Republic of the Philippines

RIZAL TECHNOLOGICAL UNIVERSITY

Cities of Mandaluyong and Pasig
COLLEGE OF BUSINESS AND ENTREPRENEURAL
TECHNOLOGY

MODULES IN

INTERNATIONAL BUSINESS AND TRADE

BA-MGT 104

BY

DR. NENITA D. TANDINGAN

Professor
 MODULE 1
Background for International Business
The definition international business
The rise of globalization
The U.S. position in international trade

Objectives: At the end of the period, the students must be able to:
1. Deliberate on the background for international business;
2. Discuss the rise of globalization; and
3. Elucidate the US position in international trade.

 
Background to International Business
The first step in the internationalization of business after the war was simply a
very rapid growth in fairly traditional terms, in the sense that more and more companies
in one developed country set up their own, or bought over existing, manufacturing
facilities in other countries. In the last decade or so, however, there has been a rather
subtle change in the nature and methods of international business. Although the
proportion of the new activities, in comparison with the more orthodox multinational
manufacturing or exporting, is still small, the future, arguably, lies with the new methods
rather than with the older methods.

Introduction to International Business

Business activities done across national borders is International Business.
The International business is the purchasing and selling of the goods, commodities
and services outside its national borders. Such trade modes might be owned by the
state or privately-owned organization. In which, the organization explores trade
opportunities outside its domestic national borders to extend their own particular business
activities, for example, manufacturing, mining, construction, agriculture,
banking, insurance, health, education, transportation, Nations that were away from each
other, because of their geological separations and financial and social contrasts are now
connecting with each other. World Trade Organization established by the administration
of various nations is one of the major contributory factors to the expanded connections
and the business relationship among the countries.

The national economies are dynamically getting borderless and fused into
the world economy as it is clear that the world has today come to be known as a ‘global
village’. Numerous more organization are making passage into a worldwide business
which presents them with opportunities for development and tremendous benefits. India
was trading with different nations for quite a while, yet it has quickened its progress of
incorporating with the world economy and expanding its foreign trade and investment.
communication and so on.

Benefits of International Business

International Business is important to both Nation and Business organizations. It
offers them various benefits.
Benefits to Nation
 It encourages a nation to obtain foreign exchange that can be utilized to
import merchandise from the global market.
 It prompts specialization of a country in the production of merchandise which
it creates in the best and affordable way.
 Also, it helps a country in enhancing its development prospects and
furthermore make opportunity for employment.
 International business makes it comfortable for individuals to utilize
commodities and services produced in other nations which help in improving
their standard of life.

Benefits to Firms
 It helps in improving profits of the organizations by selling products in the
nations where costs are high.
 It helps the organization in utilizing their surplus resources and increasing
profitability of their activities.
 Also, it helps firms in enhancing their development prospects.
 International business also goes as one of the methods for accomplishing
development in the firms confronting extreme market conditions in the
local market.
 And it enhances business vision as it makes firms more aggressive, and
diversified.

Definition International Business

International business" is also defined as the study of the internationalization
process of multinational enterprises. A multinational enterprise (MNE) is a
company that has a worldwide approach to markets, production and/or operations in
several countries. Well-known MNEs include fast-food companies such as: McDonald's
(MCD), YUM (YUM), Starbucks Coffee Company (SBUX), etc. Other industrial MNEs
leaders include vehicle manufacturers such as: Ford Motor Company, and General
Motors (GMC). Some consumer electronics producers such as Samsung, LG and Sony,
and energy companies such as Exxon Mobil, and British Petroleum (BP) are also
multinational enterprises.

Multinational enterprises range from any kind of business activity or market, from
consumer goods to machinery manufacture; a company can become an international
business. Therefore, to conduct business overseas, companies should be aware of all
the factors that might affect any business activities, including, but not limited to:
difference in legal systems, political systems, economic
policy, language, accounting standards, labor standards, living
standards, environmental standards, local
cultures, corporatecultures, foreignexchangemarkets, tariffs, import and export re
gulations, trade agreements, climate, and education.

Each of these factors may require changes in how companies operate from one
country to another. Each factor makes a difference and a connection. One of the first
scholars to engage in developing a theory of multinational companies was Canadian
economist Stephen Hymer. 

Hymer analyzed the characteristics of foreign investment by large companies

for production and direct business purposes, calling this Foreign Direct Investment
(FDI). By analyzing the two types of investments, Hymer distinguished financial
investment from direct investment. The main distinguishing feature was control. Portfolio
investment is a more passive approach, and the main purpose is financial gain,
whereas in foreign direct investment a firm has control over
the operations abroad. So, the traditional theory of investment based on differential
interest rates does not explain the motivations for FDI.

