International Business

International Business meaning and definition

What is globalization?
 Globalization refers to the shift towards a more integrated and
interdependent world economy.
 It includes globalization of markets and globalization of
production.
Historical Evolution and Nature
Globalization of markets
 It refers to the merging of historically distinct and separate
national markets into one huge global marketplace.
 Falling barriers to cross-border trade have made it easier to
sell internationally.
 The tastes and preferences of consumers in different nations
are beginning to converge on some global norm, thereby
helping to create a global market.
 Offering of standardized product worldwide also helps in
creating a global market.
 E.g. Apple, Samsung, Sony, Toyota, Microsoft, Coca-cola

 Even small sized companies are benefited by globalization.

(E.g. Firms with less than 500 people constituted 97% of the
exports in USA)
 Very significant differences exist between national markets
along many dimensions like tastes and preferences,
distribution channels, culturally embedded value systems,
business systems and legal regulations.
 Because of these differences marketing strategies, product
features and operating practices have to be customized to
best match conditions in a country. (E.g. Automobile
companies design rugged vehicles more suitable to the India
road conditions and more fuel efficient vehicles to match the
preference of the users, McDonalds does not use beef in India)
 The markets for industrial goods and materials are more
universal than consumer goods and thus are better suited for
globalization. (E.g. microprocessors, memory chips, batteries,
aircrafts)
 Many of the firms are competitors in more than one markets
the world over. (E.g. Coca-cola and Pepsi, Unilever and P&G,
LG & Samsung, Ford and General Motors)
 These firms enter all the markets that their rivals are present
in to prevent their rivals from taking advantage.
 The firms going global bring with them efficiencies in terms of
products, operating strategies, marketing strategies and
brands thus creating homogeneity across the markets.
 Thus markets are moving from diversity towards more
uniformity.
Globalization of production
 It refers to the sourcing of goods and services from locations
around the globe to take advantage of national differences in
the cost and quality of factors of production like labor, energy,
land and capital. (E.g. Manufacturing in China, software in
India)
 This helps companies to lower their overall cost structure,
improve quality or functionality of their products and to
compete more effectively. (E.g. Buying of oil blocks by ONGC,
GM buying radiator caps from Sundaram Fasteners, taking
loans from global vendors)
 Even smaller firms take advantage of this globalization.
 The impediments for firms to achieve optimal dispersion of
their production activities globally are formal and informal
barriers to trade between countries, barriers to foreign direct
investment, transportation costs and issues related to
economic and political risk.
The emergence of global institutions
The need for global institutions exist to help
 Manage, regulate and police the global marketplace

 To promote the establishment of multinational treaties to

govern the global business system

Some of the global institutions are:

 General Agreement on Tariffs and Trade (GATT) and its
successor World Trade Organization (WTO)
 The International Monetary Fund (IMF) and its sister
institution, the World Bank
 United Nations
The World Trade Organization
 It is primarily responsible for policing the world trading system
and making sure nation-states adhere to the rules laid down in
the trade treaties signed by WTO member states.
 Currently there are 164 members which gives it an enormous
scope and influence.
 It promotes lowering of barriers to cross-border trade and
investment.
 It facilitates establishment of additional multinational
agreements between member states.
 It has played a major role in promoting globalization of
markets and production to the current level.
 It has to face accusations like it is usurping the national
sovereignty of individual nation-states.
International Monetary Fund and World Bank
 Both created in 1944.

