic market
although the goods are exported to foreign countries.
International marketing - Now, Firms start to sell products to various countries and the approach
is polycentric, that is, making different products for different countries.
Multinational marketing - In this stage, the number of countries in which the firm is doing
business gets bigger than that in the earlier stage. And hence, the company identifies the regions
to which the company can deliver same product instead of producing different goods for
different countries. For example, a firm may decide to sell same products in India, Sri lanka and
Pakistan, assuming that the people living in this region have similar choice and at the same time
offering different product for American countries. This approach is termed regiocentric approach.
Global marketing - Company operating in various countries opts for a common single product in
order to achieve cost efficiencies. This is achieved by analysing the requirements and the choice
of the customers in those countries. This approach is called Geocentric approach.
The practice of marketing at the international stage does not designate any country as domestic
or foreign. The firm is not considered as the corporate citizen of the world as it has a home base.
The firm must not have a 'single marketing plan', because there are differences between the target
markets (that is domestic or international markets). There should never be a rigid marketing
campaign. A firm that is successful internationally first obtains success locally.
Few approaches that you can consider for an international marketing are:
Advertise as a foreign product - By doing so, the product will be considered as genuine and
original in some countries.
Joint partnership with a local firm - finding a firm that has already established credibility will
benefit a lot. The product will be considered as a local product by following this marketing
approach.
Licensing - You can sell the rights of your product to a foreign firm. Here the problem is that the
firm may not maintain the quality standard and therefore may hurt the image of the brand.
Culture is a major factor which influences marketing decisions and practices in a foreign country.
For example, in the middle-eastern countries the prior approval of the governing authorities
should be taken if a firm plans to advertise a product related to womens apparel, as showcasing
some aspects of women clothing is considered immodest and immoral.
8.1.2 Nature of international marketing
Operating in a foreign market depends on the level of control the firm has on the operations in
the foreign country and it also depends on the capital expenditure. Once the decision to invest in
the foreign market has been made, the mode of operation has to be established. Listed below are
the important modes of operation:
Exporting (direct or indirect).
Joint ventures.
Direct investment.
Exporting
Exporting is the process of selling goods in a foreign country keeping in mind the customer base
of the foreign country. The goods are manufactured in the home country of the firm. There are
two types of exporting methodologies, namely direct exporting and indirect exporting.
Direct exporting is the activity of directly shipping goods to a foreign country or market. For
example, a car manufacturer may manufacture cars in home country and directly ship the cars to
a foreign country like Ferrari. Indirect exporting is the process of utilising an intermediary firm,
who in turn would distribute the product in the foreign market on the instructions of the firm. For
example, a car manufacturer may employ a local distributor or a partner while selling cars in a
foreign country.
From a firm's perspective, exporting involves the least risk. This is so because no capital
expenditure or additional finance has been allocated for the product. Thus, the chance of the
existence of sunk costs or general barriers is limited. On the contrary, a firm may have less
control when exporting into a foreign market, due to limited control on the supply of the goods
within the foreign market.
Joint ventures
A joint venture is an understanding to work together between two or more firms with the aim of
gaining a benefit from a given economic activity. The directives of some countries often state
that all foreign investment in it should be through joint ventures. The level of risk is
comparatively more when compared with exporting as the control of the firm which gets into a
joint venture is limited.
Direct investment
Here, a firm invests capital in a foreign country to construct a manufacturing facility or fixed or
non-current asset. The aim of the firm is to manufacture a product within that country.
With direct investment, comes more control of the firm, attached with more risk. The return on
investment has to be determined and calculated as with any capital expenditure in addition to
recovering any related sunk costs.
Self Assessment Questions
1. For a firm to be successful internationally it is not necessary to be successful locally.
(True/False)
2. Culture of a country influences the marketing strategy of the firm. (True/False)
3. _________________ involves a firm, shipping goods directly to a foreign market.
4. Direct investment involves ________________ in the overseas market.
5. A joint venture is an understanding between
a) Two or more firms
b) Two or more countries
c) The firm and its subsidiary
d) Two or more parties
Activity 1
Find out few countries where direct foreign investment is not entertained.
Hint: China, Saudi Arabia.
8.3 Global Marketing Strategies
After getting an overview of international marketing, we shall now discuss the strategies
followed in global marketing.
Taking into account the various conditions on which markets vary and depend, appropriate
marketing strategies should be devised and adopted. Like, some countries prevent foreign firms
from entering into its market space through protective legislation. Protectionism on the long run
results in inefficiency of local firms as it is inept towards competition from foreign firms and
other technological advancements. It also increases the living costs and protects inefficient
domestic firms.
To counter this scenario firms must learn how to enter foreign markets and increase their global
competitiveness. Firms that plan to do business in foreign land find the marketplace different
from the domestic one. Market sizes, customer preferences, and marketing practices all vary;
therefore the firms planning to venture abroad must analyse all segments of the market in which
they expect to compete.
The decision of a firm to compete internationally is strategic; it will have an effect on the firm,
including its management and operations locally. The decision of a firm to compete in foreign
markets has many reasons. Some firms go abroad as the result of potential opportunities to
exploit the market and to grow globally. And for some it is a policy driven decision to globalise
and to take advantage by pressurising competitors.
But, the decision to compete abroad is always a strategic down to business decision rather than
simply a reaction. Strategic reasons for global expansion are:
Diversifying markets that provide opportunistic global market development.
Following customers abroad (customer satisfaction).
Exploiting different economic growth rates.
Pursuing a global logic or imperative to harvest new markets and profits.
Pursuing geographic diversification.
Globalising for defensive reasons.
Exploiting product life cycle differences (technology).
Pursuing potential abroad.
Likewise, there can be other reasons like competition at home, tax structures, comparative
advantage, economic trends, demographic conditions, and the stage in the product life cycle. In
order to succeed, a firm should carefully look at their geographic expansion and global
marketing strategy. To a certain extent, a firm makes a decision about its extent of globalisation
by taking a stance that may span from entirely domestic to a global reach where the company
devotes its entire marketing strategy to global competition. In the process of developing an
international marketing strategy, the firm may decide to do business in its home-country
(domestic operations) only or host-country (foreign country) only.
8.3.1 Segmentation
Firms that serve global markets can be segregated into several clusters based on their similarities.
Each such cluster is termed as a segment. Segmentation helps the firms to serve the markets in an
improved way. Markets can be segmented into nine categories, but the most common method of
segmentation is on the basis of individual characteristics, which include the behavioural,
psychographic, and demographic segmentations. The basis of behavioural segmentation is the
general behavioural aspects of the customers. Demographic segmentation considers the factors
like age, culture, income, education and gender. Psychographic segmentation takes into account:
beliefs, values, attitudes, personalities, opinions, lifestyles and so on.
Once you are done with the segmentation of market, you can choose one or more segments to
carry out trade. This process of selecting or choosing the potential market segment is known as
targeting. The three basic criteria for targeting are: potential competition, the current size and
growth rate of the market, and compatibility and feasibility. After the target market has been
ascertained firms should select a global marketing strategy.
Marketing in less developed countries offers several advantages to organisations. They can take
advantage of the huge unexploited markets and avail tax benefits. By focusing on less-developed
countries, firms can increase their market share and become market leaders. Less-developed
countries usually offer special benefits for the firms who are willing to establish their operations
in their countries. Thus, for firms marketing at a global level, less-developed countries provide
them with advantage.
8.3.2 Market positioning
The next step in the marketing process is, the firms should position their product in the global
market. Product positioning is the process of creating a favourable image of the product against
the competitor's products.
In global markets product positioning is categorised as high-tech or hightouch positioning. The
classification of high-tech and high-touch products is shown in figure 8.1.
The classification of high-touch products is shown in figure 8.2.
The pricing decision enables us to change the price in many ways, some of them are:
Sticker price changes - The simplest way of changing the price is by changing the price tag. By
doing this you are going to get the same thing, but for a different amount.
Change quantity - When sticker prices are increased, the response of consumers is unfavourable
and usually changes in quantity are noticed less.
Change quality - Another way to effectively increase profit is through reducing the quality of the
product.
Change terms - For a firm it is a possible to save money by altering the terms of operations or
transactions with consumers. For example, earlier most software manufacturers provided free
support for their programs but now services are being charged.
8.3.4.1 Transfer pricing
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 utilised when selling goods or
services between a parent company and a subsidiary or 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
commodities or services. However, in common terminology, transfer pricing generally refers
TPM.
TPM assists in saving the organisations 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 rates, 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.
8.3.5 International advertising
International advertising is usually associated with using the same brand name all over the world.
