2014

APPROACHES TO INTERNATIONAL
BUSINESS
INTERNATIONAL BUSINESS MANAGEMENT

MADHURJYA JYOTI GOGOI

HADOTSULA NARZIARY
4/28/2014

TABLE OF CONTENTS
Content

Page No.

Disclaimer

Acknowledgement.

Chapters
Abstract

Introduction

Brief introduction of the research project

Objects of research
Research Methodology
Approach to international business

Importing & Exporting

Tourism in Transportation

Mergers & Acquisition

Franchising

Licensing

Joint Venture

Management Contract

Opinion & Conclusion

24

Bibliography

25

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DISCLAIMER

This project report is co-authored by students of 3rd year under the five year BBA.LL.B (H) Program in
MATS Law School, Raipur. The report is purely academic in nature and shall not be treated as a legal or
business advice. The views expressed in this report are personal to the student and do not reflect the view
of law school or any of its staff or personnel. All the copyrights relating to this work are vested in the
authors; the same shall not be exploited without their express permission.

1) Madhurjya Jyoti Gogoi

2) Hadotsula Narziary

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ACKNOWLEDGEMENT

Firstly, we are extremely grateful to Asst. Prof. Vinisha Verma, for granting us the opportunity to make
the project report under the topic of International Business Management.
We feel highly elated to work on this dynamic, highly important project report on that is APPROACHES

TO INTERNATIONAL BUSINESS under which the subject of international business Management in our
five year BBA.LL.B course. So, this topic instantly drew our attention and attracted us to research on it.
So, we hope we have tried our level best to bring in new ideas and thoughts regarding the important
international business relating topic. Not to forget the deep sense of regard and gratitude to our faculty
adviser, Asst. prof. Vinisha Verma who played the role of a protagonist. Last but not the least; I thank all
the members of the MATS Law School and all others who have helped us in making this project a success.

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ABSTRACT
The objective of this project report is analyzed about the international business which is
the main part of international business management. This report deals with the
approach to the international business. International business comprises all commercial
transactions that take place between two or more regions, countries and nations beyond
their political boundaries. So there have been more approaches which are effects on the
international business as import & export, transportation in tourism, mergers &
acquisition, franchising, licensing, joint venture, foreign direct investment.

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INTRODUCTION
International

business

comprises

all

commercial

transactions

(private

and

governmental, sales, investments, logistics, and transportation) that take place between
two or more regions, countries and nations beyond their political boundaries. Usually,
private companies undertake such transactions for profit; governments undertake them
for profit and for political reasons.1 It refers to all those business activities which involve
cross border transactions of goods, services, resources between two or more nations.
Transaction of economic resources include capital, skills, people etc. for international
production of physical goods and services such as finance, banking, insurance,
construction etc.2
A multinational enterprise (MNE) is a company that has a worldwide approach to
markets and production or one with operations in more than a country. An MNE is often
called multinational corporation (MNC) or transnational company (TNC). Well known
MNCs include fast food companies such as McDonald's and Yum Brands, vehicle
manufacturers such as General Motors, Ford Motor Company and Toyota, consumer
electronics companies like Samsung, LG and Sony, and energy companies such as
ExxonMobil, Shell and BP. Most of the largest corporations operate in multiple national
markets.
Objectives of research:
The objectives of research are

To understand the concept of International business

To study about growth in globalization of international business

Approaches to international business

Daniels, J., Radebaugh, L., Sullivan, D. (2007). International Business: environment and operations, 11th edition.
Prentice Hall. ISBN 0-13-186942-6
2
Joshi, Rakesh Mohan, (2009) International Business, Oxford University Press, ISBN 0-19-568909-7
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RESEARCH METHODOLOGY
I have adopted the mode of doctrinal research where I have refereed to various books
and internet sources to take information about this project report. So I have taken
materials, references and guides from source from various sites like Google, Wikipedia,
Yahoo and the various books which is relating to the International Business
Management.