According to Hymer, there are two main determinants of FDI; where an imperfect
market structure is the key element. The first is the firm-specific advantages which are
developed at the specific company’s home country and, profitably, used in the foreign
country. The second determinant is the removal of control where Hymer wrote: "When
firms are interconnected, they compete in selling in the same market or one of the firms
may sell to the other," and because of this "it may be profitable to substitute centralized
decision-making for decentralized decision-making".

Hymer's second phase is his neoclassical article in 1968 that includes a theory
of internationalization and explains the direction of growth of the international
expansion of firms. In a later stage, Hymer went to a more Marxist approach where he
explains that MNC as agents of an international capitalist system causing conflict and
contradictions, causing among other things inequality and poverty in the world. Hymer is
the "father of the theory of MNEs", and explains the motivations for companies doing
direct business abroad.

Among modern economic theories of multinationals and foreign direct investment

are internalization theory and John Dunning's OLI paradigm (standing for ownership,
location and internationalization). Dunning was widely known for his research in
economics of international direct investment and the multinational enterprise. His OLI
paradigm, in particular, remains as the predominant theoretical contribution to study
international business topics. Hymer and Dunning are considered founders of
international business as a specialist field of study.

Physical and social factors of competitive business and social environment. The
conduct of international operations depends on a company's objectives and the means
with which they carry them out. The operations affect and are affected by the physical
and societal factors and the competitive environment.

All firms that want to go international have one goal in common; the desire to
increase their respective economic values when engaging in international trade
transactions. To accomplish this goal, each firm must develop its individual strategy
and approach to maximize value, lower costs, and increase profits. A firm's value
creation is the difference between V (the value of the product being sold) and C (the
cost of production per each product sold).

Value creation can be categorized as: primary activities (research and

development, production, marketing and sales, customer service) and as support
activities (information systems, logistics, human resources).  All of these activities must
be managed effectively and be consistent with the firm strategy. However, the success
of firms that extend internationally depends on the goods or services sold and on the
firm's core competencies (Skills within the firm that competitors cannot easily match or
imitate).

For a firm to be successful, the firm's strategy must be consistent with the
environment in which the firm operates. Therefore, the firm needs to change
its organizational structure to reflect changes in the setting in which they are operating
and the strategy they are pursuing. Once a firm decides to enter a foreign market, it
must decide on a mode of entry.

There are six different modes to enter a foreign market, and each mode has pros
and cons that are associated with it. The firm must decide which mode is most
appropriately aligned with the company's goals and objectives. The six different modes
of entry are exporting, turnkey projects, licensing, franchising, establishing joint
ventures with a host-country firm, or setting up a new wholly owned subsidiary in
the host country.

The first entry mode is exporting. Exporting is the sale of a product in a different
national market than a centralized hub of manufacturing. In this way, a firm may realize
a substantial scale of economies from its global sales revenue. As an example,
many Japanese automakers made inroads into the U.S. market through exporting.
There are two primary advantages to exporting: avoiding high costs of establishing
manufacturing in a host country (when these are higher) and gaining an  experience
curve. Some possible disadvantages to exporting are high transport costs and high tariff
barriers.

The second entry mode is a turnkey project. In a turnkey project, an

independent contractor is hired by the company to oversee all of the preparation for
entering a foreign market. Once the preparation is complete and the end of the contract
is reached, the plant is turned over to the company fully ready for operation.

Licensing and franchising are two additional entry modes that are similar in
operation. Licensing allows a licensor to grant the rights to an intangible property to the
licensee for a specified period of time for a royalty fee.

Franchising, on the other hand, is a specialized form of licensing in which the

"franchisor" sells the intangible property to the franchisee, and also requires the
franchisee operate as dictated by the franchisor.
 Lastly, a joint venture and wholly owned subsidiary are two more entry
modes in international business. A joint venture is when a firm created is jointly owned
by two or more companies (Most joint venture are 50-50 partnerships). This is in
contrast with a wholly owned subsidiary, when a firm owns 100 percent of the stock of a
company in a foreign country because it has either set up a new operation
or acquires an established firm in that country.

Choice of entry mode in international business

Strategic variables affect the choice of entry mode for multinational

corporation expansion beyond their domestic markets. These variables are global
concentration, global synergies, and global strategic motivations of MNC.