However, a firm can use different brand names for historic reasons. The acquisition of local firms
by global players has resulted in a number of local brands. A firm may find it unfavourable to
change those names as these local brands have their own distinctive market. Therefore, the
company may want to come-up with a certain advertising approach or theme that has been
developed as a result of extensive global customer research. Global advertising themes are
advisable for marketing across the world with customers having similar tastes.
The purpose of international advertising is to reach and communicate to target audiences in more
than one country. The target audience differ from country to country in terms of the response
towards humour or emotional appeals, perception or interpretation of symbols and stimuli and
level of literacy. Sometimes, globalised firms use the same advertising agencies and centralise
the advertising decisions and budgets. In other cases, local subsidiaries handle their budget,
resulting in greater use of local advertising agencies.
Standardisation is required for products by some firms. The issues encompassing advertising
standardisation tend to parallel issues corresponding to product and positioning standardisation.
Standardisation helps to achieve economies of scale and a consistent image can be established
across markets. Standardisation also assists in utilising creative talent across markets, and
facilitates good ideas to be transplanted from one market to other. The challenges to the approach
of standardisation are cultural differences, differences in product life cycle stages and unusual
country regulation. Additionally, local advertising professionals may oppose advertising
campaigns imposed from outside.
International advertising can be thought of as a communication process that transpires in
multiple cultures that vary in terms of communication styles, values, and consumption patterns.
International advertising is a business activity and not just a communication process. It involves
advertisers and advertising agencies that create ads and buy media in different countries. This
industry is growing worldwide. International advertising is also reckoned as a major force that
mirrors both social values, and propagates certain values worldwide.
8.3.6 International promotion and distribution
Distribution of goods from manufacturer to the end user is an important aspect of business.
Companies have their own ways of distribution. Some companies directly perform the
distribution service by contacting others whereas a few companies take help from other
companies who perform the distribution services. The distribution services include:
The purchase of goods.
The assembly of an attractive assortment of goods.
Holding stocks.
Promoting sale of goods to the customer.
The physical movement of goods.
In international marketing, companies usually take the advantage of other countries for the
distribution of their products. The selection of distribution channel is helpful to gain the
competitive advantage. The distribution channel is also dependent on the way to manage and
control the channel. Selecting the distribution channel is very important for agents and
distributors.
In order to reach its target markets a company utilises a combination of sales promotion, personal
selling, advertising and public relations, which is collectively called as promotion.
Advertising is a non-personal form of communication about an organisation or its products that
is propagated to a target audience through a broadcast medium. A firm can focus on a small,
clearly defined market segment by employing this type of promotion. This promotional method
is also cost efficient. A large number of prospective customers can be reached, at a minimal cost
per person.
The activity of catching the attention of prospects is known as sales promotion. It involves
activities and materials that are meant to attract customers. One motive of promotion is to gain a
competitive edge; other objective is to concentrate on this method as it provides quick return.
The consumers also look forward for sales promotions before purchasing a product.
People interested in a particular industry can be brought together by organising overseas product
exhibitions. These events have the potential to attract important visitors such as distributors,
agents, journalists, potential customers, politicians, and competitors. These events also provide
us with an ideal opportunity to get attention.
Self Assessment Questions
6. Firms that serve global markets can be segregated into several clusters based on their
differences. (True/False)
7. Advertising is a paid form of ______________communication about an organisation or its
products.
8. Promotional mix is a blend of advertising, personal selling, sales promotion and ___________.
9. Globalised advertising is associated with the use of the same ______ name across the world.
10. Transfer pricing is considered to be a relatively simple method of moving goods and services
among the overall corporate family. (True/False)
11. __________ is the process of ascertaining the value for the product or service.
12. This is not the way to change the price of a product:
a) By tricking
b) Sticker price
c) Changing quality
d) Changing quality
Activity 2
Find out the stages in the process of international promotions and distributions of a multinational
company.
Hint: http:// www. ehow. Com /list _ 6781615_ examples - advertising-trade-show-
exhibitions.html
8.4 Branding for International Markets
Global marketing strategies provide with the techniques and methods to sell a product. Once the
product is sold the image of the product has to be maintained. We will discuss about this
branding here in this section.
With the spread of markets and the increase in competition on a global scale, firms are expanding
their operations overseas, either through investments or acquiring firms in other countries. Firms
are also entering into strategic alliances with firms in other countries or exporting directly of
indirectly to target countries. At the same time markets are getting more integrated due to the
spread of media, the expansion of international retailers, and the mobility of people, goods, and
firms across national borders. To respond to this global market, international firms need to have
coordinated and integrated international branding strategy in place.
International branding is different from marketing in domestic markets in a number of ways.
Firstly, the macro-marketing environment such as legal, cultural, technological, and economic
aspects in which a firm operates in the overseas market is different.
The intended audience must be considered while developing an intra-organisational marketing
communication strategy. A successful promotional strategy is one, which is communicated
clearly and distributed thoroughly to their intended audience. In addition, it is important to
ensure that consistent branding and non-contradictory messages are eliminated.
8.4.1 Valuation of brands
Brand value can be defined as the branding efforts that build customer confidence and loyalty by
adding unique advantages to the firms product or service. The concept of brand value surpasses
the concepts of tangible product and basic brand. This facet of brand value distinguishes a brand
from a product. The three levels of brand value are:
Core functionality.
Emotional values.
Added value services.
The core functionality deals with the core physical product; emotional value characterise the
intangible aspects of a brand that fits the psychological profile of the target customer. Added
values concentrate on bringing in extra futures and are critical to the brand, which would
enhance the usage of the brand for the customers.
8.4.2 Challenges of international branding
A challenge to international branding is to maintain a balance between being global and being
local. Brand ideas, values, and concepts have to remain the same, but the methods to
communicate them and to make them familiar to customers have to vary. Brand values and ideas
can principally be same, but the propagating methods cannot.
The task of building a strong brand is hard and complicated. The firm has to honour the promises
made by the marketing theme. Two conflicting challenges an international brand has to face is to
remain easily recognised at any global location and simultaneously should be able to blend with
the local culture, traditions and customers' way of perception.
In the international branding process the challenges increase many fold. Therefore, the process of
building a strong brand is a complicated and challenging task.
Self Assessment Questions
13. Brand value builds customer confidence and loyalty. (True/False)
14. International branding is all about differentiating between being global and being local.
(True/False)
15. The task of building a brand is
a) Complicated
b) Easy
c) Critical
d) Moderate
8.5 Summary
Let us summarise the points covered in this unit about international marketing:
Selling a product involves considering the need of the customers. In order to build the customer
base, the firms have to take up an advertising activity.
Firms both global and local have to advertise their products in order to inform the customers
about the benefits and features of the product. International marketing or advertising differs from
domestic or local marketing as the communication process is across cultures, geographic
conditions, and tastes and preferences of the people.
A firm has to develop global marketing strategies in order to deal with protectionism. The goal of
a firm to move to a foreign country is to exploit the market there.
The different approaches for global marketing are segmentation, market positioning, branding,
promotions, competitive pricing and so on.
Segmentation is the process of dividing the market into clusters. And then positioning the
product with respect to the segment and target audience.
The pricing decision has to be competitive as there could be local firms competing.
A global firm usually have products introduced in other countries. And these products will have
some brand following. In order to bring the existing brand into a new country the firm has to
carry-out research and find out the response of the customers to this campaign. This is called as
promotion.
8.6 Glossary
Arms Length pricing rule: This is defined as the price a buyer willing to pay to for an identical
item under identical terms and conditions.
Foreign investment: It is the long term participation of a firm in a foreign country to do business.
Non-current asset: An asset that will not convert to cash within the next year.
Return on investment: A relative measure based on the profit to investment.
Sunk costs: It is the cost that has already been incurred and which cannot be recovered.
8.7 Terminal Questions
1. Bring out the differences between foreign marketing and domestic marketing.
2. Write a note on global marketing strategies.
3. What is transfer pricing?
4. What are the factors considered while branding a product or service in an international
market?
8.8 Answers
Self Assessment Questions
1. False
2. True
3. Exporting
4. Manufacturing
5. a) two or more firms
6. False
7. Non-personal
8. Public relations
9. Brand
10. True
11. Pricing
12. a) by tricking
13. True
14. False
15. a) complicated
Terminal Questions
1. International marketing is different from domestic marketing in a sense that the customer
preferences and tastes are not known. There are cultural differences and other issues. These are
explained in sub-section 8.2.1. Refer the same for details.
2. Different global marketing strategies are market segmentation, market positioning, advertising
and so on. These are explained in section 8.3 Refer the same for details.
3. Transfer pricing is usually used by companies to reduce the tax levied on them. This is
explained in sub-section 8.3.4.1 Refer the same for details.