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FACTORS THAT INFLUENCED THE GROWTH IN GLOBALIZATION OF INTERNATIONAL BUSINESS

There has been growth in globalization in recent decades due to (at least) the following
eight factors:

o Technology is expanding, especially in transportation and communications.

o Governments are removing international business restrictions.
o Institutions provide services to ease the conduct of international business.
o Consumers want to know about foreign goods and services.
o Competition has become more global.
o Political relationships have improved among some major economic powers.
o Countries cooperate more on transnational issues.
o Cross-national cooperation and agreements.

T HE INTERNATIONAL BUSINESS STANDARDS FOCUSES ON THE FOLLOWING:

o Raising awareness of the interrelatedness of one country's political policies and
economic practices on another;
o Learning to improve international business relations through appropriate
communication strategies;
o Understanding the global business environmentthat is, the interconnected-ness
of cultural, political, legal, economic, and ethical systems;
o Exploring basic concepts underlying international finance, management,
marketing , and trade relations; and
o Identifying forms of business ownership and international business opportunities.

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APPROACH TO INTERNATIONAL BUSINESS

In truth, we have become part of a global village and have a global economy where no
organization is insulted from the effects foreign markets and competition. Indeed, more
and more firm are reshaping themselves for international competition and discovering
new ways to exploit markets in every corner of the world. Failure to take a global
perspective in one of the biggest mistakes managers can make. Thus we start laying the
foundation for our discussion by introducing and describing the basic of international
business.

An international business is one that is based primarily in a single country but acquires
some meaningful share of its resources or revenues (or both) from other countries. Sears
fits this description. Most of its stores are in the United States. For example, and the
retailer earns around 90 percent of its revenues from its U. S. operation with the
remaining 10 percent coming sears stores in Canada. At the same time however, many
of the products it sells, such as tools and clothing are made abroad from any perspective.
Then it is clear that we live in a truly global economy. Virtually all business today must
be concerned with the competitive situations they face in lands for from home and with
how companies from distant lands are competing in their homelands.
APPROACHES TO INTERNATIONAL B USINESS ARE DISCUSSED BELOW :
1. Import & Export
2. Transportation in Tourism
3. Mergers & Acquisition
4. Franchising
5. Licensing
6. Joint Venture
7. Foreign Direct Investment

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IMPORTING & EXPORTING:

Import: An import is a good brought into a jurisdiction, especially across a national
border, from an external source. The party bringing in the good is called an
importer.34An import in the receiving country is an export from the sending country.
Importation and exportation are the defining financial transactions of international
trade.

In international trade, the importation and exportation of goods are limited by import
quotas and mandates from the customs authority. The importing and exporting
jurisdictions may impose a tariff (tax) on the goods. In addition, the importation and
exportation of goods are subject to trade agreements between the importing and
exporting jurisdictions.
"Imports" consist of transactions in goods and services (sales, barter, gifts or grants) from
non-residents to residents.5 The exact definition of imports in national accounts includes
and excludes specific "borderline" cases.6 A general delimitation of imports in national
accounts is given below:

An import of a good occurs when there is a change of ownership from a non-resident

to a resident; this does not necessarily imply that the good in question physically
crosses the frontier. However, in specific cases national accounts impute changes of
ownership even though in legal terms no change of ownership takes place (e.g. cross

border financial leasing, cross border deliveries between affiliates of the same
enterprise, goods crossing the border for significant processing to order or repair).
Also smuggled goods must be included in the import measurement.

Imports of services consist of all services rendered by non-residents to residents. In

national accounts any direct purchases by residents outside the economic territory of
a country are recorded as imports of services; therefore all expenditure by tourists in

Joshi, Rakesh Mohan, (2009) International Business, Oxford University Press, New Delhi and New York ISBN 0-19568909-7
4
Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle River: Pearson Prentice
Hall. p. 552. ISBN 0-13-063085-3.
5
Lequiller, F; Blades, D.: Understanding National Accounts, Paris: OECD 2006, pp. 139-143
6
for example, see Eurostat: European System of Accounts - ESA 1995, 3.128-3.146, Office for Official
Publications of the European Communities, Luxembourg, 1996
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the economic territory of another country are considered as part of the imports of
services. Also international flows of illegal services must be included.
Basic trade statistics often differ in terms of definition and coverage from the
requirements in the national accounts:

Data on international trade in goods are mostly obtained through declarations to

custom services. If a country applies the general trade system, all goods entering the
country are recorded as imports. If the special trade system (e.g. extra-EU trade
statistics) is applied goods which are received into customs warehouses are not
recorded in external trade statistics unless they subsequently go into free circulation
of the importing country.