 The task of IMF was to maintain order in the international

monetary system.
 The task of World Bank was to promote economic
development.
 The World Bank has focused on making low interest rate loans
to cash-strapped governments in poor nations that wish to
undertake significant infrastructure investments such as
building dams and roads.
 IMF is also often seen as lender of the last resort to nation-
states whose economies are in turmoil and currencies are
losing value against those of other nations.
 The IMF loans come with strings attached; in return for loans,
the IMF requires nation-states to adopt specific economic
policies aimed at returning their troubled economies to
stability and growth.
 The strings have generated a lot of debate with some
criticizing the IMF's recommendations as inappropriate and
sometimes as against the sovereignty of nation-states.
United Nations
 Established on October 24, 1945.
 It was established with the aim of preserving peace through
international cooperation and collective security.
 It currently has 193 members.
 Each member has to accept the obligations of the UN Charter,
an international treaty that sets out basic principles of
international relations.
According to the charter, the UN has four purposes
1. To maintain international peace and security
2. To develop friendly relations among nations
3. To co-operate in solving international problems and in
promoting respect for human rights
4. To be a center for harmonizing the actions of nations.
 One of the important mandates of UN is creation of a vibrant
global economy by promoting higher standards of living, full
employment, and conditions of economic and social progress
and development.
 It's work is guided by the belief that eradicating poverty and
improving the well-being of people everywhere are necessary
steps in creating conditions for lasting world peace.
Drivers of globalization
The two major factors that have helped greater globalization are
1. Political drivers

 Liberalized trading rules and deregulated markets lead to

lowered tariffs and allowed foreign direct investments in
almost all over the world
 The institution of GATT (General Agreement on Tariffs and
Trade) 1947 and the WTO (World Trade Organization) 1995 as
well as the ongoing opening and privatization in Eastern
Europe are only some examples of latest developments
 The technological changes, especially happening in areas of
communication, information processing and transportation
technology.
Declining trade and investment barriers
 International trade occurs when a firm exports goods or
services to consumers in another country.
 Foreign direct investment occurs when a firm invests resources
in business activities outside its home country.
 In 1920s and 30s nation-states erected formidable barriers to
international trade and foreign direct investment.
 Many barriers were in the form of high tariffs on imports of
manufactured goods.
 The aim of these high tariffs was protection of domestic
industries from foreign competition.
 There were retaliatory policies by other nations in terms of
raising tariffs.
 This contributed to the Great Depression of the 1930s.
 This experience made the advanced industrial nations of the
west to commit to free flow of goods, services and capital
between nations after World Ward II.
 This was done through GATT.
 The members of GATT worked towards successfully lowering
the barriers for free flow of goods and services.
 GATT also lead to establishment of World Trade Organization
to police the international trading system.

In 2001, WTO launched the Doha round of negotiations to

discuss on
1. Cutting tariffs on industrial goods, services and agricultural
products
2. Phasing out subsidies to agricultural products
3. Reducing barriers to cross border investment (FDI)
4. Limiting the use of antidumping laws
 Agricultural products with average tariffs of 40 percent and
about $300 billion of subsidies by advanced countries would
be the largest gainer as successful negotiations would mean
better access of market in developed countries to agricultural
products from poorer nations.
 There have also been reductions in the barriers for FDI.

 The lowering of barriers to international trade enables firms to

view the world, rather than a single country, as their market.
 The lowering of trade and investment barriers allows firms to
base productions at the optimal location for that activity.
 A firm may design the product in one country, product
component parts in another country, assemble these
components in yet another country and export the finished
goods to the world.
 The economies of the world's nation-states are becoming
more intertwined.
 Nations are increasingly dependent on each other for
imported goods and services.
 The globalization implies that firms are finding their home
markets under attack from foreign competitors. (E.g. Kodak,
P&G and Merrill Lynch in Japan, Japanese automobiles in U.S.,
Japanese electronic goods makers taking away shares of
Philips in Europe)
 The growing integration of the world economy has increased
the intensity of competition.
 This has also increased demand for "protection" from foreign
competitors.
2. Technological drivers
 The technological changes have made globalization of markets
and production a tangible reality.

Microprocessors and Telecommunications

 Innovations in microprocessors have enabled growth of high-
power, low-cost computing increasing the amount of
information that can be processed by individuals and firms.
 The communications have been by satellites, optical fibers,
wireless technologies, internet and the world wide web.
 The communication technologies use microprocessors to
encode, transmit, and decode the vast amount of information.
 The cost of communications are reducing resulting in
reduction of coordinating and controlling of global
organizations.
The internet and world wide web
 The internet and world wide web would form the information
backbone of the global economy.
 The web-based transactions was $ 657 billion in 2000 from
almost nil in 1994.
 Most of these transactions have been in the area of business-
to-business and also in cross-border transactions.
 Web has emerged as an equalizer and rolls back some
constraints of location, scale and time zones.
 It allows expansion of business globally at the lower cost.
Transportation technology
There are two important revolutions:
1. The development of jet aircrafts which reduced travel time
considerably
2. Introduction of containerization, which simplifies
transshipment from one mode of transport to another.