4. Branding must not have contradictory messages, the intended audience must always be kept in
mind. The branding process is a complicated task. These are explained in section 8.4 Refer the
same for details.
8.9 Case-Let
References
Colin Gilligan, Martin Hird (1986). International marketing: strategy and management.
Kumar N (2002). International Marketing, First Edition. Anmol Publication.
Roger Bennett, Jim Blythe (2002). International marketing: strategy planning, market entry.
Sean De Burca, Richard Fletcher and Linden Brown (2004), International marketing : an SME
perspective, London : FT - Prentice Hall.
Michael R. Czinkota, Ilkka A. Ronkainen.(2001), International marketing, Fort Worth ; London : Harcourt
College Publishers.
Vern Terpstra, Ravi Sarathy (2000), International marketing, Dryden Press.
Michael R. Czinkota, Best Practices In International Marketing, The Harcourt College Publishers Series
In Marketing.
E-References
http://www.consumerpsychologist.com/international_marketing.html
http://www.slideshare.net/chanvich/international-pricing-decisions-for-upload
Retrieved on 31st October 2010
9.10 Case-Let
Application of International Accounting Standards to Central Banks
As the financial markets are becoming internationalised, the international accounting standards are applied
to central banks. The primary objective of these entities is to maintain the value of the country's currency.
The idea of applying IAS is to guarantee a high degree of transparency and comparability among financial
statements and can find an efficient operation of the Community's capital market and the domestic market
also.
A sample of accounting and financial information were published on the websites of 19 central banks to
know as to how the IASs are being applied to the accounting policies and practices used by central banks in
the region. The findings of the analysis are described as follows:
1. Accounting standards governing the preparation of financial statements - It was found that there was a
beginning of an alignment with International Accounting Standards.
2. Publication of financial statements - IAS states that a total set of financial statements should include a
balance sheet, an income statement, and changes in equity statement, a cash flow statement and a summary
of accounting policies. It was found out that the biggest problem for central banks was to prepare
statements of changes in equity and cash flow statements.
3. Proper disclosure of information - According to IAS, a business is appreciative to disclose the accounting
policies used and other explanatory notes. The study show that the central banks reveal accounting policies
and practices in their notes.
4. Use of ultimate exchange rates and fair value - AS states that in each balance sheet, the dates of the items
in foreign currency must be reported at closing rate. The findings about central bank focuses on the use of
closing rates for assets and liabilities decreased in foreign currency and on the use of reasonable values for
portfolios in both foreign and domestic currency.
5. Reporting changes in the exchange rate - According to IAS, exchange differences that happen when
monetary items are developed, must be reported as fixed cost or income for the phase in which they
appeared. Through the study, it was found out that the central banks apply diverse policies and procedures
to proof their exchange differences.
All these helped in internalisation of central banks and helped in maintaining the international accounting
standards on the domestic currency.
Discussion Question
1. Discuss the application of international accounting standards to central bank. (Hint: Accounting
Standards Governing the Preparation of Financial Statements)
Source: www.cemla.org/pdf/acp/acp_9_Jairo_Contreras.pdf
References
Aswathappa. K. (2008). International Business. Tata McGraw Hill Education: New Delhi.
Paul Rodgers (2007), International Accounting Standards, From UK Standards to IAS An Accelerated Route for
Understanding the Key Principles, Elsevier Ltd.
International Accounting Standards Committee (2000), International Accounting Standards Explained, Chichester:
Wiley.
E-References
media.wiley.com/product_data/excerpt/22/EHEP0005/EHEP000522.pdf
http://www.indianmba.com/faculty_column/fc137/fc137.html
http://www.loscostos.info/english/accsyst.html
Retrieved on October 31st, 2010
Activity 2
Assume that you are the manager of International chemical dyeing firm that is undergoing a
technological change in one of their main units. How will you implement your strategic planning
so that employees accept and adopt change?
Hint: Use Bottom up planning.
10.4 Strategic Management Process
In the previous section we learnt about strategic planning and its types. In this section, we will
discuss the strategic management process.
The strategic management process is a way businesses build strategies that help firms respond
quickly to the new challenges. This process helps organisations to find new and more efficient
ways to do business.
The organisation should have a good strategic planning that clearly describes objectives and
evaluates both the internal and external situation to establish the strategy, implement, evaluate,
and make necessary changes to stay as per the vision and mission of the organisation. A pictorial
representation of strategic planning process is as shown in figure 10.1.
10.5 Summary
Let us summarise the points covered in this unit about international strategic management:
International strategic management refers to planning the strategy in international business to
compete and also ensure that they have a long-term strategy for survival.
Strategic management focuses on the process of formulating, implementing, and evaluating
strategies, to achieve the objectives of an organisation.
Strategic objectives assist in the implementation process of the organisations objectives or goals.
Most of strategic objectives focus on producing greater profits and returns for the business
owners; others focus on customers or society at large.
Strategic alliances are the means to work together with others towards a common goal for small
businesses, without losing their individuality.
Strategic alliances are the means to work together with others towards a common goal for small
businesses, without losing their individuality. Alliances are a way to obtain the rewards of team
effort and one can reap considerable profits from forming strategic alliances.
Strategy in international business has various advantages and disadvantages.
Strategic planning involves the structured efforts of an organisation to effectively recognise its
purposes for existing, the direction that the organisation will pursue, and how that direction will
allow the entity to achieve its short-term and long-term goals.
The strategic planning process involves allocation of resources to firms to fulfill their long-term
goals. The three types of planning are strategic planning, intermediate planning and and short
term planning.
A GAP analysis is a simple tool that helps the planning team to identify methods to close the
performance gaps. Gap analysis help businesses measure their possible profitability of a goal.
Top-down planning is a common strategy that is used for project planning. It helps maintain the
decision making process at the senior level. Goals and allowances are established at the highest
level.
In bottom-up planning, an organisation gives its project deeper focus because organisation has a
huge number of employees involved, and each employee is expert in their own area. Team
members work side-by-side and they contribute during each stage of the process
The concept of strategic management is still evolving and will continue to undergo changes.
Thus, understanding and following the process of strategic management in international business
is helpful to practicing managers in achieving the organisations' objectives.
10.6 Glossary
Regulatory bodies: These are professional bodies established on the basis of legal mandate to
protect the public.
Uncertainty: It is the situation where the consequences of events are unpredictable.
MNC: Acronym for multinational company.
Strategy: Plan of action designed to achieve a specific objective.
Alliances: An agreement between two or more entities to achieve a common goal.
Partnership: An arrangement where individuals agree to cooperate towards a common goal.
Mergers: Combination of two or more companies, usually by offering the stockholders of one
company securities in the acquiring company for the surrender of their stock.
Acquisitions: Corporate action in which a company buys most or all the target company's
ownership stakes to assume control of the target firm.
10.7 Terminal Questions
1. Explain strategic objectives and alliances.
2. What is Strategic planning?
3. Explain top-down and bottom up planning.
4. What is Strategic management process?
5. Explain strategy formulation and implementation.
10.8 Answers
Self Assessment Questions
1. Strategic management
2. True
3. Outsourcing
4. GAP analysis
5. False
6. Project managers
7. Strategic management
8. b) Corporate level strategy
9. Strategy implementation
Terminal Questions
1. In order to measure the fulfilment of the objectives, strategic objectives need to be implemented.
Strategic alliances are far-reaching through nearly every industry. These are explained in sub-section 10.2
of this unit. Refer the same for details.
2. Strategic planning involves the structured efforts of an organisation to effectively recognise its
purposes for existing, the direction that the organisation will pursue and how that direction will allow the
entity to achieve its short-term and long-term goals. These are explained in sub-section 10.3 of this unit.
Refer the same for details.
3. Top-down planning is commonly referred to as strategy. Bottom-up planning is commonly referred to
as tactics. These are explained in sub-section 10.3.3 of this unit. Refer the same for details.
4. The strategic management process is a way businesses build strategies that help the company respond
quickly to new challenges. The five levels of management process are explained in sub-section 10.4 of
this unit. Refer the same for details.
5. Strategic formulation is the second phase in the strategic management process. Strategy
implementation is one of the stages of strategic management. These are explained in sub-section 10.4.1
and 10.4.2 of this unit. Refer the same for details.
10.9 Case-Let
Magazine Distribution GAP Analysis
Company PQR is the top bio-medical magazine in Pune. The vision of Company PQR was to be the top
distributor throughout India and also expand their operation abroad. Company PQR initially completed an
analysis showing how it got to be the top regional, then top national magazine distributor. This includes an
overview of every aspect of the business that contributes to the Company PQR's success, including
marketing, accounting, information technology, management, and other departments.