A special case is the intra-EU trade statistics. Since goods move freely between the
member states of the EU without customs controls, statistics on trade in goods
between the member states must be obtained through surveys. To reduce the
statistical burden on the respondents small scale traders are excluded from the
reporting obligation.

Statistical recording of trade in services is based on declarations by banks to their

central banks or by surveys of the main operators. In a globalized economy where
services can be rendered via electronic means (e.g. internet) the related international
flows of services are difficult to identify.

Basic statistics on international trade normally do not record smuggled goods or

international flows of illegal services. A small fraction of the smuggled goods and
illegal services may nevertheless be included in official trade statistics through
dummy shipments or dummy declarations that serve to conceal the illegal nature of
the activities.

There are two basic types of import:

1. Industrial and consumer goods
2. Intermediate goods and services
Companies import goods and services to supply to the domestic market at a cheaper
price and better quality than competing goods manufactured in the domestic market.
Companies import products that are not available in the local market.
There are three broad types of importers:
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1. Looking for any product around the world to import and sell.
2. Looking for foreign sourcing to get their products at the cheapest price.
3. Using foreign sourcing as part of their global supply chain.

Export: The term export means shipping the goods and services out of the port of a
country. The seller of such goods and services is referred to as an "exporter" who is based
in the country of export whereas the overseas based buyer is referred to as an "importer".
In International Trade, "exports" refers to selling goods and services produced in the
home country to other markets.7

Export of commercial quantities of goods normally requires involvement of the customs

authorities in both the country of export and the country of import. The advent of small
trades over the internet such as through Amazon and eBay have largely bypassed the
involvement of Customs in many countries because of the low individual values of these
trades. Nonetheless, these small exports are still subject to legal restrictions applied by
the country of export. An export's counterpart is an import.
"Foreign demand for goods produced by home country" In national accounts "exports"
consist of transactions in goods and services (sales, barter, gifts or grants) from residents
to non-residents. 8 The exact definition of exports includes and excludes specific
"borderline" cases.9A general delimitation of exports in national accounts is given below:

o An export of a good occurs when there is a change of ownership from a resident

to a non-resident; this does not necessarily imply that the good in question
physically crosses the frontier. However, in specific cases national accounts
impute changes of ownership even though in legal terms no change of ownership
takes place (e.g. cross border financial leasing, cross border deliveries between
affiliates of the same enterprise, goods crossing the border for significant

Joshi, Rakesh Mohan, (2005) International Marketing, Oxford University Press, New Delhi and New York ISBN 019-567123-6
8
Lequiller, F; Blades, D.: Understanding National Accounts, Paris: OECD 2006, pp. 139-143
9
for example, see Eurostat: European System of Accounts - ESA 1995, 3.128-3.146, Office for Official
Publications of the European Communities, Luxembourg, 1996
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processing to order or repair). Also smuggled goods must be included in the

export measurement.
o Export of services consists of all services rendered by residents to non-residents.
In national accounts any direct purchases by non-residents in the economic
territory of a country are recorded as exports of services; therefore all
expenditure by foreign tourists in the economic territory of a country is
considered as part of the exports of services of that country. Also international
flows of illegal services must be included.
National accountants often need to make adjustments to the basic trade data in order to
comply with national accounts concepts; the concepts for basic trade statistics often
differ in terms of definition and coverage from the requirements in the national
accounts:

o Data on international trade in goods are mostly obtained through declarations to

