International Business

- Nirav Parekh

International business

Activities that buys and sells goods and services across two or more national boundaries, even if the management is located in one country.

Importance of International Business

Reasons for increasing importance
Globalization Competition Exchange Rate Global Capital Flows Comparative cost advantage Industrial Development Economic Development Interdependence New Technology

Difference Between Domestic and International Trade

Higher Rate of Profits
Profits from exports is exempted from Tax whereas profits from domestic business is subject to tax.

Expansion of Production capacities

Domestic Companies expand their production capacities more than the demand ( economies of scale)

Competition

Cont.
Wide Market Political Stability Technology High Cost of Transportation Foreign Exchange

Difference between Domestic Business and International Business

Dimension 1. Environment Domestic Business Pest (known) IB PEST (not fully known). Certain factors could change at any time which could effect business

2) Plan and strategy

Can be worked out for short term and carried forward to long term Many domestic and some international players and one can understand their movement.

Only long term planning and strategy will work International competitive forces play a vital role and it is very difficult to understand the motive and movement

3) Competition

Difference between Domestic Business and International Business

4) Currency Local Different currencies. Fluctuations in currencies can cause problems.

5) Legal aspects

Only local regulations are fully applicable to conduct business

International regulations and host country regulations are applicable

Difference between Domestic Business and International Business

6) marketing mix Local in scope Have to adapt to host country requirements. E.G Certain countries have left hand driving and certain countries have right hand driving. Certain countries have banned advertisements for liquor and cigarettes. Certain countries the retail environment is different. The ads have to be changed to suit international tastes. Packaging also needs to be changed.

Difference between Domestic Business and International Business

7) culture and language Fully understood Takes a lot of time to understand and adapt to it. Also colours and Brand names have to be proper for the host country. Except exports every other kind of overseas operation calls for huge investments. Also special regulatory bodies are involved since foreign currency is involved. Difficult to predict.

8) Investment

One can start with minimum investment. Also regulatory bodies are less involved

9) Business risk

One can predict the risk

10) Research

Reasonable cost and easy to conduct research

Very expensive and difficult to conduct business research.

Global Business Environment

Several countries have increased the openness of their markets, through the
progressive lowering of barriers to trade and foreign investment, the liberalization of domestic financial markets and removal of restrictions on capital movements Implementation of privatization programme

Competition, rising cost in domestic markets, falling transport and communication cost have encouraged firms to look for opportunities abroad

Global Business Environment

Three aspects of the recent period of increased international capital mobility set it apart from pre-1914 period of free capital movement
The monetary and exchange rate regime The range of financial assets Role of institutional investors

As countries get richer, they enact tougher environmental and labour regulations Free trade enables developing countries to increase their economic growth and become richer The pollution levels are rising in the worlds poor countries, while they have been falling in developed countries. Eg:- the US manufacturing firms have been moving to Mexico.

Factors affecting International Business

Social and Cultural Environment
Social environment consists of religious aspects, language, customs, traditions, beliefs, tastes and preferences etc Study helps in deciding on the type of product Culture is thought and behavior patterns Culture change quickly picking up new ideas and dropping old ones Irrespective of caste and religion, we have more or less the same needs known as cultural universal The cultural universals enables a businessman to market the products internationally.

Social Environment:
1) national taste:
In Thailand , people prefer black shampoo.

Nestle brews different varieties of instant coffee as people in different countries have different taste. Green is a favourite colour in Middle east countries. 2) Language 3) demographic profile:
A number of demographic factors such as age, sex ratio, family size and occupation influence the business of many companies. Different companies concentrate on different segments. e.g Barbie generates huge revenues through the childrens segment of affluent countries. Also brands like Osh Kosh BGosh and Jini and Joni can do well in India considering the huge children population.

Social Environment:
4) Literacy rate: Countries with a high literacy rate experience a better standard of living . Here the need is for standardised goods, supported by technical services. For a country with an educated population , the amount of training required for the staff will be far less than in the case of a country which has a low literacy rate. This is an important parameter as it influences the costs incurred.