Company PQR outlined the advantages of achieving its goal of becoming the top distributor country as well
as internationally. Goals were designed that were specific and measurable. There was a time frame set for
regional supremacy. In this case, Company PQR planned to become the top nationwide magazine
distributor within two years. They achieved their primary goal of nationwide popularity by bringing
innovative schemes that attracted consumers to buy the same. They brought out an exclusive section for
researchers who were in the field. Company PQR then researched as to how they would achieve
international distributor and what it requires to do to arrive at this goal. The outcome of Company PQR's
analysis was a complete plan that analysed the competitor analysis using Porters model as to what they
required to do so that they can see their goal of international distribution. The aim was to achieve an
international reach as they co-ordinated with scientists abroad. They shared information on various aspects
of the bio-medical field. There were many seminars organised and eminent scientists were recognised.
At the next step, they gathered information and conducted GAP analysis to see where they lacked. The
analysis includes a review of competitors, knowing the needs of the foreign customers, and also interviews
with staff members to know the strengths. After gathering all the information, a gap analysis report was
tabulated.
The reports provided a summary of the present situation, the goals the company wishes to achieve, and the
steps they had to implement to achieve these goals. The steps were analysed into strategic planning. This
plan includes detailed action steps of the business for each area, an agenda to complete each step, and a
plan that outlines how much the plan will cost.
The next and final step was the management to approve and support the action plan and confirm on the
budget. The plan was put into action. Each step was tracked to assure that the plan stays on the agenda and
within budget. The success of the Indian bio-medical magazine in the foreign shores was the talk of the
town that year
Discussion Questions
1. What did the initial analysis include? (Hint: Review of current system)
2. What does the gap analysis report include (Hint: Refer the steps, summary, plan)
Sources: http:// www. wisegeek. com/ what- is- gap - analysis.htm - Retrieved on 11th November 2010
References
K. Aswathappa (2008). International Business. Tata McGraw Hill Publishing Company Limited.
Geoff Goldman, Cecile Nieuwenhuizen (2006). Strategy: Sustaining Competitive Advantage in a Globalised Context. Juta and
Co.
Mike W Peng (2009), Global Strategic Management, Cengage, London.
Phillippe Lesserre (2007), Global Strategic Management, Palgrave Macmillan.
Gerardo R Ungson & Yim Yu Wang, (2008), Global Strategic Management, Library of Congress Cataloging in Publication Data.
Abbass F Alkhafaji, (2003), Strategic Management, Formulation Implementation in dynamic environment, Haworth Press.
E-Reference
http://www.smallbusinessnotes.com/operating/leadership/strategicalliances.html
Retrieved on 8th November 2010
http://www.referenceforbusiness.com/management/Sc-Str/Strategy-Formulation.html - Retrieved on 9th November 2010
Unit 11 E-Business
Structure:
11.1 Introduction
Objectives
11.2 Nature of E-Business
11.3 E-Business Strategy
Planning
Market selection
Establish regional parameters
11.4 E-Business Models
Business to business model
Business to consumer model
Consumer to consumer model
Consumer to business model
11.5 The Challenges of E-Business
Technology
Logistics
Legal concerns
11.6 Summary
11.7 Glossary
11.8 Terminal Questions
11.9 Answers
11.10 Case Let
11.1 Introduction
In the previous unit, you have studied about the need for strategic management process at
the international level. The unit also covered the steps involved in the strategy process,
techniques of building and implementing strategies in an international environment.
The e-business denotes a major trend in the management like any other trends such as the
supply chain management, mail order service or the service economy. The e-business is
done by many asynchronous experts across the globe. The suppliers, customers and also
the competitors coordinate the e-business.
In this unit, you will study about the dynamic nature and process of e-business in an
international scenario. The different models of e-business and various strategies adopted
are discussed. The unit also includes the global challenges and obstacles faced by e-
business.
Objectives:
After studying this unit you should be able to:
explain e-business.
evaluate various strategies in an e-business environment.
identify different models in e-business.
describe the challenges faced by managers in a e-business.
11.2 Nature of E-Business
E-business can be defined as "the use of networks and information technology in order to
electronically design, market, buy, sell and deliver products and services worldwide". E-
business, meaning electronic-business, deals with application of information and
communication technologies, in short an electronic medium in support of all the activities
of business.
The e-business mainly stands for the internet enabled business. There are four entities in
the internet enabled business. These four entities are as shown in the figure 11.1.
Implementation Of E-Business
This case study is about the ABC company that is known as the leading producer of
butente-1 and butadiene in Thailand. The ABC company mainly focused on various
activities such as the production and marketing of various petrochemical products. These
petrochemicals are produced using the C4 as raw material. The ABC company's business
was expanding rapidly and the existing system was too small to accommodate the
required information. The company maintains all the sales activities and sale related
information manually. The digital computerised system was used to manage the system
within the ABC company. The hi-tech control system aims at adjusting the operating
conditions such as the temperature control, pressure, level of liquid container and so on.
Challenges
The ABC company wanted the applications of the XYZ company to accommodate the
dynamic growth of their business mainly in the areas of process manufacturing. These
processes included the shift towards the e-business and supply chain management. The
ABC company was mainly expecting the timely and quality information to the top
management from the XYZ company. This timely and quality information was very
useful for making the strategic business decisions at a competitive speed.
Results
The XYZ company was able to understand the needs of the ABC company and was able
to respond on time. The XYZ company was able to match the current requirements and
match with the future e-business requirements. The server towards financial and
distribution was implemented for the e-business and this enabled the company to stay
competitive in the market of today.
Discussion Questions
1. What are the challenges faced by the ABC company?
(Hint: Accommodation of the dynamic growth of the company)
2. What was the main raw material that was used by ABC company?
(Hint: C4)
Sources: http://www.iomworld.com/Clients/Case_Studies.html
References
Abrol P.N, Bhalla V.K (2005), International business environment and management,
Anmol Publications PVT LTD.
Brahm Canzer (2006), E-business strategic thinking and practice, Cengage learning.
Janice Reynolds (2001), Logistics and fulfillment for e-business: a practical guide to
mastering back office functions for online commerce, Focal press.
E-References
http://e-articles.info/e/a/title/The-Changing-Nature-of-E-Business-~-Ethics-and-Trust/
- Retrieved on 30th October, 2010
http://www.ebusinesssupport.com/ebusiness-strategy.asp
- Retrieved on 31st October, 2010
www.skyinfonet.com/html/ecom_b2c.asp
http://www.ifp.uni-stuttgart.de/publications/phowo01/Reiss.pdf
http://pwebs.net/marketing/ethics/articles/internetethics.htm
- Retrieved on 2nd November, 2010
Reference
Walter Carlsnaes, Thomas Rissee and Beth A Simmons. (2006): Handbook of International
Relations. Sage Publications Ltd.
E-References
http://books.google.co.in/books?
id=wVltIwsWzr4
C
&printsec=frontcover&dq=International+labour+Organisation&hl=en&ei=_b7cTMfYGZP0ca7-
xNE
L
&sa=X&oi=book_result&ct=result&resnum=1&ved=0CDgQ6AEwAA#v=onepage&q&f=false
http://books.google.co.in/books?id=01K0MsG3C4cC&pg=PA197&dq=
General+Agreement+on+Tariffs+and+Trade+
(GATT)&hl=en&ei=zLXcTK3IJ8nzcdSdyMMG&sa=X&oi=book_result&ct=result&resnum=8
&ved=
0CFAQ6AEwBw#v=onepage&q=General%20Agreement%20on%20
Tariffs%20and%20Trade%20(GATT)&f=false
-Retrieved in 11th November, 2010
http://books.google.co.in/books?id=OaNumuFsIhwC&pg=PA131&dq=
WTOstructure&hl=en&ei=cangTNfBNca3cM3t9JYM&sa=X&oi=book_
result&ct=result&resnum=1&ved=0CCsQ6AEwAA#v=onepage&q=WTO-structure&f=false
http://books.google.co.in/books?id=-Zpjyhcu7TMC&pg=PA74&dq=WTO-
issue
s
&
hl=e
n
&
ei=BKrgTPbDBsHzcdP6yZc
M&sa=X&oi=book_result&ct=result&resnum=3&ved=0CDYQ6AEwAg#v=onepage&q=WTO-
issues&f=false
-Retrieved on 12th November, 2010
Terminal Questions
1. The letter of credit is a letter that is given to the seller. In the letter, the bank promises that it will honour the drafts
drawn on it if the seller confirms to the specific conditions that are set forth in the letter of credit. For more
information refer subsection 13.2.2 of this unit.
2. The insurance certificate is known as an insurance policy which certifies that the goods that are transported are
insured under an open policy and these are not actionable with the risks that are covered. We have discussed this in
subsection 13.3.3 of this unit. You can refer the same for more details.
