State the advantages and disadvantages of FDI to he home and host country?

List down the problem

faced by MNE’s in the home country and the problem faced by host country due to MNE’s.

Ans: Benefits of Foreign Direct Investment (Home Country)

FDI benefits the home country to a large extent. The home country refers to the country from which
the funds originate for onward investment in another foreign country. Listed below are some of the
reasons as to why foreign direct investment is beneficial to the home country.

1. Cost Advantages.
2. New Markets.
3. Exposure to other countries.
4. International Relations.

Disadvantages of Foreign Direct Investment (Home Country)

Foreign direct investment may be very advantageous to the home country, that is the country
which provides the investment flows with respect to the profits, dividends and gains being
repatriated to it, however, having operations in another country gives rise to additional risks
which at times may prove very costly for the home country. Let us see some of the ways in which
foreign direct investment may be disadvantageous to the home country.

1. Loss of Employment.
2. Problem of Repatriation.
3. Possibility of Loosing Competitive Advantage.

Benefits of Foreign Direct Investment (Host Country)

Foreign Direct Investment (FDI) has become a very popular means of transfer for capital flows
from one country to another. In short, FDI refers to an investment in which an entity for another
country invests capital in some income generating assets in another country and maintains full or
partial control over such assets acquired.

There are several benefits of foreign direct investment which accrue to both the home country as
well as the host country. However, it must be noted that such benefits accrue only when
appropriate regulation and an ethical sense of doing business exists with the home country, the
host country as well as the foreign investor. Some benefits of foreign direct investment are
mentioned below.

1. Technological Gap.
2. Exploitation of Natural Resources.
3. Employment Generation.
4. Development of Managerial Pool.

Formation of Clusters : Group of similar projects and manufacturing centres are formed in a specific
location by way of providing common production , R&D, training and pollution control system to group
competing companies. In Italy, Brazil and India, such clusters have made wonders.

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Disadvantages of Foreign Direct Investment (Host Country)

Foreign direct investment may be very advantageous to the host country that is the country which
receives the investment flows in terms of helping the country progress economically and
financially. However, foreign direct investment can remain beneficial only when the governments
of the host countries put in needed regulations so as to prevent the country from being exploited
and used as a profit generating machine for such corporate giants. The past has given many
examples of how foreign direct investment can also at times be detrimental to the economy of a
country, some examples of which are highlighted below:

1. Political Lobbying.
2. Exploitation of Resources.
3. Threaten Small Scale Industries.
4. Technology.

Problems faced by Host country due to MNEs

 Technology developed by the MNCs may not suit the needs of host country.
 MNCs may not operate within national autonomy and sovereignty.
 Monopolistic practices of MNCs may kill the domestic industry.
 MNCs may adopt ethnocentric approach in staffing.
 MNCs may use the natural resources of the host country indiscriminately.
 A large sum of money may flow from the domestic country in the form of dividends and
royalty.
 MNCs normally concentrate on consumer goods and not capital goods and infrastructural
goods in host country.
 MNCs may distort the economic structure of the host country.
 MNCs normally provide the outdated technology to the host country industry.
 Pollutes the environment of the host countries.

Problems faced by MNEs in the Home country.

 Transfer capital to other countries and cause unfavorable balance of payments.

 May not create employment opportunities to domestic people by following geocentric
approach or outsourcing business operations in various countries like USA software
companies outsourcing business operation in India.
 May neglect the industrial development of the home country as the transnational companies
follow the secular approach.
 May cause erosion of the domestic culture.
 May exploit the natural resources resulting in excessive exploitation of natural resources.

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What is the meaning of globalization? Categorize manufacturing and service sectors of India having
global competitive advantages.
ANS : Globalisation is the “strategy of optimizing” the resources available in various countries and catering
to customers throughout the world with internationally standardised products, at competitive prices. It
advocates that the nation or a company or product involved should be global. A global man is one who is
born in India, studies in the UK, wears Reid & Taylor, shops in Marks & Spencer, drives a Lexus, acquires a
steel plant in Kazakhstan and ships his hot rolled coil to China. Thus, he becomes a part of globalisation
process.
Assuming that the trends described here are inevitable the following issues need serious consideration by
any medium-sized or large company that is inclined to go global.
1. Size of the market:
How extensive do you want your markets to be, particularly the major emerging markets for your products
and services? How should you build a necessary global presence?
2. Location advantage:
To what extent do you want to capture the cost reducing and quality enhancing potential of locations
around the world for the execution of various activities in your company’s value chain? How should you
deal with the problem of suboptimal locations currently in use?
3. Global competitiveness:
How effective do you want to be in exploiting global presence and turning it into a true global competitive
company as opposed to global mediocrity? How should you eliminate the existing shortcomings and
impediments?
4. Longer local production:
The local market is larger than the minimum efficient scale of production. The larger the local market,
the more local production will translate into scale economies while holding down tariff and
transportation costs. An example is the entry of the Japanese tyre group Bridgestone into the US market
by acquiring the local production base of Firestone instead of exporting tyres from Japan.