 Containerization has significantly lowered the costs of shipping

goods over long distances .(E.g. loading and unloading at the
shipyards)
 Since 1980 the world's containership fleet has more than
quadrupled, reflecting the switch to this mode of
transportation.
 As a result of the efficiency gains associated with
containerization, transportation cost have plummeted which
has helped in globalization.
Implications for the globalization of production
 Reduction in transportation costs, information processing and
communications costs have facilitated globalization of
production
 The development of commercial jet aircraft helps CEOs to
travel to various production units across the world in least
amount of time
Implications for the globalization of markets
 Reduction in transportation cost have helped in shipping of
products to various markets across the world thus creating a
global market.
 Low cost communications like World Wide Web have helped
create electronic global marketplace.
 Low-cost jet travel has resulted in mass movement of people
between countries.
 These have helped in reducing cultural differences between
countries and some convergence in consumer tastes and
preferences.
 Global communication networks and global media are creating
a worldwide culture.
3. Market drivers
 As domestic markets become more and more saturated, the
opportunities for growth are limited and global expanding is a
way most organizations choose to overcome this situation
 Common customer needs and the opportunity to use global
marketing channels to some extent are also incentives to
choose internationalization

4. Cost drivers
 Sourcing efficiency and costs vary from country to country and
global firms can take advantage of this fact
 Other cost drivers to globalization are the opportunity to build
global scale economies and the high product development
costs nowadays
5. Competitive drivers
 With the global market, global inter- firm competition
increases and organizations are forced to “play” international
 Strong interdependences among countries and high two-way
trades and FDI actions also support this driver
Barriers to Globalization
1. Technological Barriers

 Standards-related trade measures, known in WTO language as

technical barriers to trade play a critical role in shaping global
trade
 Governments, market participants, and other entities can use
standards-related measures as an effective and efficient
means of achieving legitimate commercial barriers
 Significant foreign trade barriers in the form of product
standards, technical regulations and testing, certification, and
other procedures are involved in determining whether or not
products conform to standards and technical regulations
2. Cultural Barriers
 It is typically more difficult to do business in a foreign country
than in one’s home country due to cultural barriers
 People from different cultures find it is hard to communicate
not only due to language barriers but also cultural differences
 This is especially in the early stages when a firm is considering
either physical investment in or product expansion to another
country
 Expansion planning in another country requires an in- depth
knowledge of existing market channels and suppliers, of
consumer preferences and current purchase behavior, and of
domestic and foreign rules and regulations
 With the process of globalization and increasing global trade,
it is unavoidable that different cultures will meet, conflict, and
blend together
3. Ethical Barriers
 Despite international trading laws and declarations, countries
continue to face challenges around ethical trading and
business practices
 Anti-globalization groups continue to protest what they view
as the unethical trading practices of multinational businesses
and capitalist nations, often targeting groups such as the WTO
and IMF
 Although some argue that the increasing integration of
financial markets between countries leads to more consistent
and seamless trading practices, others point out that capital
flows tend to favor the capital owners more than any other
group
 With increased international trade and global capital flows,
critics argue that income disparities between the rich and poor
are exacerbated, and industrialized nations grow in power at
the expense of under-capitalized countries
4. Economics Barriers
 Trade barriers are government-induced restrictions on
international trade, which generally decrease overall economic
efficiency
 Trade barriers cause a limited choice of products and,
therefore, would force customers to pay higher prices and
accept inferior quality
 Trade barriers generally favor rich countries because these
countries tend to set international trade policies and standards
 Economists generally agree that trade barriers are detrimental
and decrease overall economic efficiency, which can be
explained by the theory of comparative advantage
5. Local competitive situation
 Many companies avoid doing business in other countries due
to the formidable challenge they will have to face in those
countries
 The number and size of competitors to be faced may
discourage firms to do business in some countries
 Local distribution challenges may be very high