3. The term factoring is the financial transaction in which the business sells its accounts receivable at a discount. For
more information on factoring refer subsection 13.4.2 of this unit.
4. As the country economy is progressing, there is a need for more number of imports. We need to have much of the
exports to pay our imports. You can refer section 13.5 of this unit for more details.
5. This plays an important role in the export financing. This bank provides the financial assistance for promoting the
Indian exports. For more information refer subsection 13.6.3 of this unit.
13.11 Case-Let
Use of Financing Techniques
M/s.GHI Industries is an established manufacturer of clothing in India. They intend to export their clothing and
accordingly have obtained about 15 orders from different overseas companies each of the value Rs.2, 00,000/-.
The following options are available to M/s.GHI Industries:
1. Request a letter of credit from each customer but assume that the cost has to be borne by GHI Industries. The
cost for Letter of Credit is Rs.1000 and 0.5% of the invoice amount.
2. Factor the receivables. Assume charge for factoring @ 1.5%
3. Insure the orders. Assume insurance premium @ 1%
Discussion Questions
1. What are the advantages and disadvantages in each case? Which option do you think will favour M/s.GHI
Industries best and Why?
(Hint: Calculate the cost to GHI Industries in each case
1. Letter of Credit (Rs.2,00,000 x 15 x 0.5%) + 1000 = Rs.16000
2. Factoring receivables (Rs.2,00,000 x 15 x 1.5%) = Rs.45,000
3. Insurance (Rs.2, 00,000 x 15 x 1%) = Rs.30, 000
Option 1 is the best option for GHI Industries )
References
B.L. Mathur (2001), Towards economic development, Discovery publishing house.
Aswathappa (2008), International business, Tata McGraw-Hill.
E-Reference
http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1077787643 &type=RESOURCES
- Retrieved on 3rd November, 2010.
http://www.infodriveindia.com/Exim/Guides/Export-Finance/Ch_4_Trade_Documents.aspx
- Retrieved on 4th November, 2010
http://www.economywatch.com/international-trade/heckscher-ohlin-model.html
http://www.bangkoklogistics.com/international-business/Three-Barriers-To-International-Trade.html
-Retrieved on 18th November
Unit-14-Regional Integration
Structure:
14.1 Introduction
Objectives
14.2 Overview of Regional Integration
Need for integration
Impact of integration
14.3 Types of Integration
Preferential trading agreement
Free trade area
Common market
Economic union
Political union
14.4 Regional Trading Arrangements
The European Union (EU)
European Free Trade Association (EFTA)
North American Free Trade Agreement (NAFTA)
South Comman Market (MERCOSUR)
ASEAN Free Trade Area (AFTA)
Asia-Pacific Economic Cooperation (APEC)
Gulf Cooperation Council (GCC)
South Asian Free Trade Area (SAFTA)
14.5 India and Trade Agreements
14.6 Summary
14.7 Glossary
14.8 Terminal Questions
14.9 Answers
14.10 Case-Let
14.1 Introduction
By now you must be familiar with the different types and techniques of financing employed
when trading in the international markets. You have also learnt about the documentation process
that takes place while trading in foreign countries. The previous unit also gave us an insight on
how we can get finance for importing or exporting goods. In this unit, we shall discuss about the
need and importance of regional integration.
Regional integration is bonding between nations and states through political, cultural and
economic cooperation. The cooperation is overseen by rules and regulations decided upon by the
states entering into an understanding.
This unit covers the need, process and different types of integration among countries. It also
discusses various trading blocs in existence, its importance, structure and functioning. This unit
also includes Indian participation in the regional trading blocks and trade agreements that Indian
Government has with other nations and regions.
Objectives:
After studying this unit you should be able to:
explain the need for regional integration.
analyse the impact of different types of integration amongst countries.
describe several regional trade arrangements.
evaluate different trade agreements of India.
14.2 Overview of Regional Integration
Regional integration can be defined as the unification of countries into a larger whole. Regional
integration also reflects a countrys willingness to share or unify into a larger whole. The level of
integration of a country with other countries is determined by what it shares and how it shares.
Regional integration requires some compromise on the part of countries. It should aim to
improve the general quality of life for the citizens of those countries.
In recent years, we have seen more and more countries moving towards regional integration to
strengthen their ties and relationship with other countries. This tendency towards integration was
activated by the European Union (EU) market integration. This trend has influenced both
developed and developing countries to form customs unions and Free Trade Areas (FTA). The
World Trade Organisation (WTO) terms these agreements of integration as Regional Trade
Agreements (RTA).
14.2.1 Need for integration
There are many different approaches to achieve regional integration. To some extent, each
country and region will find its own way. But typically
there are some common ideas for achieving regional integration. Some of these are:
Facilitating the growth of trade.
Creating attractive investment climates.
Surmounting the regulatory and administrative barriers to transit zones.
Guaranteeing the physical security of trade routes.
Strengthening physical and institutional infrastructure.
Promoting economic diversification.
New-comers to industrialisation enjoy some substantial benefits that their ancestors did not. The
economic policy makers today have a better understanding of the process of industrialisation
than their earlier counterparts. They now have the comprehension of microeconomic inputs and
market opportunities. Therefore, policy makers can make use of the wealth of knowledge that is
made possible by the rise of the global economy. On the long run regional integration may
transform the regions.
The initiative of regional integration should perform at least the following functions:
Strengthening of trade integration in the region.
Creating an appropriate environment for enabling private sector development.
Developing infrastructure programmes to support economic growth and regional integration.
Developing strong public sector institutions and good governance.
Reducing social disparities and developing an inclusive civil society.
Contributing to the peace and security of the region.
Building environmental programmes at the regional level.
Strengthening the regions interaction with other regions of the world.
14.2.2 Impact of integration
Regional integration results in the creation and diversion of trade. It supports overall growth of
the region, coupled with efficient trading practices. Trade creation increases production and
income, and also leads to new entries in the market and therefore, results in tougher competition.
The transfer of technology is also faster.
Regional integration provides some sort of reduction on tariffs and prohibitions. It spreads
goodwill among member countries and also helps in reducing the chances of conflict between
countries.
Self Assessment Questions
1. Regional integration can be defined as the unification of countries. (True/False)
2. Promoting ____________________ is a need of regional integration.
3. Identify the correct answer. Regional integration should not ________________
a) Build environmental programmes at the regional level
b) Strengthen trade integration in the region
c) Contribute to the peace and security of the region
d) Break ties with other countries
14.3 Types of Integration
In the previous section an overview and the need for regional integration was covered. A whole
range of regional integrations exist today. Different types of regional integration are discussed in
this section.
14.3.1 Preferential trading agreement
Preferential trading agreement is a trade pact between countries. It is the weakest type of
economic integration and aims to reduce the taxes on few products to the countries who sign the
pact. The tariffs are not abolished completely but are lower than the tariffs charged to countries
not party to the agreement. India is in PTA with countries like Afghanistan, Chile and South
Common Market (MERCOSUR). The introduction of PTA has generated an increase in the
market size, and resulted in the availability and variety of new products.
14.3.2 Free trade area
Free Trade Area (FTA) is a type of trade bloc and can be considered as a second stage of
economic integration. It is made up of all the countries that are willing to or agree to reduce
preferences, tariffs and quotas on most of the services and goods traded between them. Countries
choose this kind of economic integration if their economical structures are similar. If the
countries compete among themselves, they are likely to choose customs union.
The importers must obtain product information from all the suppliers within the supply chain, in
order to determine the eligibility for a Free Trade Agreement (FTA). After receiving the supplier
documentation, the importer must evaluate the eligibility of the product depending on the rules
surrounding the products. The importers product is qualified individually by the FTA. The basis
on which the product will be qualified is that the finished product should have a minimum
percentage of local content.
14.3.3 Common market
Common market is a group formed by countries within a geographical area to promote duty free
trade and free movement of labour and capital among its members. European community is an
example of common market. Common markets levy common external tariff on imports from
non-member countries.
A single market is a type of trade bloc, comprising a free trade area with common policies on
product regulation, and freedom of movement of goods, capital, labour and services, which are
known as the four factors of production. This agreement aims at making the movement of four
factors of production between the member countries easier. The technical, fiscal and physical
barriers among the member countries are eliminated considerably as these barriers hinder the
freedom of movement of the four factors of production. The member countries must come
forward to eliminate the barriers, have a political will and formulate common economic policies.
A common market is a first step towards a single market. It may be initially limited to a FTA
with moderate free movement of capital and services, but it is not capable of removing rest of the
trade barriers.
Benefits and costs
A single market has many advantages. The freedom of movement of goods, capital, labour and
services between the member countries, results in the efficient allocation of these production
factors and increases productivity.