Globalisation has positive impacts on productivity

While globalisation has certain negative consequences for particular groups, especially in the
short term, it also has important positive effects. The impact on productivity is important, as
openness is found to raise productivity and hence average incomes and wages. A number of
studies have shown that more open countries typically grow faster than less open countries and
have higher income levels. At the economy-wide level, the OECD Growth Study estimated that
an increase in openness by 10% points translates over time into an increase of 4% in per capita
income in the OECD area. Gains from trade typically arise from the exploitation of comparative
advantages and economies of scale. Instead of producing a particular good or service, a country
can obtain more of it, indirectly, by exporting goods and services in which it has a comparative
advantage. Trade opens foreign markets for goods and services that can be most efficiently
produced in the home country. Furthermore, larger markets due to international trade may
enable firms to take advantage of economies of scale not available when sales are limited to the
domestic market, helping to lower costs. At the same time, trade generally results in lower prices
for imported goods and services (final and intermediate) and increases product variety and quality
in the home country. Larger markets through trade also

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 Define 'International Business'. Explain fundamental differences between domestic business operation
and International business operation using business characteristics.

Ans: International business is defined as “any commercial transaction-taking place across the boundary lines of a
sovereign entity”. It may take place either between countries or companies or both. These transactions include
investments, physical movements of goods and services, transfer of technology and manufacturing.

Private companies involve themselves in such transactions for revenue, profit and prosperity. If governments are
involved, they need to maintain their image, dependency and economic growth. Sometimes economic ties are
strengthened through such transactions.

Domestic Business versus International Business:

Dimension Domestic Business International Business

Operations Operations
1.Environment The economic, political, legal, The environment is not fully known.
socio-cultural, competitive and Innumerable hidden factors which may emerge
technology environments are known any time to pose as problems.
They will lead to pitfalls
2. Plan and Can be worked out for short terms Only long term planning and strategy
strategy and carried forward to long term will work. Strategic inputs are required
in multiples
3. Competitive The maximum domestic competitive International competitive forces play a
forces and their forces operate and one can vital role and its difficult to understand
intensity understand their movements as they their motive and movement
are visible
4. Research It is reasonable and easy to conduct Very expensive and difficult to conduct.
business research, demand analysis Reliability criteria depends on
and customer surveys. It is also individual countries and there is no
reliable. uniformity in the output and findings
5.Organizational Narrowed down to work in a single Broadened to cover many countries and
Vision and country with a steady growth geographic and cultural diversity may
objective objective. Each one will understand influence the vision and objective.
the vision and objective easily
6. Pricing strategy A majority of companies use cost Companies use marginal cost pricing or
plus margin pricing or competitive transfer pricing or competitive pricing to
pricing. succeed.
7. Logistics Domestic players are involved in all International players with advanced
the activities. The cost of logistics is technology and systems are involved.
very high locally Proportionately, the cost is low for
physical movements.
Some business groups like Adanis started only overseas operations without any linkage with domestic
operation right from the beginning. Tata group established a good name at home country and gradually
moved to other countries. For companies in IT, such as Wipro or Infosys, the major focus is on overseas
operations. All the companies cited as examples above are successful in their own right, but the

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 strategies and operation systems differ from country to country. Organizations like RELIANCE INDUSTRIES
have inherent strength in indigenous business such as completing the project prior to stipulated time. This
experience enables the company to grab any business opportunity in petrochemicals around the world
and build reputation. Gammon India, IRCON (Indian Railway Construction), Larsen & Toubro (L&T) and
Sapoorji Pallonji are successful due to their meticulous way of understanding both operations.

Discuss the economic, cultural, social, political and technological environment of international business
as it prevails today. Draw lessons for Indian companies wishing to go global.
Ans: An international business entry or operation depends upon multiple environmental factors. They may
change the direction, strategy and every moment of international business operations.