 Global concentration: many MNEs share and overlap markets with a limited
number of other corporations in the same industry.
 Global synergies: the reuse or sharing of resources by a corporation and
may include marketing departments or other inputs that can be used in
multiple markets. This includes, among other things, brand name recognition.
 Global strategic motivations: other factors beyond entry mode that are the
basic reasons for corporate expansion into an additional market. These are
strategic reasons that may include establishing a foreign outpost for
expansion, developing sourcing sites among other strategic reasons.

Means of businesses
 Entry modes: Export/import, wholly owned subsidiary, merger or acquisition,
alliances and joint ventures, licensing[15]
 Modes: importing and exporting, tourism and transportation, licensing and fra
nchising, turnkey operations, management contracts, direct
investment and portfolio investments.
 Functions: marketing, global manufacturing and supply chain
management, accounting, finance, human resources
 Overlaying alternatives: choice of countries, organization and control
mechanisms

Physical and social factors

 Geographical influences: There are many different geographic factors that
affect international business. These factors are: the geographical size,
the climatic challenges happening throughout the world, the natural
resources available on a specific territory, the population distribution in a
country, etc.
 Social factors: Political policies: political disputes, particularly those that
result in the military confrontation, can disrupt trade and investment.
 Legal policies: domestic and international laws play a big role in determining
how a company can operate overseas.
 Behavioral factors: in a foreign environment, the related disciplines such as
anthropology, psychology, and sociology are helpful for managers to get a
better understanding of values, attitudes, and beliefs.
  Economic forces: economics explains country differences in costs, currency
values, and market size.

Risks
1. Faulty Planning
To achieve success in penetrating a foreign market and remaining profitable,
efforts must be directed towards the planning and execution of Phase I. The use of
conventional SWOT analysis, market research, and cultural research, will give a firm
appropriate tools to reduce risk of failure abroad.
Risks that arise from poor planning include: large expenses in marketing,
administration and product development (with no sales); disadvantages derived
from local or federal laws of a foreign country, lack of popularity because of
a saturated market, vandalism of physical property due to instability of country;
etc.
There are also cultural risks when entering a foreign market. Lack of research
and understanding of local customs can lead to alienation of locals and brand
dissociation. Strategic risks can be defined as the uncertainties and untapped
opportunities embedded in your strategic intent and how well they are executed. As
such, they are key matters for the board and impinge on the whole business, rather than
just an isolated unit.

2. Operational risk
A company has to be conscious about the production costs to not waste time and
money. If the expenditures and costs are controlled, it will create an efficient production
and help the internationalization.
 Operational risk is the prospect of loss resulting from inadequate or failed
procedures, systems or policies; employee errors, systems failure, fraud or other
criminal activity, or any event that disrupts business processes.

3. Political risk
How a government governs a country (governance) can affect the operations of a
firm. The government might be corrupt, hostile, or totalitarian; and may have a negative
image around the globe. A firm's reputation can change if it operates in a country
controlled by that type of government.
 Also, an unstable political situation can be a risk for multinational
firms. Elections or any unexpected political event can change a country's situation and
put a firm in an awkward position.
 Political risks are the likelihood that political forces will cause drastic changes in
a country's business environment that hurt the profit and other goals of a business
enterprise. Political risk tends to be greater in countries experiencing social unrest.
When political risk is high, there is a high probability that a change will occur in the
country's political environment that will endanger foreign firms there.
Corrupt foreign governments may also take over the company without warning,
as seen in Venezuela.

4. Technological risk
 Technological improvements bring many benefits, but some disadvantages as
well. Some of these risks include "lack of security in electronic transactions, the cost of
developing new technology ... the fact that this new technology may fail, and, when all
of these are coupled with the outdated existing technology, [the fact that] the result may
create a dangerous effect in doing business in the international arena."

5. Environmental risk
Companies that establish a subsidiary or factory abroad need to be conscious
about the externalizations they will produce, as some may have negative effects such
as noise or pollution. This may cause aggravation to the people living there, which in
turn can lead to a conflict. People want to live in a clean and quiet environment, without
pollution or unnecessary noise.
If a conflict arises, this may lead to a negative change in customer's perception of
the company. Actual or potential threat of adverse effects on living organisms and
environment by effluents, emissions, wastes, resource depletion, etc., arising out of an
organization's activities is considered to be risks of the environment. As new business
leaders come to fruition in their careers, it will be increasingly important to curb business
activities and externalizations that may hurt the environment.