A single market presents a challenging environment for businesses as well as for customers,
making the existence of monopolies difficult. This affects the inefficient companies and hence,
results in a loss of market share and the companies may have to close down. However, efficient
companies can gain from the increased competitiveness, economies of scale and lower costs.
Single market also benefits the consumers in a way that the competitive environment provides
them with inexpensive products, more efficient providers of products and increased variety of
products.
A country changing over to a single market may experience some short term negative effects on
the national economy due to increased international competition. The national companies that
earlier benefited from market protection and subsidies, may find it difficult to cope with their
efficient peers. If the companies fail to improve their methods, they may have to close down
leading to migration and unemployment.
14.3.4 Economic union
Economic union is a type of trade bloc and is instituted through a trade pact. It comprises of a
common market with a customs union. The countries that are part of an economic union have
common policies on the freedom of movement of four factors of production, common product
regulations and a common external trade policy.
The purpose of an economic union is to promote closer cultural and political ties, while
increasing the economic efficiency between the member countries.
Economic unions are established by means of a formal intergovernmental legal agreement,
among independent countries with the intention of fostering greater economic integration. The
members of an economic union share some elements associated with their national economic
jurisdictions. These include the free movements of:
Goods and services within the union along with a common taxing method for imports from non-
member countries.
Capital within the economic union.
Persons within the economic union. Some form of cooperation usually exists when framing fiscal
and monetary policies.
14.3.5 Political union
A political union is a type of country, which consists of smaller countries/nations. Here, the
individual nations share a common government and the union is acknowledged internationally as
a single political entity. A political union can also be termed as a legislative union or state union.
Self Assessment Questions
4. Countries under a political union do not have a common government. (True/False)
5. The purpose of an economic union is to promote closer __________ ties.
6. Identify the factor of production
a) Capital
b) Consumers
c) Market
d) Policy maker
Activity 1
Analyse the reasons that lead to the formation of economic unions and common markets.
Hint: Economic regionalism, taxation and regional integration.
14.4 Regional Trading Arrangements
After learning the various types of integration, we will now discuss the regional trading
arrangements required for integration. The different regional trading agreements that are in
existence today among various countries spread across different continents are discussed in this
section.
14.10 Case-Let
References
Bernadette Androsso-O'Callaghan (2005), Regional integration: Europe and Asia compared.
Ashgate Publishing.
Rouhollah K. Ramazani, Joseph A. Kechichian (1988), The Gulf Cooperation Council: record
and analysis. University Press of Virginia.
Sisir Gupta (1981), India and regional integration in Asia. Asia Publishing House.
E-References
http://business.gov.in/trade/trade_agreements.php
http://en.wikipedia.org/wiki/Regional_integration
- Retrieved on 6th November 2010
Objectives:
After studying this unit you should be able to:
evaluate the impact of globalisation in India.
interpret the competitive environment in India.
explain the challenges faced by Indian business due to globalisation.
describe strategies that can be adopted by Indian businesses.
15.2 Globalisation and India
Globalisation is the process of increasing connectivity and interdependence of the worlds market
and businesses. It is a way of interacting among countries to develop global economy.
Globalisation is the integration of economies of the world through trade and mutual exchange of
technology and knowledge. In India, globalisation refers to the opening up of the economy to
foreign direct investment by offering facilities to foreign companies to invest in various areas of
economic activity. Globalisation had a strong impact in all sectors and business in India. It has
created challenge for technical manpower in India. Globalisation has helped India in the
following ways to:
Open up Indian economy to foreign direct investments and to facilitate foreign companies to
invest in different sectors of economic activities.
Enable Indian companies to enter into foreign collaboration.
Remove restrictions for the entry of multinational companies.
Have a direct and indirect impact on Indian currency and enable inflow of foreign exchange into
India.
15.2.1 Evolution in India
For India, globalisation is not something new. One of the first instances of globalisation in India
was in 1647 A.D, when the Kings in India had a foreign collaboration with East India Company.
However, the incidents that occurred post the foreign collaboration, until India attained
independence in 1947, is an example of collaboration without any sufficient control. During
1947, India had placed restrictions on Foreign Direct Investments (FDI) which restricted the flow
of FDI in India.
Globalisation with respect to India was seen in terms of how the Government of India allowed
the foreign business entities to operate in India and the amount of foreign direct investments
entered India. Globalisation in India became prominent after 1991. The early policies from 1962
to 1977 were mainly driven by the needs of the local industry and economy. From 1978, the
policies promoted liberalisation of the economy and several steps were taken to implement these
policies. Over a period of time, the whole entrepreneurial abilities of a people were restricted
with a set of regulations and licenses and the Indian economy was called a License Raj. In the
year 1991, a major restructuring of the Indian economy called LPG (Liberalisation, Privatisation
and Globalisation) was welcomed.
15.2.2 Liberalisation of economy in 1991
Liberalisation is the process to reduce unnecessary restrictions on business units that are imposed
by the government. Before 1991, the government had imposed many restrictions and controls on
the economy such as import license, foreign exchange control, and industrial licensing system
and so on. These restrictions discouraged entrepreneurs to establish new industries. The
economic liberalisation in India began in July 1991 which paved way for a rapid progress in
India. Trade liberalisation provided flexible exchange rate. Liberalisation of policies towards
foreign direct investments (FDI) helped in opening up the economy. The reforms brought
changes in the opinion about the role of public sector. The areas that were reserved exclusively
for public sector were now open to the private sector, example, telecommunications, air
transport, steel, petroleum and so on.
Since 1991, the Government of India took many policy measures to bring the country out of
economic crisis and to accelerate the growth of the economy. The important policy measures are
the following:
Reducing controls and promoting liberalisation.
Encouraging private sector.
Promoting foreign direct investment.
Introducing improved technology.
Introducing changes in trade and monetary policy.
Various policy measures were undertaken since July 1991 to increase the productivity and
efficiency of the economy.
In addition to liberalising the economic policies, the other major change that occurred in the
legislation front was the repealing of Foreign Exchange Regulation Act (1973) [FERA] to
Foreign Exchange Management Act (1999) [FEMA]. In case of other laws everything is allowed
unless specifically prohibited, under FERA nothing was permitted unless specifically permitted.
FERA was more of regulation of the foreign exchange containing stricter rules and policies. The
Enforcement Directorate that operated under FERA had enormous powers to order imprisonment
for minor offences. However the scenario was changed after 1999, when FEMA was passed.
FEMA was more of foreign exchange management legislation with less stringent rules when
compared to FERA.
Self Assessment Questions
1. The process of increasing connectivity and interdependence of the worlds market and
businesses is ________.
a) Liberalisation
b) Globalisation
c) Privatisation
d) Standardisation
2. _____________ is the process to reduce unnecessary restrictions on business units that are
imposed by the government.
3. The economic liberalisation in India began in July 1985. (True/False)
15.3 Competitiveness
Competitiveness is the main driving force for all organisations. The economic reforms
commenced by the Government of India in 1991, opened way to create new business
opportunities for private investors and entrepreneurs in the country. The competitive advantage
of a company is important to determine the success of its global business. This has led to tough
competitive environment among the private investors to compete for market share.
The economic reforms have attracted many foreign investors, mainly MNCs to invest in India.
India has demonstrated global competitive standards in telecom and ITES, manufacturing,
medico-tourism, technical and management education and so on. Many major Indian companies
have transformed into MNCs to go global. India is constantly trying to enhance its global
competitiveness to dominate global market. India has core competencies in IT/ITES sector. The
IT Act has helped India in getting recognition as a leader in the service sector. The
competitiveness of service sector is emerging as a crucial factor. To improve competitiveness in
the service sector, the Government of India has set up a board which has recommended reforms
in the education system. The government is taking measures to improve the skills that are deficit
in all service sectors.
15.3.1 Knowledge base
India is the worlds sixth most important offshore research and development location. The
country has a global reputation by being in the leading position for business process outsourcing
(BPO) and call centers. Global technology leaders such as IBM, Hewlett-Packard, Nokia, Dell
and others invest in operations in India. Dell has established a major production center to serve
the local Indian market. With the increased degree of globalisation, the Research and
Development (R&D) activities are given importance to enhance global competitiveness. There
has been steady increase in the literacy rate in India. India has a large resource of educated and
technical staff. India ranks high in terms of availability of skilled labour, especially engineers.
Currently, India is a service hub of the world and holds a dominant position in a variety of
service and knowledge based activities.