custom services. If a country applies the general trade system, all goods entering
or leaving the country are recorded. If the special trade system (e.g. extra-EU
trade statistics) is applied goods which are received into customs warehouses are
not recorded in external trade statistics unless they subsequently go into free
circulation in the country of receipt.
o A special case is the intra-EU trade statistics. Since goods move freely between the
member states of the EU without customs controls, statistics on trade in goods
between the member states must be obtained through surveys. To reduce the
statistical burden on the respondents small scale traders are excluded from the
reporting obligation.
o Statistical recording of trade in services is based on declarations by banks to their
central banks or by surveys of the main operators. In a globalized economy where
services can be rendered via electronic means (e.g. internet) the related
international flows of services are difficult to identify.
o Basic statistics on international trade normally do not record smuggled goods or
international flows of illegal services. A small fraction of the smuggled goods
and illegal services may nevertheless be included in official trade statistics
through dummy shipments or dummy declarations that serve to conceal the
illegal nature of the activities.

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TOURISM IN TRANSPORTATION:
Tourism sector is one of the main important sectors of the economy. Many countries
take advantage of covering the budget deficit with the help of profits coming from
tourism. That is why tourism sometimes is called a factory without chimney. But
tourism has its own unique features that differentiate this sector from the others. Like in
the other service industries, in tourism the customers, that is, the tourists come to the
destination where the tourism services are provided.
As the matter of fact it is difficult to think of tourism sector without transportation.
Transportation is the main mean to carry passengers, that is, the tourists to the actual
site where tourism services are performed.
Air Transportation
One of the most important transportation modes in tourism is air travel. Air travel has
made significant changes in peoples minds concerning time and distance. In order to
meet the demand which increases every day, the airline companies spend billions of
dollars and apply new technological innovations. Having matchless role in long
distances the air travel industry develops very rapidly.
Automobile Transportation
In short distances automobile transportation comes forward in regard to other modes of
transportation. The automobile transportation makes it easy to see local culture and
nations. It presents great flexibility in contrast to other modes of transportation. The
importance of this mode in tourism is also very important. When compared with the
prices in air transportation, this mode of transportation is frequently used by tourists
because of low prices. But the main factor affecting this choice is time and distance
Railway Transportation
The other mode that affects tourism is railway transportation. This type of
transportation is considered the oldest one. In 19th century the railways were frequently
used. Currently in many countries the railways are used for transportation of loads. The
reason for this is tourist choice of air or automobile transportation. But there exists such
railroads that have been included to touristic packages. For the example, we can give
Orient Express railways. But nowadays application of technology and technological
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innovation gave birth to fast trains which compete with air and automobile
transportation modes. In order to take advantage of fast trains many countries rebuild
their existing railroad systems completely. In Azerbaijan new railway is being built
which will take passengers from Baku and to Kars passing through Tbilisi. This will play
an important role in development of tourism in future. Currently, France, China, Japan,
Singapore, Turkye are using fast trains.
Like in bus companies, in railway transportation the tickets are also sold online which
make it easy for passengers not leaving their home, buy tickets and book places in train
beforehand. This makes the railways work 24 hours in a day.

MERGERS & ACQUISITION:

Mergers and acquisitions are both aspects of corporate strategy, corporate finance and
management dealing with the buying, selling, dividing and combining of different
companies and similar entities that can help an enterprise grow rapidly in its sector or
location of origin, or a new field or new location, without creating a subsidiary, other
child entity or using a joint venture. Mergers and acquisitions activity can be defined as
a type of restructuring in that they result in some entity reorganization with the aim to
provide growth or positive value. Consolidation of an industry or sector occurs when
widespread M&A activity concentrates the resources of many small companies into a
few larger ones, such as occurred with the automotive industry between 1910 and 1940.

