INTERNATIONAL BUSINESS

- refers to the trade of goods, services, technology, capital and/or

knowledge across national borders and at a global or transnational
level. It involves cross-border transactions of goods and services
between two or more countries.
- International business is evolved from international trade and
international marketing.
- International business is a crucial venture due to the influence of
varied social, cultural, political, economic, natural factors, and
government policies and laws.
- Business firms go globally to maximize benefits and minimize risks.
- The advantages of international business include: wider markets,
high living standards, optimum utilization of resources, etc.
- Problems of international business include: political factors, foreign
exchange, tariffs, cost, etc.
- The firms get the competitive advantages like economies of scale,
latest technology, expert human resources, etc., by going global

FORMS OF INTERNATIONAL MARKET/MODE OF ENTRY

A. EXPORTING
- Exporting is frequently employed mode of internationalization. It is
one of the simplest and most common approaches adopted by firms
in their endeavor to enter foreign markets.
- Exporting is marketing and sale of domestically produced goods in
another country.

1. Direct export
- Producer sells directly to the importer. This mode gives the
company a greater degree of control over its distribution
channels.

2. Indirect export
 - Indirect exporting is the process of exporting through
domestically based export intermediaries.

B. LICENSING
- is when a firm, called the licensor, leases the right to use its
intellectual property-technology, work methods, patents, copyrights,
brand names, or trademarks—to another firm, called the licensee, in
return for a fee.
- The property licensed may include:
1. Patents
1. Copyrights
2. Technology
3. Technical know-how
4. Specific business skills
- Example: using the design of a popular logo or character

C. FRANCHISING
- Under franchising, an independent organization called the
franchisee operates the business under the name of another
company called the franchisor. In such an arrangement the
franchisee pays a fee to the franchisor. Franchising is a form of
Licensing but the Franchisor can exercise more control over the
Franchisee as compared to that in Licensing.

- Examples:
D. SPECIAL MODES

1. Management Contract
- A management contract is an agreement between two
companies whereby one company provides managerial
assistance, technical expertise and specialized services to the
second company for a certain period of time in return for
monetary compensation.
- Some examples of a first-tier management company include
Accor, Hilton, Hyatt, IHG, Marriott, Rezidor, and Starwood.

2. Turnkey Projects
- A turnkey project is a contract under which a firm agrees to fully
design, construct and equip a manufacturing/business/service
facility and turn the project over to the purchaser when its ready
for operation, for a remuneration.
- Example: Toyota’s car plant in Adapazari, Turkery

3. Contract Manufacturing
- Contract manufacturing is outsourcing entire or part of
manufacturing operations.
- Example: Foxconn, who manufactures parts or even whole
products for giants like Apple, Amazon, and Microsoft.

E. Foreign Direct Investment without

alliances
- Companies enter the international market through FDI, invest their
money, establish manufacturing and marketing facilities through
ownership and control.
- Greenfield strategy- the term Greenfield refers to starting of the
operations of a company from scratch in a foreign market.
F. Foreign Direct Investment with alliances
- Strategic alliance is a cooperative and collaborative approach to
achieve the larger goals.
Role of alliances:
o Many complicated issues are solved through alliances
o They provide the parties each other’s strengths
o Helps in developing new products with the interaction of
2 or more industries
o Meet the challenges of technological revolution.
o Managing heavy outlay
o Become strong to compete with a multinational

1. Mergers and acquisitions

MERGER
- The combining of two or more companies, generally by offering
the stockholders of one company securities in the acquiring
company in exchange for the surrender of their stock.
- Example: the infamous Daimler Benz and Chrysler merger (car
developing, manufacturing and retailing).

ACQUISITION
- When one company takes over another and clearly established
itself as the new owner, the purchase is called an acquisition.
- Example: Disney acquire Pixar

2. Joint ventures
 - A joint venture is an entity formed between two or more parties
to undertake economic activity together. The parties agree to
create a new entity by both contributing equity, and then they
share in the revenues, expenses, and control of the enterprise.
- Example: Sony-Ericsson is a joint venture by the Japanese
consumer electronics company Sony Corporation and the
Swedish telecommunications company Ericsson to make mobile
phones.