6.Economic risk
These are the economic risks explained by Professor Okolo: "This comes from
the inability of a country to meet its financial obligations. The changing of foreign-
investment or/and domestic fiscal or monetary policies. The effect of exchange-rate and
interest rate make it difficult to conduct international business." Moreover, it can be a
risk for a company to operate in a country and they may experience an unexpected
economic crisis after establishing the subsidiary.[20] Economic risks is the likelihood that
economic management will cause drastic changes in a country's business environment
that hurt the profit and other goals of a business enterprise. In practice, the biggest
problem arising from economic mismanagement has been inflation. Historically many
governments have expanded their domestic money supplying misguided attempts to
stimulate economic activity.[21]

7.Financial risk
According to Professor Okolo: "This area is affected by the currency exchange
rate, government flexibility in allowing the firms to repatriate profits or funds outside the
country. The devaluation and inflation will also affect the firm's ability to operate at an
efficient capacity and still be stable."
Furthermore, the taxes that a company has to pay might be advantageous or
not. It might be higher or lower in the host countries. Then "the risk that a government
will indiscriminately change the laws, regulations, or contracts governing an investment
—or will fail to enforce them—in a way that reduces an investor's financial returns is
what we call 'policy risk.'" Exchange rates can fluctuate rapidly for a variety of reasons,
including economic instability and diplomatic issues. 

8.Terrorism
 Terrorism is a voluntary act of violence towards a group(s) of people. In most
cases, acts of terrorism is derived from hatred of religious, political and cultural beliefs.
An example was the infamous 9/11 attacks, labeled as terrorism due to the massive
damages inflicted on American society and the global economy stemming from the
animosity towards Western culture by some radical Islamic groups.
Terrorism not only affects civilians, but it also damages corporations and other
businesses. These effects may include: physical vandalism or destruction of property,
sales declining due to frightened consumers and governments issuing public safety
restrictions. Firms engaging in international business will find it difficult to operate in a
country that has an uncertain assurance of safety from these attacks.

9. Bribery
Bribery is the act of receiving or soliciting of any items or services of value to
influence the actions of a party with public or legal obligations. This is considered to an
unethical form of practicing business and can have legal repercussions. Firm that wants
to operate legally should instruct employees to not involve themselves or the company
in such activities. Companies should avoid doing business in countries where unstable
forms of government exist as it could bring unfair advantages against domestic
business and/or harm the social fabric of the citizens.

The Rise of Globalization

Globalization has led to a sharp increase in trade and economic
exchanges, but also to a multiplication of financial exchanges. In the 1970s world
economies opened up and the development of free trade policies accelerated the
globalization phenomenon. Between 1950 and 2010, world exports increased 33-fold.

Simple Globalization Definition
Globalization means the speedup of movements and exchanges (of human
beings, goods, and services, capital, technologies or cultural practices) all over the
planet. One of the effects of globalization is that it promotes and increases interactions
between different regions and populations around the globe.

Globalization can be defined as ”the increased interconnectedness and

interdependence of peoples and countries. It is generally understood to include two
inter-related elements: the opening of international borders to increasingly fast flows of
goods, services, finance, people and ideas; and the changes in institutions and policies
at national and international levels that facilitate or promote such flows.”

What Is Globalization in the Economy?

According to the Committee for Development Policy (a subsidiary body of the
United Nations), from an economic point of view, globalization can be defined as:
“(…) the increasing interdependence of world economies as a result of the
growing scale of cross-border trade of commodities and services, the flow of
international capital and the wide and rapid spread of technologies. It reflects the
continuing expansion and mutual integration of market frontiers (…) and the rapid
growing significance of information in all types of productive activities and marketization
are the two major driving forces for economic globalization.”

What Is Globalization in Geography?

In geography, globalization is defined as the set of processes (economic, social,
cultural, technological, institutional) that contribute to the relationship between societies
and individuals around the world. It is a progressive process by which exchanges and
flows between different parts of the world are intensified.

Globalization and the G20: What is the G20?