The distinction between a "merger" and an "acquisition" has become increasingly blurred
in various respects (particularly in terms of the ultimate economic outcome), although it
has not completely disappeared in all situations. From a legal point of view, a merger is
a legal consolidation of two companies into one entity, whereas an acquisition occurs
when one company takes over another and completely establishes itself as the new
owner (in which case the target company still exists as an independent legal entity
controlled by the acquirer). Either structure can result in the economic and financial
consolidation of the two entities. In practice, a deal that is an acquisition for legal
purposes may be euphemistically called a "merger of equals" if both CEOs agree that
joining together is in the best interest of both of their companies, while when the deal is
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unfriendly (that is, when the target company does not want to be purchased) it is almost
always regarded as an "acquisition".
An acquisition or takeover is the purchase of one business or company by another
company or other business entity. Such purchase may be of 100%, or nearly 100%, of the
assets or ownership equity of the acquired entity. Consolidation occurs when two
companies combine together to form a new enterprise altogether, and neither of the
previous companies remains independently. Acquisitions are divided into "private" and
"public" acquisitions, depending on whether the acquiree or merging company (also
termed a target) is or is not listed on a public stock market. An additional dimension or
categorization consists of whether an acquisition is friendly or hostile.

Achieving acquisition success has proven to be very difficult, while various studies have
shown that 50% of acquisitions were unsuccessful. 10 The acquisition process is very
complex, with many dimensions influencing its outcome.11 "Serial acquirers" appear to
be more successful with M&A than companies who only make an acquisition
occasionally (see Douma & Schreuder, 2013, chapter 13). The new forms of buy out
created since the crisis are based on serial type acquisitions known as an ECO Buyout
which is a co-community ownership buy out and the new generation buy outs of the
MIBO (Management Involved or Management & Institution Buy Out) and MEIBO
(Management & Employee Involved Buy Out).
Whether a purchase is perceived as being a "friendly" one or a "hostile" depends
significantly on how the proposed acquisition is communicated to and perceived by the
target company's board of directors, employees and shareholders. It is normal for M&A
deal communications to take place in a so-called "confidentiality bubble" wherein the
flow of information is restricted pursuant to confidentiality agreements.12In the case of a
friendly transaction, the companies cooperate in negotiations; in the case of a hostile
deal, the board and/or management of the target is unwilling to be bought or the
target's board has no prior knowledge of the offer. Hostile acquisitions can, and often do,
ultimately become "friendly", as the acquiror secures endorsement of the transaction

10

Investment banking explained pp. 223-224

Mergers and acquisitions explained". Retrieved 2009-06-30.
12
Harwood, 2005
11

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from the board of the acquiree company. This usually requires an improvement in the
terms of the offer and/or through negotiation.

"Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes,

however, a smaller firm will acquire management control of a larger and/or longerestablished company and retain the name of the latter for the post-acquisition combined
entity. This is known as a reverse takeover. Another type of acquisition is the reverse
merger, a form of transaction that enables a private company to be publicly listed in a
relatively short time frame. A reverse merger occurs when a privately held company
(often one that has strong prospects and is eager to raise financing) buys a publicly
listed shell company, usually one with no business and limited assets.13

FRANCHISING
Franchising is the practice of selling the right to use a firm's successful business model.
The word "franchise" is of Anglo-French derivationfrom franc, meaning freeand is
used both as a noun and as a (transitive) verb.[1] For the franchisor, the franchise is an
alternative to building "chain stores" to distribute goods that avoids the investments and
liability of a chain. The franchisor's success depends on the success of the franchisees.
The franchisee is said to have a greater incentive than a direct employee because he or
she has a direct stake in the business.

Essentially, and in terms of distribution, the franchisor is a supplier who allows an

operator, or a franchisee, to use the supplier's trademark and distribute the supplier's
goods. In return, the operator pays the supplier a fee.14

13
14

Reverse Merger in the glossary of mergers-acquisitions.org

Gurnick, David (2011). Distribution Law of the United States. U.S.: Juris Publishing. p. 35. ISBN 978-1-57823-277-

2.
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Thirty three countriesincluding the United States and Australiahave laws that
explicitly regulate franchising, with the majority of all other countries having laws
which have a direct or indirect impact on franchising.15
Mid-sized franchises like restaurants, gasoline stations and trucking stations involve
substantial investment and require all the attention of a businessperson. There are also
large franchises like hotels, spas and hospitals, which are discussed further under
technological alliances.