An international marketer is required to understand, evaluate and work out various parameters before
venturing into any country. These Parameters are called environmental factors and they determine the
direction and purpose of the international business operation. Many decisions depend upon environmental
factors right from selection of the country, location of the plant, liaison with the government, and entry of
investment from local bodies, product launch, channel management, promotion and opening of outlets. The
first challenge for an organization is to navigate from its home country to the host country. Thereafter it has
to develop a proper system so that the venture is successful in the host country; learn all about the regulatory
bodies both in the host country and home country; understand the customer’s changing tastes and attitude
towards foreign goods and finally obtain revenue and make the business effective with right people.

Prior to entry or investing millions of dollars, the experts gather all the relevant information about the country
and interpret those facts to facilitate the company. By such risk analysis, companies can safeguard
themselves from future dangers. The major risks are:
1. Political
2. Economic
3. Exchange
4. Socio culture
5. Financial
6. Legal
7. Technological
8. Competitive
9. Infrastructural and
10. Labour.

An organization can overcome the effects of all the risks by taking into account the different environmental
factors. Since the home environment is known, one can understand and overcome the pitfalls in the event
that any action goes wrong.

1. ECONOMIC ENVIRONMENT:
The economic environment can be classified into three categories:
a) Economy in the home country
b) Economy in the host country
c) Economy at a global level.
a) Home country Economy

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 In order to encourage the business community to venture overseas, it is necessary for a country to have
liberal economic and trade policies.
b) Host Country Economy.
When a firm from one country enters any other country, the following major criteria are taken into account:
1. Size of the market
2. Gross Domestic Product (GDP)
3. Industrialization
4. Banking
5. Purchasing Power
6. Foreign Exchange
7. Income Levels
8. Economic diversity
c) Economy at a Global level
Organizations such as the World Trade Organization, World Bank, International Monetary Fund, Asian
development bank and the organization of petroleum Exporting countries (OPEC) can affect international
business. The preferential treatment given to the members of NAFTA, ASEAN, the European Union and
COMESA can have a negative impact on the trade between outside cartels and non-members.

2. SOCIAL ENVIRONMENT
The social environment encompassing religious aspects, language, customs, traditions and beliefs, influences
buying consumption habits. Many companies face failure in foreign countries, due to their inability to
understand the socio cultural environment. For example whenever any company establishes business in
some African countries, the local population expects that many jobs will open up for them. Very few countries
perceive tat they may be exploited.
1. National Taste
2. Language
3. Values and beliefs
4. Demography
5. Literacy rate
6. Female Workforce
7. Double Income Families
8. Impulse buying
3. POLITICAL ENVIRONMENT.
The political environment in international business operates in different dimensions:
1. The home country political environment;
2. The host country political environment, and
3. The global political environment.

4. CULTURAL ENVIRONMENT
The cultural environment for international business refers to the set of factors which shape the material and
psychological development of a nation and represents the primary influence on individual lifestyle, attitude,
pre-deposition and behavior as consumers in the market. The most important task of international business
is to identify relevant similarities and differences among countries, and means and methods to match the
organization’s culture with that of the country of its operation. For example, when Toshiba gained 100
percent ownership of Rank-Toshiba in the Plymouth all the managers in charge learnt the British Style of
working.
The performance of a company in the international arena partly depends on how well the strategic elements
fit into the culture of the host country. Culture may be described as the totality of the complex and learned

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 behavior of members of a given society. Elements of culture include beliefs, art, morale, code of conduct and
customs.

5. TECHNOLOGY ENVIRONMENT
Technology and its applications are key factors in determining the international competitiveness of a firm in
conducting international business. Multimedia using Pentium 4 is common in advanced countries whereas it
will take at least another five years to introduce such products in Africa. Leadership in technology is achieved
and maintained through a consistent program of intensive research and development, which can be very
expensive. Only those companies that are able to maintain their technological activities will remain
competitive.

6. LEGAL ENVIRONMENT :
This relates to the laws and regulations governing the conduct of business activities in the country. Before
entering any country, firms avail of the services of local legal firms to understand business interpretations
pertaining to labor legislations, taxes, environment, pollution, investment, distribution, contracts, logistics
etc. The international legal environment has three
aspects:
a) Home country laws
b) Host country laws
c) International laws.