15.3.2 Demographics
Demographics are a statistical data of the population which includes age, gender, occupation,
income and so on. For the success of a business an understanding of the demographics is
essential. Demographics is the basic statistical information study of population based on factors
such as age, gender, economic status, education, income and employment, Demographics are
used by governments, corporations and non-government organisations to learn more about the
characteristics of the population for various purposes, which includes policy development and
economic market research.
Basic demographic analysis is conducted for two reasons:
To identify the characteristics of the population to determine the potential customer.
To locate geographic areas of the majority of potential customers.
For example, if a firm wants to sell a new denture cream, it first identifies the states or cities in
India that has the largest population of elderly consumers. After identifying those areas, the firm
analyses certain information about the consumers, such as their buying habits, number of people
using dentures, number of people having fixed income. The demographic studies can help in
getting the relevant information.
In addition, the demographic data also helps in analysing the factors which in turn help in getting
information about the customers. They are as follows:
Income The degree of income that a person spends over other expenses.
Residences If the customers live in home that is rented or owned.
Transportation The number of prospective customers who own vehicles.
Age ranges The number of young professionals and retirees.
Family status The marital status of the people.
Recreational activities The hobbies and recreational activities of the people.
The above examples clearly state that the demographic data acts as a powerful tool for planning
business strategies.
15.3.3 Cost
The main reason of global sourcing is to benefit from lower costs of labour, raw materials and so
on that is available in the host country. Enterprises need to bear the cost of knowledge
acquisition for outsourcing. It can be conducted independently or by leveraging industry experts.
The cost of knowledge acquisition covers the cost of leveraging an external knowledge base for
processes, tools and templates and the best practices to help develop and manage their offshore
projects.
A global sourcing project requires substantial travel by various people as the initiatives progress
through the global life cycle. Many sponsors and process owners travel during the knowledge
phase. The managers and process leads travel substantially during the transitional phase. Hence,
international travel increases the expense. Exchange rate fluctuations affect the financial
situation. The cost includes expenditure in physical infrastructure and support, training, wage
rate and so on.
Activity 1
Dell is the second largest personnel computer manufacturer in the world. Dell India is one of the
star performers of Dell. Discuss the competitiveness of Dell India.
Refer to the following website for guidance:
http://www.techgoss.com/Story/1789S14-Dell-s-premature-release.aspx
Self Assessment Questions
4. _____________ bears the cost of knowledge acquisition for outsourcing.
5. Demographic is a statistical data of the MNCs in a country. (True/False)
6. India has core competencies in _______ sector.
a) Manufacturing sector
b) Automobile sector
c) IT/ITES sector
d) Education sector
15.4 Challenges for Indian Businesses
India is a developing country and every developing country has its own organisational problems.
In the past decade, some Indian companies have made remarkable progress by reaching the
international platform in short time. India has transformed from being primarily domestic players
into confident global corporations. The TATA Jaguar deal was one prominent example of an
Indian global power house to acquire an internationally reputed automotive company
15.4.1 Brand India
Brand India is a phrase that describes the campaign which projects India as an emerging
destination for business in various fields such as information technology, manufacturing,
infrastructure, service sector and so on. Country names can amount to brand names and assist
consumers in evaluating the products before purchasing them.
Brand India is receiving a positive response. However, Brand India is weak in many ways. In
developed countries, people are yet to associate India with world-class standards. The initial
market entry strategy of a company from a developing country is to offer cheaper products of
acceptable quality, example, China and Korea. The customers of developed countries buy those
products only on the basis of price. Brand India is comprised of a large number of sub-brands
that are relatively established. It reflects the economic reforms and liberalisation process that
Indian economy has undergone. The famous brands from India are Indian information
technology (IT) companies such as Infosys, Wipro and Tata. The positive image of these
companies help in changing consumer perceptions and also help in re-branding India as a leading
manufacturing and service hub by improving Indias brand equity.
Brand equity is the worth derived from the goodwill and name recognition acquired over a
period of time. It improves sales volume and profit margins. The India Brand Equity Foundation
(IBEF) was established to promote brand India.
15.4.2 Government and bureaucracy
The political environment of a country influences the business to a large extent. The political
environment includes political stability in the country, nature and extent of bureaucracy, ideology
of government, party in power and so on. Another challenge that influences business is
bureaucracy. Industrial incentives are administered by an elaborate and expensive bureaucracy.
The relationship of government to international business is based on the concept of sovereignty.
The concept identifies that the nation has complete control over the international affairs. The
infrastructure such as airport, road or port upgradation takes years for completion or are stalled
for many years. This affects the business in India negatively.
Government policy and procedures in India are very complex and confusing. Government policy
and bureaucratic culture in India do not encourage international business. Unnecessary
government interference can hinder globalisation. Government support is essential to encourage
globalisation. Government support is extended in the form of policy reforms, development of
infrastructure, financial market, R&D support and so on. Changes in government and political
instability disrupt business. Good business thrives on predictability which is lacking in India.
15.4.3 Corporate governance
Corporate governance is a process of promoting corporate transparency and accountability. It is
set of policies that affect the way a company is administered and controlled. Quality corporate
governance is a tool for socio-economic development. Corporate governance deals with power
and accountability for the safety of assets and resources entrusted to the operating team of the
firm.
The objective of the corporate governance is to attain highest standards of procedures and
practices that are followed by the corporate world. The new emerging corporate India needs
guiding principles for corporate governance. The common aspects for the failure of corporate
governance are misuse of power, frauds, misappropriation of funds and so on. Good corporate
governance promotes accountability in relation to public satisfaction and responsive delivery of
service. In India, corporate governance initiatives are undertaken by Ministry of Corporate
Affairs (MCA) and the Securities and Exchange Board of India (SEBI).
Ethics
Corporate governance is about ethical conduct of the business. Ethics is related to the code of
values and principles that helps a person to choose between right or wrong. Managers make
decisions based on a set of values and principles that are influenced by the culture of the
organisation. Ethical leadership is important for the business to be conducted by meeting the
expectations of all the stakeholders. Corporate governance is the ethical framework under which
corporate decisions are taken. Ethics is a generalised value system avoiding discrimination in
recruitment and adopting fair business practices. Business ethics provide a general guidelines
within which a management can operate. An organisation has to be ethical because it has to exist
in the competitive world. The varying ethical norms and social values make international
business environment complex. The ethical norms vary from country to country.
Labour practices
Ethical concerns are at the core of dispute regarding the labour practices. The multinational
enterprises are charged of unjust treatment of workers in developing nations. The labour law
enforcement is weak. The laws that force firms to obtain permission from the government prior
to retrenchment are not enforced properly. Hiring labors to contractor and subcontracting non-
core activities to other companies provides flexibility to the firms that seek to manage their
labour force in volatile context. Child labour is used in the manufacture of exports from the
developing countries is criticised by people in the developed countries. For example, in India the
carpet industry uses child labour and social activists in developed nations demand ban on the
import goods embodying child labour. Consumers tend to boycott such goods and this in turn
adversely affects the business.
15.4.4 Managing diversity
Most of the international businesses face problems in managing multicultural diversity.
Previously, MNCs had a country specific business strategy but now it is moving towards a global
one. Managing diversity is a process of establishing workforce to perform in an unbiased
environment where no member has an advantage or disadvantage. For an international manager,
managing diversity is a challenge. The challenge is to create a work environment where every
person performs to his full potential and compete for rewards and promotions that based on
merits. The success of an MNC is determined by its ability to manage diversity. In an
international organisation, the workforce consists of variety of cultures. Today, a typical firm is a
combination of diverse workforce in terms of gender, race and so on. Most companies encourage
exchange programs where employees from one country come and interact with employees of
other countries. There are some practical steps taken by managers to manage diversity. They are:
Focusing on bringing in best talent.
Establishing programmes among employees of same and different race.
Developing an age, gender and race profile of the workforce.
Promoting minorities and other sections to decision-making positions.
Providing extended leaves, flexible time, and job sharing opportunities.
Self Assessment Questions
7. The phrase used to describe the campaign which projects India as an emerging destination for
business is:
a) Made in India
b) Brand India
c) Incredible India
d) Destination India
8. _____________ is a process of promoting corporate transparency and accountability.
9. Discrimination in recruitment is an ethical practice. (True/False)
15.5 Strategy for International Business in India
The strategy for international business is through incorporation of the concept of configuration
and competence. The concept of configuration is based on the value chain concept. The
competence strategy is to identify the core competency of the firm that puts it in a superior
position. Core competence is achieved when the financial, technological and manpower
resources are available conveniently at low cost.