APPROACHES OF INTERNATIONAL BUSINESS

A. Ethnocentric Approach

- The domestic companies normally formulate their strategies, their

product design and their operations towards the national markets,
customers and competitors. But, the excessive production more
than the demand for the product, either due to competition or due
to changes in customer preferences push the company to export the
excessive production to foreign countries. The domestic company
continues the exports to the foreign countries and views the foreign
markets as an extension to the domestic markets just like a new
region. The executives at the head office of the company make the
decisions relating to exports and, the marketing personnel of the
domestic company monitor the export operations with the help of
an export department.

- The Ethnocentric Approach is one of the methods of international

recruitment wherein, the HR recruits the right person for the right
 job for the international businesses, on the basis of the skills
required and the willingness of the candidate to mix with the
organization’s culture.

- In Ethnocentric Approach, the key positions in the organization are

filled with the employees of the parent country. All the managerial
decisions viz. Mission, vision, objectives are formulated by the
MNC’s at their headquarters, and the same is to be followed by the
host company.

It is based on the rationale that, the staff of the parent country is

best over the others, and also, they can better represent the
interest of the headquarters.

Advantages of Ethnocentric Approach

- Better coordination between the host and the parent company.

- The culture of the parent company can be easily transferred to the
subsidiary company, thereby infusing beliefs and practices into the
foreign country.
- Effective control over the subsidiary.
- The parent company can have a close watch on the operations of
the subsidiary.
- Better transfer of technical know-how.
- Effective communication between the host and the parent company.
- No need to have a well-developed international local labor market.

Disadvantages of Ethnocentric Approach

- The staff of the parent country may find it difficult to adjust in the
host country due to the cultural differences.
- Difficulty in guiding employees living far away from the parent
country.
- Missed out the opportunity to hire the best personnel from the host
country.
- The cultural clashes between the executives of parent country and
the staff members of the host country.
- The expatriates from the parent country are much expensive as
compared to the employees in the host country.
- The government restrictions in the host country may hamper the
business of the parent company.
- The failure rate is very high.

This approach is beneficial in a situation when a new

subsidiary is set up in the host country, and the employees of the
parent company visit there and initializes its operations.

Example:

- Typical example of ethnocentric approach company are Japanese

firms such as Panasonic, Sony and Hitachi. In Mastec organization,
the staffing approach for subsidiaries in Thailand, Vietnam and India
adopted ethnocentric system due to lack of competency of HCNs
and the needs for corporate communication.

B. Polycentric Approach
- The domestic companies which are exporting to foreign countries
using the ethnocentric approach find at the later stage that the
foreign markets need an altogether different approach.
- Then, the company establishes a foreign subsidiary company and
decentralizes all the operations and delegates decision-making and
policy-making authority to its executives. In fact, the company
appoints executives and personnel including a chief executive who
reports directly to the Managing Director of the company. Company
appoints the key personnel from the home country and all other
vacancies are filled by the people of the host country.

- The executives of the subsidiary formulate the policies and

strategies, design the product based on the host country’s
environment (culture, customs, laws, government policies, etc.), and
the preferences of the local customers. Thus, the polycentric
 approach mostly focuses on the conditions of the host country in
policy formulation, strategy implementation and operations.

- The Polycentric Approach is the international recruitment method

wherein the HR recruits the personnel for the international
businesses.

- In Polycentric Approach, the nationals of the host country are

recruited for the managerial positions to carry out the operations of
the subsidiary company. The rationale behind this approach is that
the locals of the host country know their culture better and can run
the business more efficiently as compared to their foreign
counterparts.

Advantages of Polycentric Approach

- The difficulty in the adjustment of expatriates from the parent

country gets eliminated.
- The hiring of locals or the nationals of the host country is
comparatively less expensive.
 - The morale of the local staff increases.
- Better productivity due to better knowledge about the host market.
- The career opportunities for the nationals of the host country
increases.
- Better government support.
- Chances of success are high.

Disadvantages of Polycentric Approach

- Lack of coordination between the host and the parent company, due
to the absence of a link that gets created when expatriates from the
parent country hold the managerial positions at the subsidiary.
- The lack of effective communication between the staff members of
both the host and the parent company, due to the language barrier.
- Difficult to exercise control over the subsidiary.
- Lack of knowledge about the market conditions of the host country.
- The conflict may arise between the managers of both the host and
the parent company due to the different thinking processes.

In this approach, the natives of the host country are chosen to

run the operations of the subsidiary and are given the authority to
formulate strategies for the business keeping the mission and vision
of the subsidiary company in mind. Whereas the parent country
nationals hold key positions at the corporate headquarters and
scrutinize the operations of the subsidiary from the home office.