Social Environment:
5) Female workforce:
With economic independency in countries like China, India , women no longer depend on men to make decisions about what to buy.

As they have the required purchasing ability, they make decisions on their own. In India , china , Thailand and Russia, there is a huge demand for categories like Jewellery, Cosmetics, vehicles, ready to eat foods, primarily because of the working women.
6) Double Income families (from to nuclear families): As the household income increase the demand for the number of products, increases proportionately.

 Technological Environment

Cont.

International Business has gained significance due to advancement in technology It flows from the advance countries to developing countries through multinationals, JV, technological alliances, licensing and franchising. It influences the way we live, cook, communicate or sell. Advanced countries spend considerable amount on research and development Developing countries like India allow MNCs entry into their country to develop domestic markets. Hence technology and global business are interdependent. MNCs have to understand and analyze more of economic environment of the foreign countries for strategy formulation.

 Economic Environment

Cont.

IB is directly influenced by the Economic environment of various countries. Business helps for identification of needs of the people, their wants, demand, supply etc. Developing countries concentrate on allocation of scarce resources, increasing production and productivity, to meet the growing need of the people. IB houses streamlines the distribution of goods from the manufacturing centers to customers.

Economic environment :
Before entering any country, the economic study is of vital importance

A) Size of the market : most companies are looking at India because of the huge potential. A case in point is HP which is now focusing on India to sell their range of laptops and printers in India. Indias middle class and upper class population is more then the population of Europe.
B) Gross Domestic Product (GDP) : If a constant good rate is maintained , MNCs would definitely look at such countries. India is maintaining around 7-8% growth rate. In the 1990s it was Malaysia and Indonesia.

Economic environment :
C) Purchasing Power: Higher PP leads to a highly potential market. D) Banking : is the only channel through which remittances take place and hence is a major infrastructure for IB. Europe and American and the Far east economies have a highly effective banking system. On the other hand, Africa and CIS are not able to provide good banking services to the International business community.

Economic environment :
E) Foreign exchange : countries with sufficient foreign exchange reserves, a liberal policy on repatriation and which have demand for the products and services are an ideal destination for any company to do IB

Economic environment :
F) Income levels: Economies are classified into low and high income economies. Industrialised nations are high income economies and enjoy a high per capita income. Companies marketing premium quality or high technology products have an easy entry into such advanced economies with the proper strategy e.g IPOD and Playstations. Similarly developing countries which are low income economies are price sensitive. Accordingly foreign companies will think of cheaper or middle level products for these economies.

 Political Environment
Countries with stable government and political system enjoy successful business operations. Includes Policies and characteristics of political party, the nature of constitution and government system. Eg. USA is the best example of better Political environment Political friendship results in growth of bilateral or multilateral trade. International business face political risk as and when there are changes in government policies and political power.

Political Environment :
Host country political environment : The political parities in each country have different ideologies. It is imperative to know these ideologies before entering any country. Both Coke and IBM had to leave India , when in 1977 , Janata party came to power in India. Global Political environment : formation of strategic alliances like EU helps companies in that region to enter any country in that alliance as it benefits them more than companies form non EU.

GNP (Gross National Product)

The GNP per capita of a country shows the average value of goods and services produced by each person each year. This is then divided by the total population to get an average earnings per person.
http://www.studentsoftheworld.info/infopays/rank/PNBH2.html

Countries are divided into 4 categories depending on the GNP

Low Income Countries Lower-middle Income countries Upper Middle Income countries High Income Countries

Cont.
Low Income Countries - Countries having less than US $ 400 per capita. Also called as Third countries. Characteristics are high birth rate, limited industrialization, low literacy rate, etc Lower-middle Income countries Countries having GNP per capital of US $ between 400 and 2000. Called as LDCs. Characteristics are early stage of industrialization, availability of cheap labour, dependency on agriculture

etc.
Upper Middle income countries GNP per capita of US $ ranging from 2000 to 12000. Also known as industrializing countries. Characteristics are increase in literacy, low wage costs, high exports, and rapid economic developments. High Income countries Countries with more than GNP of US $ 12000. Characteristics are high income, industrialization, development of

technology etc