15.5.1 Regional understanding
Regional understanding is a strategy that has macroscopic and microscopic forms. In a
macroscopic view, a regional understanding refers to the co-operation between nations that have
are geographically placed together. Developing countries must strengthen regional cooperation
with other developing countries to enhance development. The international regional
organisations such as ASEAN (Association of South East Asian Nations), EU (European Union),
MERCOSUR (South American Countries), and NAFTA (North American Free Trade Agreement)
are examples of international regional alliances that have evolved immensely benefiting the
member countries in terms of market access and economies. The regional co-operation also has
its own advantages and disadvantages. The advantages of regional understanding are the
following:
Better market access among the regional alliances.
Improved inflow of foreign exchange.
Enhanced economies of scale.
Easier mode of representation in the international market.
The conflicts arise in terms of bilateral agreements outside the regional co-operation, threat of
acquisition by foreign companies, destruction of domestic market and so on.
In a microscopic view, the regional understanding as a corporate business strategy achieves the
following:
Enhance business productivity and increase employment opportunities.
Prioritise resources such that public funding offers effective business support which satisfies
business needs.
Maximum benefit to the region by focusing on key priorities.
Regional understanding as a business strategy is a process by which decisions are coordinated
and integrated across the entire region.
Regional understanding focuses on the review of an overall regional acquisition. It also focuses
to regionalise contracting, facilitate sharing of contracts, develop contracting capabilities,
develop and implement standard operating procedure for regional contracting, and enhance small
business opportunities.
15.5.2 Strategic alliances
Strategic alliances refer to the alliance between actual or potential competitors. In strategic
alliance, two organisations who are potential competitors agree to cooperate with each other and
form an alliance by entering into a cooperative agreement. For example, Motorola initially found
it difficult to enter the Japanese market. It then formed an alliance with Toshiba in 1987 to build
microprocessors. Toshiba provided marketing and managerial help to Motorola for expansion in
Japan. Strategic alliances among international businesses are common. Strategic alliance is
preferred in industries such as electronics, computer hardware and software, telecommunication
and so on. The companies cooperate in technology development, sharing R&D information of
mutual interest to develop new products that complement each other. Strategic alliance also helps
them to build networks of dealers and distributors to handle their products.
Another reason for forming strategic alliance is risk sharing. When industries enter a new market
or develop new products there is no guarantee of success. These agreements can help in reducing
and controlling the risk of an individual firm.
Strategic alliances are formed to exploit economies of scale. Alliance partners can reap
economies of scale in partnership. The complementary assets and resources that alliance partners
possess are their development, manufacturing and distribution activities. Strategic alliances help
in learning important skills and abilities from their competitors.
Strategic alliance can be classified into the following categories:
Non-equity alliances In the non-equity alliance, the cooperating firms agree to work together to
carry out activities. They do not take equity positions in each other or form an independent
organisation to manage their cooperative efforts. These alliances are managed by contracts.
Equity alliances In equity alliance, the cooperating firms supplement contracts with equity
holding in alliance partners.
Joint ventures In joint venture, the cooperating firms create a legal independent firm in which
they invest and share profits.
Strategic alliance is preferred in international business because it helps in:
Providing access to new markets.
Gaining access to local distribution network.
Gaining access to other financial resources.
Attaining risk reduction.
Enhancing the manufacturing process.
Improving access to latest technologies.
Alliances formed among firms of developed and developing countries help in mutual motivation.
The partner from the developing country obtains technology and capital from the developed
country. The partner from the developed country gets advantages from the lesser-developed
country in form of low cost labour, reserves of raw materials and so on.
Activity 2
Refer any website and create a report on the strategic alliance between HCL and Sybase.
Refer to the following website for guidance:
http://pbdj.sys-con.com/node/1083825
Self Assessment Questions
10. In _____________ the cooperating firms create a legal independent firm in which they invest
and share profits.
a) Non-equity alliance
b) Equity alliance
c) Joint venture
d) Non-joint venture
11. _____________ refer to the agreement between potential competitors to form an alliance by
entering into a cooperative agreement.
12. In the non-equity alliance, the cooperating firms agree to work together to carry out activities
and take equity positions in each other. (True/False)
15.6 Summary
Let us now summarise the salient points you learnt in this unit on global sourcing and its impact
in India:
Global sourcing is a procurement strategy that is aimed at exploiting global efficiencies in
production.
Globalisation is the process of increasing connectivity and interdependence of the worlds market
and businesses.
The economic liberalisation in India began in July 1991. The economic liberalisation paved way
for rapid progress in India.
The competitive advantage of a company is important to determine the success of its global
business.
Brand India is used to describe the campaign which projects India as an emerging destination for
business in various fields.
Corporate governance is a process of promoting corporate transparency and accountability.
The strategy for international business is through incorporation of the concept of configuration
and competence.
Strategic alliance between potential competitors is the contract to cooperate with each other and
form an alliance by entering into a cooperative agreement.
15.7 Glossary
Economies of scale: Reduction in cost per unit resulting in increased production.
Equity: Ownership interest in a corporation in the form of common stock.
International management: The skills and knowledge required by managers in charge of
operations that involve people from different countries.
Sub-contracting: The practice of assigning work under a contract to another party.
15.8 Terminal Questions
1. Evaluate the impact of globalisation in India.
2. Interpret the competitive environment in India.
3. Explain the challenges faced by Indian business in the wake of globalisation.
4. Describe strategies that can be adopted by Indian businesses.
15.9 Answers
Self Assessment Questions
1. Globalisation
2. Liberalisation
3. False
4. 1991
5. Enterprises
6. IT/ITES sector
7. Brand India
8. Corporate governance
9. False
10. Joint venture
11. Strategic alliance
12. False
Terminal Questions
1. In India, globalisation refers to the opening up of the economy to foreign direct investment by
providing facilities to foreign companies to invest in different areas of economic activity in India.
Refer to section 15.2 for details.
2. The competitive advantage of a company is important to determine the success of its global
business. Refer to section 15.3 for details.
3. The challenges faced by Indian businesses due globalisation are given in section 15.4.
4. The strategy for international business is through incorporation of the concept of configuration
and competence. Refer to section 15.5 for details.
15.10 Case-Let
References
Jayanta Bagchi. (2005). Liberalisation of Services Global and Indian Perspective. I.K.International Pvt
Ltd.
Boutilier, Robert. (1993). Targeting Families: Marketing To and Through the New Family. American
Demographics Books.
Miller, Berna. (1995). A Beginner's Guide to Demographics. Marketing Tools.
Nirmalya Kumar, Pradipta K. Mohapatra & Suj Chandrasekhar. (2009). India's Global Powerhouses. Tata
McGraw-Hill Publishing Company Limited.
E-References
http://books.google.co.in/books?id=bgLXTW2oq2cC&pg=PA144&dq=
labour+practices+in+indiaglobal+sourcing&hl=en&ei=n4nSTIbkDob8vQO4g6ifDw&sa=X&oi=book_result&ct=re
sult&resnum=7&ved=0CFYQ6AEwBg#v=onepage&q=Regional%20understanding&f=false
http://books.google.co.in/books?id=7L8TsMVCGEkC&pg=PA672&dq=
international+business+strategy+in+india&hl=en&ei=rY7STOuCHIvMuAOdl8S_Dw&sa=X&oi=book_result&ct=r
esult&resnum=2&ved=0CDcQ6AEwAQ#v=onepage&q=international%20business%20strategy%20in%20
india&f=false
- Retrieved on 2nd November 2010
http://books.google.co.in/books?
id=4iqJ2168IwC&pg=PA317&dq=Strategy+for+International+Business+in+India &hl=en&ei=CI3STISCPY-
AvgOz2_nRDw&sa=X&oi=book_result&ct=result&resnum=10&ved=
0CGEQ6AEwCQ#v=onepage&q=Strategy%20for%20International%
20Business%20in%20India&f=false
http://books.google.co.in/books?
id=39lJz_L4MdU
C
&
pg=PA13
3
&
dq=Challenges+for+Indian+BusinessesBrand+indi
a
&
hl=e
n
&
ei=VlHRTMPJII7qvQPShbmRD
A&sa=X&oi=book_result&ct=result&resnum=1&ved=0CDIQ6AEwAA#v=onepage&q&f=false
- Retrieved on 3rd November 2010
References
Abbass F. Alkhafaji, (2003), Strategic Management, Formulation Implementation in dynamic environment, Haworth
Press.
Abrol P. N., Bhalla V. K. (2005), International business environment and management, Anmol Publications PVT
LTD.
Aswathappa. K. (2008). International Business. Tata McGraw Hill Education: New Delhi.
B. L. Mathur (2001), Towards economic development, Discovery publishing house.
Batra G. S. (2006). Liberalisation, Globalisation and International Business. Deep and Deep Publications.
Bennet Roger (2006). International Business, Pearson Education Ltd
Bernadette Androsso-O'Callaghan (2005), Regional integration: Europe and Asia compared
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