The G20 is a global bloc composed by the governments and central bank
governors from 19 countries and the European Union (EU). Established in 1999, the
G20 gathers the most important industrialized and developing economies to discuss
international economic and financial stability.
Together, the nations of the G20 account for around 80% of global economic
output, nearly 75 percent of all global trade, and about two-thirds of the world’s
population.
G20 leaders get together in an annual summit to discuss and coordinate pressing
global issues of mutual interest. Though economics and trade are usually the
centerpieces of each summit’s agenda, issues like climate change, migration policies,
terrorism, the future of work, or global wealth are recurring focuses too. 
Since the G20 leaders represent the “political backbone of the global financial
architecture that secures open markets, orderly capital flows, and a safety net for
countries in difficulty”, it is often thanks to bilateral meetings during summits that major
international agreements are achieved and that globalization is able to move forward.
The joint action of G20 leaders has unquestionably been useful to save the
global financial system in the 2008/2009 crisis, thanks to trade barriers removal and the
implementation of huge financial reforms.
Nonetheless, the G20 was been struggling to be successful at coordinating
monetary and fiscal policies and unable to root out tax evasion and corruption, among
other downsides of globalization. As a result of this and other failures from the G20 in
coordinating globalization, popular, nationalist movements across the world have been
defending countries should pursue their interests alone or form fruitful coalitions.

How Do We Make Globalization More Just?

The ability of countries to rise above narrow self-interest has brought
unprecedented economic wealth and plenty of applicable scientific progress. However,
for different reasons, not everyone has been benefiting the same from globalization and
technological change: wealth is unfairly distributed and economic growth came at huge
environmental costs. How can countries rise above narrow self-interest and act together
or designing fairer societies and a healthier planet? How do we make globalization more
just?
According to Christine Lagarde, former President of the International Monetary
Fund, “debates about trade and access to foreign goods are as old as society itself ”
and history tells us that closing borders or protectionism policies are not the way to go,
as many countries doing it have failed.

Lagarde defends we should pursue globalization policies that extend the benefits
of openness and integration while alleviating their side effects. How to make
globalization more just is a very complex question that involves redesigning economic
systems. But how? That’s the question.

Globalization is deeply connected with economic systems and markets, which,

on their turn, impact and are impacted by social issues, cultural factors that are hard to
overcome, regional specificities, timings of action and collaborative networks. All of this
requires, on one hand, global consensus and cooperation, and on the other, country-
specific solutions, apart from a good definition of the adjective “just”.

Examples of Globalization (Concept Map)

Because of trade developments and financial exchanges, we often think of
globalization as an economic and financial phenomenon. Nonetheless, it includes a
much wider field than just flowing of goods, services or capital. Often referred to as
the globalization concept map, some examples of globalization are:

 Economic globalization: is the development of trade systems within

transnational actors such as corporations or NGOs;
 Financial globalization: can be linked with the rise of a global financial system
with international financial exchanges and monetary exchanges. Stock markets,
for instance, are a great example of the financially connected global world since
when one stock market has a decline, it affects other markets negatively as well
as the economy as a whole.
 Cultural globalization: refers to the interpenetration of cultures which, as a
consequence, means nations adopt principles, beliefs, and costumes of other
nations, losing their unique culture to a unique, globalized supra-culture;
 Political globalization: the development and growing influence of international
organizations such as the UN or WHO means governmental action takes place at
an international level. There are other bodies operating a global level such as
NGOs like Doctors without borders or Oxfam;
 Sociological globalization: information moves almost in real-time, together with
the interconnection and interdependence of events and their consequences.
People move all the time too, mixing and integrating different societies;
 Technological globalization: the phenomenon by which millions of people are
interconnected thanks to the power of the digital world via platforms such as
Facebook, Instagram, Skype or Youtube.
 Geographic globalization: is the new organization and hierarchy of different
regions of the world that is constantly changing. Moreover, with transportation
and flying made so easy and affordable, apart from a few countries with
demanding visas, it is possible to travel the world without barely any restrictions;
 Ecological globalization: accounts for the idea of considering planet Earth as a
single global entity – a common good all societies should protect since the
 weather affects everyone and we are all protected by the same atmosphere. To
this regard, it is often said that the poorest countries that have been polluting
the least will suffer the most from climate change.

The Benefits of Globalization

Globalization has benefits that cover many different areas. It reciprocally
developed economies all over the world and increased cultural exchanges. It also
allowed financial exchanges between companies, changing the paradigm of work. Many
people are nowadays citizens of the world. The origin of goods became secondary and
geographic distance is no longer a barrier for many services to happen.

The Engine of Globalization – An Economic Example

The most visible impacts of globalization are definitely the ones affecting the
economic world. Globalization has led to a sharp increase in trade and economic
exchanges, but also to a multiplication of financial exchanges.
In the 1970s world economies opened up and the development of free trade
policies accelerated the globalization phenomenon. Between 1950 and 2010, world
exports increased 33-fold. This significantly contributed to increasing the interactions
between different regions of the world.
This acceleration of economic exchanges has led to strong global economic
growth. It fostered as well a rapid global industrial development that allowed the rapid
development of many of the technologies and commodities, we have available
nowadays.
Knowledge became easily shared and international cooperation among the brightest
minds speeded things up.
According to some analysts, globalization has also contributed to improving
global economic conditions, creating much economic wealth (that was, nevertheless,
unequally distributed – more information ahead).