 Brand loyalty for existing brands in a market will make it very

costly for new comers in a country
 The stage of the industry in the life cycle will have to be
considered for investments in a country
 Demographic profile also plays a role in attracting firms
 Need and Importance/Why go international?
1. Market expansion
 Every company wants to expand its market share and to sell more
and more products
 The importance of International business lies in the fact that a
company gets a new market to enter and to expand in
 No matter what was a company's position is in the existing market,
the new market provides a new opportunity for expansion

2. Non-availability of product in new market

 A major advantage a company can have is that the product it
produces is not available in the international market which is being
targeted by the company
 The firm, therefore, has a advantage which it can use to maximum
benefit
 As a result, the firm can establish itself in the target market, thereby
generating a lot of revenue
3. Cost advantage
 Many times, there is a cost advantage of exporting products to
a different country
 Exporting leads to huge quantity of products being
manufactured, leading to economies of scale and thus
reduction in cost
 This reduction in cost can lead to further expansion into many
more countries
 E.g. This cost advantage is apparent in the way China is
operating in today’s business environment

4. Product Differentiation
 If a company has products which are differentiated in their
home country, international business provides an opportunity
to take this differentiation into other countries also
 There may be opportunities to further improve on the
differentiation and design better products or services
4. Economic recession in one’s own country
 International business becomes very important for companies
which are facing recession in their own countries
 Recession will lead to reduction in the demand, revenues and
profits
 Recessions, when they happen, take time to come back to
normalcy
 Since companies cannot afford low growth for a prolonged
period, international business becomes a viable option
 This is one of the major reason for many companies to go
international
5. Loss of domestic market share
 Many times companies lose market share due to factors such
as:
 Arrival of foreign companies into their home country
 Too much competition among the local companies
 Obsolete and outdated products/service
 This is a difficult situation for any organization

 International business can provide an opportunity for such

companies to grow their business
 Strong growth from international business can help a company
to gain lost market share in the domestic market also
6. Growth in Demand in other markets
 New and emerging markets provide great opportunity for
growth for businesses
 This is the reason why many companies are investing in
countries like India or China
 International companies want to establish them selves in
many markets as it gives them advantages of larger market
share and better control on the market
 E.g. When South Africa belonged to the primitives and native
tribes, there was no business being conducted. However, with
globalization, we can see the growth and development of
Ghana and Nigeria as well as other African cities
7. Excess capacity of Production
 One reason for large companies to look towards international
business is to utilize the excess production capacity of their
manufacturing plants
 Many companies have built huge production capacity

 When they have such production potential, utilizing that

potential becomes very important
 As a result, many companies take the benefits of International
business by utilizing their manufacturing potential and starting
the sale of their brand in International markets
 This helps the companies to generate more revenue and also
manufacture huge volumes in their large factories
8. Economies of Scale
 When companies want more operations and growth, one
factor which helps the profitability of the company to a great
extent is economies of scale
 With a company's business growing, it increases its fixed costs

 The fixed cost goes down when the volume of manufacturing

goes up from the same assets, that is when the concept of
economies of scale sets in
 This benefits the company as the company gets a cost
advantage over competitors
 It also improves its own scale of operations
9. Purchasing Power
 Another reason for the Importance of doing International
business is the purchasing power rising in target markets
 E.g. The best example of this is Dubai which as a country has
grown exponentially in the last several years and today is a
huge tourist market. The purchasing power in Dubai is great
and you will find showrooms of all top brands present in Dubai
markets
 Thus, if there is increase in purchasing power of customers in a
market, it makes logical sense that the companies will target
that market as well
10. Economic growth of countries
 When foreign companies do business in a country, it helps in
the economic growth of the country
 It helps nations to overcome shortage of capital, manpower
and technology
 It provides better products for the people