Example:
- The polycentric approach to recruitment means that we hire locals
to fill our positions in a host country. For example, we could
advertise on local job boards or create a contract with a local
recruitment agency. We use the polycentric approach when [we
need the skills of locals to conduct our business.

C. Regiocentric Approach

- The company after operating successfully in a foreign country,

thinks of exporting to the neighboring countries of the host country.
At this stage, the foreign subsidiary considers the regional
environment (for example, Asian environment like laws, culture,
policies, etc.), for formulating policies and strategies. However, it
markets more or less the same product designed under polycentric
approach in other countries of the region, but with different market
strategies.
 - The Regiocentric Approach is an international recruitment
method wherein the managers are selected from different countries
lying within the geographic region of business.

- In other words, the managers are selected from within the region of
the world that closely resembles the host country.

Advantages of Regiocentric Approach

- Culture fit, i.e. the managers from the same region as that of the
host country may not encounter any problem with respect to the
culture and the language followed there.
- Less cost is incurred in hiring the natives of the host country.
- The managers work well in all the neighboring countries within the
geographic region of the business.
- The nationals of host country can better influence the decision of
managers at headquarters with respect to the entire region.
Disadvantages of Regiocentric Approach

- The managers in different regions may not understand the

viewpoint of the managers employed at the headquarters.
- There could be a communication barrier because of different
languages.
- The manager selected from a particular region may lack the
international experience.
- It may lead to the confusion between the regional objectives and the
global objectives. The regional managers may only focus on
accomplishing the regional targets and may oversee the impact on
the firm as a whole.

The rationale behind the Regiocentric Approach is that the

person belonging to the same region as that of the host country is
well versed in the language and the culture that prevails there and
would better understand the problems that arise in the market, as
compared to the foreign counterparts.

Example:

- For example, companies such as Coca Cola have been using this
kind of regiocentric orientation approach. For marketing purposes,
countries such as India, Pakistan and Bangladesh have been
grouped together due to their similarities, and a similar
marketing strategy is used across these countries.

D. Geocentric Approach

- Under this approach, the entire world is just like a single country
for the company. They select the employees from the entire globe
and operate with a number of subsidiaries. The headquarters
coordinate the activities of the subsidiaries. Each subsidiary
functions like an independent and autonomous company in
formulating policies, strategies, product design, human resource
policies, operations, etc.
- The Geocentric Approach is a method of international recruitment
where the MNC’s hire the most suitable person for the job
irrespective of their Nationality.

- The rationale behind the Geocentric Approach is that the world is a

pool of talented staff and the most eligible candidate, who is
efficient in his field, should be appointed for the job irrespective of
his nationality. This approach is followed by the firms that are truly
global because they follow the integrated global business strategy.

Advantages of Geocentric Approach

- MNC’s can develop a pool of senior executives with international

experiences and contacts across the borders.
- The expertise of each manager can be used for the accomplishment
of MNC’s objective as a whole.
- Reduction in resentment, i.e. the sense of unfair treatment reduces.
- Shared learning, the employees, will learn from each other’s
experiences.

Disadvantages of Geocentric Approach

- The cost of training, compensation, and relocation of an employee is

too high.
- Highly centralized control of staffing is required.
- Proper scrutiny is required by the HR to select the most suitable
person for the job, which could be time-consuming.
- This approach is very costly since the recruitment agencies or the
consultants are to be hired for the global search for eligible
candidates.

Generally, the recruitment agencies or the consultants are

hired to find the most suitable employee equipped with all the
 necessary skills, residing in any part of the world, to be employed in
the global business.

In addition to this, MNC’s can make use of their internal source

of recruitment, by maintaining a track record of its employees, and
scrutinize these to find the most suitable candidate for the global
posting.

Example:

- The geocentric approach uses the best available managers for a

business without regard for their country of origin. In this example,
the UK parent company uses natives of many countries at company
headquarters and at the U.S. subsidiary.

CONCLUSION
The process of location of foreign operation in a new country must
be carried out carefully. When an organization is choosing to
internationalize their operations, they will first need to decide what
its optimal levels of: commitment, flexibility, control, presence and
risk are in order to select the most appropriate entry mode. Entry
modes in international business can be successful if implemented in
the right circumstances.