Three important payments are made to a franchisor:

(a) A royalty for the trademark,
(b) Reimbursement for the training and advisory services given to the franchisee, and
(c) A percentage of the individual business unit's sales.
These three fees may be combined in a single 'management' fee. A fee for "disclosure" is
separate and is always a "front-end fee".

A franchise usually lasts for a fixed time period (broken down into shorter periods,
which each require renewal), and serves a specific territory or geographical area
surrounding its location. One franchisee may manage several such locations.
Agreements typically last from five to thirty years, with premature cancellations or
terminations of most contracts bearing serious consequences for franchisees. A franchise
is merely a temporary business investment involving renting or leasing an opportunity,
not the purchase of a business for the purpose of ownership. It is classified as a wasting
asset due to the finite term of the license. Franchise fees are on average 6.7% with an
additional average marketing fee of 2% 16

A franchise can be exclusive, non-exclusive or 'sole and exclusive'. Although franchisor

revenues and profit may be listed in a franchise disclosure document (FDD), no laws
15

"International Franchise and Distribution". DLA Piper. 2012. Retrieved 2012-02-02.

The Profile of Franchising Report Series III - Royalty and Advertising Fees". International Franchise Association.
2006.
16

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require an estimate of franchisee profitability, which depends on how intensively the

franchisee 'works' the franchise. Therefore, franchisor fees are typically based on 'gross
revenue from sales' and not on profits realized. See remuneration.

Various tangibles and intangibles such as national or international advertising, training

and other support services are commonly made available by the franchisor. Franchise
brokers help franchisors find appropriate franchisees. 17 There are also main 'master
franchisors' who obtain the rights to sub-franchise in a territory. According to the
International Franchise Association approximately 4% of all businesses in the United
States are franchisee-worked.

It should be recognized[citation needed] that franchising is one of the only means

available to access venture investment capital without the need to give up control of the
operation of the chain and build a distribution system for servicing it. After the brand
and formula are carefully designed and properly executed, franchisors are able to sell
franchises and expand rapidly across countries and continents using the capital and
resources of their franchisees while reducing their own risk.

It's important to know that there is risk for the people that are buying the franchises, too.
There are a lot of myths surrounding the success and failure rates of franchise
businesses. One of the more popular myths states that franchise businesses have lower
risk than independent business startups. 18 Another one suggests that it's almost
impossible to fail. Both are untrue,19 and it's important for today's franchise-seekers to be
aware of that fact.

17

"The Economic Impact of Franchised Businesses In the United States". Price Waterhouse Coopers. 2012.
Retrieved 2012-02-02.
18
Patterns of Internationalization for Developing Country Enterprises (Alliances and Joint Ventures) United
Nations Industrial Development Organization, Vienna, 2008, ISBN 978-92-1-106443-8, pp 65
19
"The Profile of Franchising Report Series III - Royalty and Advertising Fees". International Franchise Association.
2006.
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Franchisor rules imposed by the franchising authority are usually very strict in the US
and most other countries need to study them carefully to protect small or start-up
franchisee in their own countries. Besides the trademark, there are proprietary service
marks which may be copyrighted and corresponding regulations.

LICENSING
Licensing is the process of leasing a legally protected (that is, trademarked or
copyrighted) entity a name, likeness, logo, trademark, graphic design, slogan,
signature, character, or a combination of several of these elements. The entity, known as
the property or intellectual property, is then used in conjunction with a product. Many
major companies and the media consider licensing a significant marketing tool.

Licensing is a marketing and brand extension tool that is widely used by everyone from
major corporations to the smallest of small business. Entertainment, sports and fashion
are the areas of licensing that are most readily apparent to consumers, but the business
reaches into the worlds of corporate brands, art, publishing, colleges and universities
and non-profit groups, to name a few.

Licensing can extend a corporate brand into new categories, areas of a store, or into new
stores overall. Licensing is a way to move a brand into new businesses without making a
major investment in new manufacturing processes, machinery or facilities. In a well-run
licensing program, the property owner maintains control over the brand image and how
it's portrayed (via the approvals process and other contractual strictures), but eventually
reaps the benefit in additional revenue (royalties), but also in exposure in new channels
or store aisles.