 In increases competition among companies, leading to better

options for customers
 Differences between Domestic, Global, International and
Transnational companies
Domestic companies
 The stage-one company is domestic in its focus, vision, and
operations
 Its orientation is ethnocentric
 This company focuses upon domestic markets, domestic
suppliers, and domestic competitors
 The environmental scanning of the stage-one company is
limited to the domestic familiar, home-country environment
 The unconscious motto of a stage-one company is: “If it’s not
happening in the home country, it’s not happening”
 There are many companies in the world which have failed due
to this belief that they were invincible in their own turf
 E.g. Cavinkare
International companies
 These are companies which aim to leverage their core
competencies by expanding opportunistically into foreign
markets
 E.g. Walmart
 These companies depend on local subsidiaries in each country
to administer business as instructed by headquarters
 Some subsidiaries may have the freedom to adapt products to
local conditions as well as set up some light assembly
operations or promotion programs
 Still, control resides with managers at headquarters who
reason they best know the basis and potential extension of the
company's core competencies
 Critical activities such as R&D and branding are centralized
 It facilitates the transfer of skills, expertise and products from
the parent company to its subsidies
 This strategy is best used when a firm has a core competence
that local competitors in other markets lack and there is no
need for much localization
Disadvantages
 The headquarters may hinder identifying and responding to
local conditions
 Headquarter’s ethnocentric orientation can lead to missed
opportunities
 There may be a feeling in other countries that their operations
are secondary to the home market
Multinational companies
 Also called multidomestic or locally responsive company,
allows each of its foreign-country operations to act fairly
independently
 The company's subsidiaries have the authority to design, make
and market products that directly respond to local customers'
preferences
 E.g. General Electric
 Each country's operations have the discretion to respond to its
local cultural, legal-political and economic environments
 These companies customize their products, marketing and
service programs to local conditions
 The decision making is decentralized from headquarters to
subsidiary operations
 The managers in these companies hold polycentric view that
people who are close to the market ought to run the business
Advantages
 This strategy is best used when there is need for high local
responsiveness and low need for reducing cost or global
integration
 It minimizes political risk, lowers exchange rate risk, greater
prestige given its national prominence, high potential for
innovative products from local R&D, and higher growth
potential due to entrepreneurial spirits
 E.g. Procter & Gamble
Disadvantages
 It leads to duplication of management, design, production,
and marketing activities
 It is not suitable for industries with intense cost pressures, as
local supply chain are used
 The powerful subsidiaries may behave like autonomous units

 Headquarters must try to persuade rather than command

changes, which can lead to costly struggle
 E.g. Johnson & Johnson companies Tylenol, which was
launched in US in 1960 was finally launched in Japan in 2000
Global companies
 These companies make and market a standardized product or
service for a specific market segment
 They create products for a world market, manufacturing them
on a global scale in a few efficient plants, and marketing them
through a few focused distribution channels
 These companies see the world as one market and assume
there are either no differences among countries with regard to
consumer tastes and preferences or, if there are, then
consumers will sacrifice them if given the opportunity to buy a
comparatively higher-quality product for a lower price
 They aim to become low-cost player in their industry
 R&D, production and marketing activities are concentrated in
the most favorable locations
 Decision making is fully centralized, with the managers
coordinating the activities which are globally dispersed
 There is very little scope for localization
Advantages
 These companies are best suited for industries that put strong
pressure on efficient operations and where there is little need
for localization
 E.g. Razors, technological products, credit cards

 They can explore world wide distribution option, standardized

financial controls and global advertisements

Disadvantages
 It is unsuitable for industries that need a lot of localization
such as consumer goods or health care
Transnational companies
 These companies differentiate capabilities and contributions
from country to country, finding ways to learn systematically
from its various environments, and then ultimately integrating
and diffusing this knowledge throughout its global operations
 These companies endorse an integrated framework of
technology, financial resources, creative ideas, and people
 It has characteristics of both multinational and global
organizations
 It is unique from other companies in terms of using the
valuable skills it learns in any part of the world to improve its
core competence and then diffusing these competencies
throughout its global operations
 It is suitable for companies that face high pressure for cost
reduction, high pressure for local responsiveness, and where
there are opportunities to leverage core competencies
extensively throughout the company's global network.
 E.g. BMW
Disadvantages
 It is difficult to build, poses serious challenges and is prone to
shortfalls
 Internalization stages and orientation
 There are four types of attitudes or orientations towards
internationalization that are associated with successive stages
in the evolution of international operations
 They are:

1. Ethnocentric Approach - (Home country Orientation)

2. Polycentric Approach - (Host country Orientation)

3. Regiocentric Approach - (Regional Orientation)

4. Geocentric Approach - (World Orientation)

 These stages reflect the goals and philosophies of the

company in so far as international operations are concerned
which leads to different management strategies and planning
procedures for their International operations
1. Ethnocentric Approach
 Ethnocentrism is predominantly a home country orientation

 In the ethnocentric approach, overseas operations are viewed

as secondary to domestic operations and primarily as a means
of disposing of ‘surplus’ domestic productions
 The top management views domestic techniques and
personnel as superior to foreign and also as the most effective
in overseas markets
 Plans for overseas markets are developed in the home office,
utilizing policies and procedures identical to those employed
in the domestic market
 Overseas marketing is most commonly administrated by an
export department or international division, and the
marketing personnel is composed primarily of home country
nationals
 Overseas operations are conducted from a home country
base, and there is likely to be a strong reliance on export
agents
 No international investment needed

 This approach entails a minimal risk and commitment to

overseas markets
2. Polycentric Approach
 As the company begins to recognize the importance of
inherent differences in overseas markets, a polycentric
attitude emerges
 The prevalent philosophy at this stage is that local personnel
and techniques are best suited to deal with local market
conditions
 Subsidiaries are established in overseas markets, and each
subsidiary operates independently of the others and
establishes its own marketing objectives and plans
 The environment of each market is considered while
formulating the marketing strategy
 The important merit of polycentrism is the adaption of the
business strategies to the local conditions
 Polycentrism is multi national orientation
 Marketing is normally characterized by the Adaptation Strategy
3. Regiocentric Approach
 A regiocentric company views different regions as different
markets
 A particular region with certain important common
marketing characteristics is regarded as a single market,
ignoring national boundaries
 Strategy integration, organizational approach and product
policy tend to be implemented at regional headquarters on
the one hand and between regional headquarters and
individual subsidiaries on the other
 More economical and manageable
 Provides improved coordination and control
4. Geocentric Approach
 A geocentric company views the entire world as a single
market and develops standardized marketing mix, projecting
a uniform image of the company and its products, for the
global market
 The business of the geocentric multinational is usually
characterized by sufficiently distinctive national markets that
the ethnocentric approach is unworkable and where the
importance of learning curve effects in marketing,
production technology and management makes the
polycentric philosophy substantially suboptimal
 Geocentrism is global orientation
International Business decisions
1. Define a business plan for accessing global markets
 An international business plan is important in order to define a
company's present status and internal goals and commitment
 It also helps to measure the results of the expansion plan

2. Determine how much the company can afford to invest in its

international expansion efforts
 Will it be based on a certain percent of the company's domestic
business profits or on a pay-as-you-can-afford process?

3. Conduct market research to identify the company's prime target

markets
 Company has to find out where in the world its product will be in
greatest demand
 Market research is a powerful tool for exploring and identifying the
fastest-growing, most penetrable market for the company's product
4. Prepare the product for export
 Company should expect to adapt its product to some degree for
sales outside its domestic markets
 Packaging also plays a vital role in enabling international
connections

5. Establish a direct or indirect method of export

 It all boils down to export strategy and how much control the
company wishes to exercise over its ventures
 It should also focus on the readiness to seize an opportunity

6. Prepare pricing and determine the landed costs

 The company must get ready to test its price on its customer
 It must be able to decide the right price for its products
7. Implement an effective after-sales service plan
 After-sales service is extremely important to build relationship
with customers
 It will lead to better branding for the product