Globalization Benefits – A Financial Example

At the same time, finance also became globalized. From the 1980s, driven by
neo-liberal policies, the world of finance gradually opened. Many states, particularly the
US under Ronald Reagan and the UK under Margaret Thatcher introduced the famous
“3D Policy”: Disintermediation, Decommissioning, Deregulation.
The idea was to simplify finance regulations, eliminate mediators and break down
the barriers between the world’s financial centers. And the goal was to make it easier to
exchange capital between the world’s financial players. This financial globalization has
contributed to the rise of a global financial market in which contracts and capital
exchanges have multiplied.

Why Is Globalization Bad? The Negative Effects of Globalization

Globalization is a complex phenomenon. As such, it has a considerable influence
on several areas of contemporary societies. Let’s take a look at some of the main
negative effects globalization has had so far.
The Negative Effects of Globalization on Cultural Loss
Apart from all the benefits globalization has had on allowing cultural exchanges it
also homogenized the world’s cultures. That’s why specific cultural characteristics from
some countries are disappearing. From languages to traditions or even specific
industries. That’s why according to UNESCO, the mix between the benefits of
globalization and the protection of local culture’s uniqueness requires a careful
approach.
The Economic Negative Effects of Globalization
Despite its benefits, the economic growth driven by globalization has not been
done without awakening criticism. The consequences of globalization are far from
homogeneous: income inequalities, disproportional wealth and trades that benefit
parties differently. In the end, one of the criticisms is that some actors (countries,
companies, individuals) benefit more from the phenomena of globalization, while others
are sometimes perceived as the “losers” of globalization. As a matter of fact, a recent
report from Oxfam says that 82% of the world’s generated wealth goes to 1% of the
population.
Many critics have also pointed out that globalization has negative effects on the
environment. Thus, the massive development of transport that has been the basis of
globalization is also responsible for serious environmental problems such as
greenhouse gas emissions, global warming or air pollution.
At the same time, global economic growth and industrial productivity are both
the driving force and the major consequences of globalization. They also have big
environmental consequences as they contribute to the depletion of natural
resources, deforestation and the destruction of ecosystems and loss of biodiversity.
The worldwide distribution of goods is also creating a big garbage problem, especially
on what concerns plastic pollution. From a globalization perspective, regionalization
means a world that is less interconnected and has a stronger regional focus.

The Road from Globalization to Regionalization

Regionalization can also be analyzed from a corporate perspective. For instance,
businesses such as McDonald’s or Starbucks don’t sell exactly the same products
everywhere. In some specific stores, they consider people’s regional habits. That’s why
the McChicken isn’t sold in India, whereas in Portugal there’s a steak sandwich menu
like the ones you can get in a typical Portuguese restaurant.
Politically speaking, when left-wing parties are in power they tend to focus on their
country’s people, goods and services. Exchanges with the outside world aren’t seen as
very valuable and importations are often left aside.

The U.S. Position in International Trade

Countries & Regions
The United States is the world’s largest trading nation, with over $5.6 trillion in
exports and imports of goods and services in 2019. The U.S. has trade relations with
more than 200 countries, territories, and regional associations around the globe.

Goods Exports
 The United States is the 2nd largest goods exporter in the world. U.S. goods
exports to the world totaled $1.6 trillion in 2019, down 1.4 percent ($22.5 billion) from
2018. Canada was the largest purchaser of U.S. goods exports in 2019, accounting for
17.8 percent of total U.S. goods exports. The top five purchasers of U.S. goods exports
in 2019 were: Canada ($292.6 billion), Mexico ($256.6 billion), China ($106.4 billion),
Japan ($74.4 billion), and the United Kingdom ($69.1 billion). U.S. goods exports to the
European Union 27 were $267.6 billion.

Goods Imports
The United States is the largest goods importer in the world. U.S. goods imports
from the world totaled $2.5 trillion in 2019, down 1.6 percent ($40.2 billion) from 2018.
China was the top supplier of goods to the United States, accounting for 18 percent of
total goods imports. The top five suppliers of U.S. goods imports in 2019 were: China
($452 billion), Mexico ($358 billion), Canada ($319 billion), Japan ($144 billion), and
Germany ($128 billion). U.S. goods imports from the European Union 27 were $515
billion.