Licensing gives a licensee certain rights or resources to manufacture and/or market a

certain product in a host country.

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KEY POINTS
o Licensing is a business agreement involving two companies: one gives the other
special permissions, such as using patents or copyrights, in exchange for
payment.
o An international business licensing agreement involves two firms from different
countries, with the licensee receiving the rights or resources to manufacture in
the foreign country.
o Rights or resources may include patents, copyrights, technology, managerial
skills, or other factors necessary to manufacture the good.
o Advantages of expanding internationally using international licensing include:
the ability to reach new markets that may be closed by trade restrictions and the
ability to expand without too much risk or capital investment.
o Disadvantages include the risk of an incompetent foreign partner firm and lower
income compared to other modes of international expansion.

EXAMPLES
Suppose Company A, a manufacturer and seller of Baubles, was based in the US and
wanted to expand to the Chinese market with an international business license. They can
enter the agreement with a Chinese firm, allowing them to use their product patent and
giving other resources, in return for a payment. The Chinese firm can then manufacture
and sell Baubles in China.

JOINT VENTURE
A joint venture (JV) is a business agreement in which the parties agree to develop, for a
finite time, a new entity and new assets by contributing equity. They exercise control
over the enterprise and consequently share revenues, expenses and assets. There are
other types of companies such as JV limited by guarantee, joint ventures limited by
guarantee with partners holding shares.

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A joint venture takes place when two parties come together to take on one project. In a
joint venture, both parties are equally invested in the project in terms of money, time,
and effort to build on the original concept. While joint ventures are generally small
projects, major corporations also use this method in order to diversify. A joint venture
can ensure the success of smaller projects for those that are just starting in the business
world or for established corporations. Since the cost of starting new projects is generally
high, a joint venture allows both parties to share the burden of the project, as well as the
resulting profits.

Since money is involved in a joint venture, it is necessary to have a strategic plan in

place. In short, both parties must be committed to focusing on the future of the
partnership, rather than just the immediate returns. Ultimately, short term and long
term successes are both important. In order to achieve this success, honesty, integrity,
and communication within the joint venture are necessary.
Company incorporation
A JV can be brought about in the following major ways:
o Foreign investor buying an interest in a local company
o Local firm acquiring an interest in an existing foreign firm
o Both the foreign and local entrepreneurs jointly forming a new enterprise
o Together with public capital and/or bank debt
Some of the issues in a shareholders' agreement are:

o Valuation of intellectual rights, say, the valuations of the IPR of one partner
and,say, the real estate of the other
o the control of the Company either by the number of Directors or its "funding"
o The number of directors and the rights of the founders to their appoint Directors
which shows as to whether a shareholder dominates or shares equality.
o management decisions - whether the board manages or a founder
o transferability of shares - assignment rights of the founders to other members of
the company
o dividend policy - percentage of profits to be declared when there is profit
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o winding up - the conditions, notice to members

o confidentiality of know-how and founders' agreement and penalties for disclosure
o first right of refusal - purchase rights and counter-bid by a founder.
F OREIGN DIRECT INVESTMENT:
Foreign direct investment (FDI) is a direct investment into production or business in a
country by an individual or company of another country, either by buying a company in
the target country or by expanding operations of an existing business in that country.
Foreign direct investment is in contrast to portfolio investment which is a passive
investment in the securities of another country such as stocks and bonds.
Broadly, foreign direct investment includes "mergers and acquisitions, building new
facilities, reinvesting profits earned from overseas operations and intra company
loans".20In a narrow sense, foreign direct investment refers just to building new facilities.
The numerical FDI figures based on varied definitions are not easily comparable.