7. COMPETITIVE ENVIRONMENT:
Competition is a threat imposed by an environment, which may effect or hamper or challenge the operation
of an international business firm. Competition either could be from the firm’s home country or host country
or third country. Some times product related competition may crop up through substitutes or low cost
production process or technology or cost reduction through economies of scale. The current international
business operation has to encounter competition as various levels such as entry, operation, production,
administration, human resource, technical resource, and financial resource. Distribution and logistics

Globalization does not take place in a single instance. It takes place gradually through an evolutionary
approach. Depending on the industry you are in, and where you intend to seek business, here are 5
considerations before you take that big leap:

1) Don’t assume you have to be big to go global. It’s largely thanks to inexpensive technology
and services designed to help small businesses operate across borders with the same
efficiencies as large businesses.

Why is FDI important for home and host country? Discuss the FDI environment in china and India.
Draw lessons for India to increase inward FDI.

Ans: FDI

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 Definition: FDI stands for Foreign Direct Investment, a component of a country's national financial
accounts. Foreign direct investment is investment of foreign assets into domestic structures,
equipment, and organizations. It does not include foreign investment into the stock markets.
Foreign direct investment is thought to be more useful to a country than investments in the equity
of its companies because equity investments are potentially "hot money" which can leave at the
first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly.
Importance of FDI
The simple answer is that making a direct foreign investment allows companies to accomplish
several tasks:

 Avoiding foreign government pressure for local production.

 Circumventing trade barriers, hidden and otherwise.
 Making the move from domestic export sales to a locally-based national sales office.

 Capability to increase total production capacity.

 Opportunities for co-production, joint ventures with local partners, joint marketing
arrangements, licensing, etc;

A more complete response might address the issue of global business partnering in very general
terms. While it is nice that many business writers like the expression, “think globally, act locally”,
this often used cliché does not really mean very much to the average business executive in a small
and medium sized company. The phrase does have significant connotations for multinational
corporations. But for executives in SME’s, it is still just another buzzword. The simple explanation
for this is the difference in perspective between executives of multinational corporations and
small and medium sized companies. Multinational corporations are almost always concerned
with worldwide manufacturing capacity and proximity to major markets. Small and medium sized
companies tend to be more concerned with selling their products in overseas markets. The
advent of the Internet has ushered in a new and very different mindset that tends to focus more
on access issues. SME’s in particular are now focusing on access to markets, access to expertise
and most of all access to technology.

FDI Environment in India:

The constant efforts of the Government of India in making the country an investor friendly destination
are reaping dividends. Alongside the United Nations Conference on Trade and Development (UNCTAD)
ranking India at second place in global foreign direct investments (FDI) in 2010, in its report titled,
'World Investment Prospects Survey 2009-2012' has added to the initiative to a great extent . The report
further forecasts, India to be among the top five attractive destinations for international investors
during 2010-12.

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FDI inflow rose by more than 100 per cent to US$ 4.66 billion in May 2011, which is the highest monthly
inflow in 39 months, while the cumulative amount of FDI equity inflows from April 2000 to May 2011
stood at US$ 205.96 billion, according to the latest data released by the Department of Industrial Policy
and Promotion (DIPP).

The service (including financial and non-financial) sectors attracted highest FDI equity inflows during
April-May 2011-12 at US$ 910 million. India received maximum FDI from countries like Mauritius,
Singapore, and the US at US$ 56.31 billion, US$ 13.25 billion and US$ 9.71 billion, respectively, during
April 2000-May 2011.

India's foreign exchange (Forex) reserves have increased by US$ 2.29 billion for the week ended July 22,
2011, according to the weekly statistical bulletin released by the Reserve Bank of India (RBI). In the week
under consideration, foreign currency assets went up by US$ 2.23 billion to US$ 284.53 billion.

Furthermore, India may emerge as US Export –Import Bank's (Ex-Im) largest market in next 12-18
months. “During the last nine months, we have approved 173 transactions involving 100 companies and
US$ 1.4 billion in financing of US exports to India,” as per Fred P Hochberg, the bank's Chairman and
President.

Investment Scenario

The total merger and acquisitions (M&A) and private equity (PE) (including qualified institutional
placement (QIP)) deals in the first half of 2011 include 524 deals valued at US$ 32.48 billion,
according to data released by Grant Thornton India. The global M&A activity has been increasing
so far in 2011 (Jan-June 2011) clocking deals worth US$ 1.5 trillion.

In addition, the total value of outbound deals-Indian companies acquiring businesses outside
India-in the first half of 2011 was recoded at 86 deals worth US$ 5.89 billion. PE deals amounted
to 203 deals worth US$ 5.09 billion in the first half of 2011 as compared to 125 deals worth US$
2.95 billion during the corresponding period in 2010.