Services Exports
The United States is the largest services exporter in the world. In 2019, U.S.
exports of services were $875.8 billion, up 1.6 percent ($13 billion) from 2018. U.S.
exports of services account for 35 percent of overall U.S. exports in 2019. The United
Kingdom was the largest purchaser of U.S. services exports in 2019 accounting for
nearly 9 percent of total U.S. services exports. The top five purchasers of U.S. services
exports in 2019 were: the United Kingdom ($78.3 billion), Canada ($67.7 billion), Ireland
($57.5 billion), China ($56.5 billion), and Japan ($50.0 billion). U.S. services exports to
the European Union 27 were $200.3 billion.

Services Imports
The United States is the largest services importer in the world. In 2019, U.S.
imports of services were $588.4 billion, up 4.7 percent ($26.3 billion) from 2018. The
United Kingdom was the largest supplier of services, accounting for 11 percent of total
U.S. service imports in 2019. The top five suppliers of U.S. services imports in 2019
were: the United Kingdom ($62.3 billion), Canada ($38.5 billion), Japan ($35.8 billion),
Germany ($34.9 billion), and Mexico ($29.8 billion). U.S. services imports from the
European Union 27 were $145.9 billion.

Trade Agreements
Trade Agreements can create opportunities for Americans and help to grow the
U.S. economy.
USTR has principal responsibility for administering U.S. trade agreements. This
involves monitoring our trading partners' implementation of trade agreements with the
United States, enforcing America's rights under those agreements, and negotiating and
signing trade agreements that advance the President's trade policy.
The United States is Member of the World Trade Organization (WTO), and the
Marrakesh Agreement Establishing the World Trade Organization (WTO Agreement)
sets out rules governing trade among the WTO's 154 members. The United States and
other WTO Members are currently engaged in Doha Development Round of world trade
talks, and a strong, market-opening Doha agreement for both goods and services would
be an important contribution to addressing the global economic crisis and helping to
restore trade's role in leading economic growth and development.
The United States has free trade agreements (FTAs) in effect with 20 countries.
These FTAs build on the foundation of the WTO Agreement, with more comprehensive
and stronger disciplines than the WTO Agreement. Many of our FTAs are bilateral
agreements between two governments. But some, like the North American Free Trade
Agreement and the Dominican Republic-Central America-United States Free Trade
Agreement, are multilateral agreements among several parties.
Another important type of trade agreement is the Trade and Investment
Framework Agreement. TIFAs provide frameworks for governments to discuss and
resolve trade and investment issues at an early stage. These agreements are also a
means to identify and work on capacity-building where appropriate.
The United States also has a series of Bilateral Investment Treaties (BITs) help protect
private investment, develop market-oriented policies in partner countries, and promote
U.S. exports.

Activity 1
1. How did International Business begin?
2. Discuss the rise of globalization and the US position in the
international trade
3. Discuss the Physical and social factors that affect international business.
 MODULE 2
Theories Of International Trade & Investment
The Advantages of Specialization
The Concept of Comparative Advantage

Objectives: At the end of the period, the students must be able to:
1. Explain the theories of international trade & investment.
2.Discuss the advantages of specialization.
3.Explain the concept of comparative advantage.

Theories of International Trade & Investment

1. Classical or country-based theories
The founders of the various theories of the classical country-based approach
were mainly concerned with the fact that the priority should be increasing the wealth of
one’s own nation. They were mainly of the view that focus should be on economic
growth on a priority basis. The main classical theories in reference to international trade
are discussed below.