FDI is defined as the net inflows of investment (inflow minus outflow) to acquire a
lasting management interest (10 percent or more of voting stock) in an enterprise
operating in an economy other than that of the investor. 21 FDI is the sum of equity
capital, other long-term capital, and short-term capital as shown the balance of
payments. FDI usually involves participation in management, joint-venture, transfer of
technology and expertise. There are two types of FDI: inward and outward, resulting in a
net FDI inflow (positive or negative) and "stock of foreign direct investment", which is
the cumulative number for a given period. Direct investment excludes investment
through purchase of shares.22FDI is one example of international factor movements.
Types:
1. Horizontal FDI arises when a firm duplicates its home country-based activities at
the same value chain stage in a host country through FDI.23

20

"China Edges Out U.S. as Top Foreign-Investment Draw Amid World Decline". Wall Street Journal. 2012-10-23.
"Foreign direct investment, net inflows (BoP, current US$) | Data | Table". Data.worldbank.org. Retrieved 201211-17.
22
"CIA - The World Factbook". Cia.gov. Retrieved 2012-11-17.
23
"What is Foreign Direct Investment, Horizontal and Vertical Knowledge Base". Guidewhois.com. Retrieved
2012-11-17.
21

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2. Platform FDI Foreign direct investment from a source country into a destination
country for the purpose of exporting to a third country.
3. Vertical FDI takes place when a firm through FDI moves upstream or
downstream in different value chains i.e., when firms perform value-adding
activities stage by stage in a vertical fashion in a host country.24
METHODS
The foreign direct investor may acquire voting power of an enterprise in an economy
through any of the following methods:

1. by incorporating a wholly owned subsidiary or company anywhere

2. by acquiring shares in an associated enterprise
3. through a merger or an acquisition of an unrelated enterprise
4. participating in an equity joint venture with another investor or enterprise25

MANAGEMENT CONTRACT
A management contract is an arrangement under which operational control of an
enterprise is vested by contract in a separate enterprise which performs the necessary
managerial functions in return for a fee. Management contracts involve not just selling
a method of doing things (as with franchising or licensing) but involve actually doing
them. A management contract can involve a wide range of functions, such as technical
operation of a production facility, management of personnel, accounting, marketing
services and training.

In Asia, many hotels operate under management contract arrangements, as they can
more easily obtain economies of scale, a global reservation systems, brand recognition
etc. It is not unusual for contracts to be signed for 25 years, and having a fee as high as
24
25

Slaughter and May (2012). "Legal regimes governing Foreign Direct Investment (FDI) in host countries".
Healthmetrics.
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3.5% of total revenues and 6-10% of gross operating profit. The Marriott International
Corporation operates solely on management contracts.

Management contracts have been used to a wide extent in the airline industry, and when
foreign government action restricts other entry methods. Management contracts are
often formed where there is a lack of local skills to run a project. It is an alternative to
foreign direct investment as it does not involve as high risk and can yield higher returns
for the company. The first recorded management contract was initiated by Qantas and
Duncan Upton in 1978.26

OPINION & CONCLUSION

APPROACHES TO INTERNATIONAL BUSINESS ARE NECESSARY BECAUSE
o Most companies are either international or compete with international
companies.
o Modes of operation may differ from those used domestically.
o The best way of conducting business may differ by country.
o An understanding helps us make better career decisions.
o An understanding helps us decide what governmental policies to support.

26

http://www.iaccm.com
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BIBLIOGRAPHY
WEBSITES REFFERRED
a.
b.
c.
d.
e.

www.scribd.com
http://www.docstoc.com
http://www.gbv.de/dms/zbw/55573465X.pdf
http://www.thebhc.org/publications/BEHprint/v022n1/p0042-p0053.pdf
http://www.hks.harvard.edu/m-rcbg/CSRI/publications/report_5_edelman_survey.pdf

BOOKS REFFERRED
a.

Twelfth Edition, INTERNATIONAL BUSINESS, Environments and Operations, Authors John D.

Daniels, University of Miami, Lee H. Radebaugh, Brigham Young University, Daniel P. Sullivan,
University of Delaware

b.

Global Business Management, A cross cultural perspective, Abel Adekola and Bruno S. Sergi

c.

International Business Strategy, Management, and the New Realities, Authors S. Tamer Cavusgil,
Michigan State University, Gary Knight, Florida State University, John R. Riesenberger, Executive
in Residence, CIBER Michigan State University

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