1. Mercantilism
The Mercantilism theory is the first classical country-based theory, which was
propounded around the 17-18th century. This theory has been one of the most talked
about and debated theories. The country focused on the motto that, on a priority basis,
it must look after its own welfare and therefore, expand exports and discourage imports.
It stated that an attempt should be made to ensure that only the necessary raw
materials are imported and nothing else.
The theory also propounded the view that the first thing a nation must focus on is
the accumulation of wealth in the form of gold and silver, thus, strengthening the
treasure of the nation.  
To put it simply, it can be stated that the classical economists behind the theory
of Mercantilism firmly believed that a country’s wealth and financial standing are largely
demonstrated by the amount of gold and silver it holds. Hence, economists believe that
it is best to increase the reserve of precious metals to maintain a wealthy status.
For this theory to work, the aim to be fulfilled was that a country must produce
goods in such a large quantity that it exports more and should be less dependent on
buying goods and other materials from others, thereby strongly encouraging exports
and strictly discouraging imports. 
A large number of countries in the past benefited from strictly following the theory
of Mercantilism. History is evident that by implementing this theory, many nations
benefited by strictly following the theory of Mercantilism. Various studies done by
economists prove why this theory flourished in the early period. In the early period, i.e.,
around 1500, new nations and states were emerging and the rulers wanted to
strengthen their country in all possible ways, be it the army, wealth, or other
developments.
 The rulers witnessed that by increasing trade they were able to accumulate more
wealth and, thus, certain countries became very strong because of the massive amount
of wealth they stored. The rulers were focused on increasing the number of exports as
much as possible and discouraging imports. The British colony is the perfect example of
this theory. They utilized the raw materials of other countries by ruling over them and
then exporting those goods and other resources at a higher price, accumulating a large
amount of wealth for their own country. 
This theory is often called the protectionist theory because it mainly works on
the strategy of protecting oneself. Even in the 21 st century, we find certain countries that
still believe in this method and allow limited imports while expanding their exports.
Japan, Taiwan, China, etc. are the best examples of such countries. Almost every
country at some point in time follows this approach of protectionist policies, and this is
definitely important. But supporting such protectionist policies comes at a cost, like high
taxes and other such disadvantages. 

Absolute Advantage
In 1776, the economist Adam Smith criticized the theory of mercantilism in his
publication, “The Wealth of Nations”, and propounded the theory of Absolute advantage.
Smith firmly believed that economic growth in reference to international trade firmly
depends on specialization and division of labor. Specialization ensures higher
productivity, thereby increasing the standard of living of the people of the country. He
proposed that the division of labor in small markets would not cater for specialization,
which would otherwise become easy in the case of larger markets. This increase in size
fostered a more refined specialization and thus increased productivity all around the
globe.
Smith’s theory proposes that governments should not try to regulate trade
between countries, nor should they restrict global trade. His theory also
encapsulated the consequences of the involvement and restraint of the government in
free trade. Also, he firmly believed that it is the standard of living of the residents of a
country that should determine the country’s wealth and the amount of gold and silver
that a country’s treasure has.  He states that trading should depend on market factors
and not the government’s will. 
Smith was firmly against the mercantilist theory, and he argued that diminishing
importation and just focusing on exports was not a great idea, and thus restricting
global trade is not what needs to be done. He proposed that even though we might
succeed in forcing our country’s people to buy our own goods, however, we may not be
able to do so with foreigners, and hence it is better that we make it a two-way trade and
just focus on exports.
In relation to the restrictions imposed on import, Smith stated that even though
the restrictions on import may benefit some domestic industries and merchants when
looked at from a broad spectrum, it will result in decreasing competition. Along with this,
it will increase the monopoly of some merchants and companies in the market.
Another disadvantage is that the increase in the monopoly will cause inefficiency and
mismanagement in the market. 
Smith completely denied the promotion of trade by the government and
restrictions on free trade. He reiterated that it is wasteful and harmful to the country.
He proposed that free trade is the best policy for trading unless, otherwise, some
unfortunate or uncertain situations arise. 

2. Comparative advantage
The theory of comparative advantage flourished in the 19th century and was
propounded by David Ricardo. This theory strengthened the understanding of the
nature of trade and acknowledges its benefits.
The theory suggests that it is better if a country exports goods in which its
relative cost advantage is greater than its absolute cost advantage when
compared with other countries.
For instance, let’s take the examples of Malaysia and Indonesia. Let’s say
Indonesia can produce both electrical appliances and rubber products more efficiently
than Malaysia. The production of electrical appliances is twice as much as that of
Malaysia, and for rubber products, it is five times more than that of Malaysia. In such a
condition, Indonesia has an absolute productive advantage in both goods but a relative
advantage in the case of rubber products. In such a case, it would be more mutually
beneficial if Indonesia exported rubber products to Malaysia and imported electrical
appliances from them, even if Indonesia could efficiently produce electrical appliances
too. 
What Ricardo proposed is that even though a country may efficiently produce
goods, it may still import them from another country if a relative advantage lies therein.
Similar is the case with export, even if a country is not very efficient in certain goods
from other countries, it may still export that product to other countries. This theory
basically encourages trade that is mutually beneficial. 

3. Heckscher-Ohlin theory (Factor Proportions theory)

The theories founded by Smith and Ricardo were not efficient enough for the
countries, as they could not help the countries determine which of the products would
benefit the country.
The theory of Absolute Advantage and Comparative Advantage supported
the idea of how a free and open market would help countries determine which products
could be efficiently produced by the country.
However, the theory proposed by Heckscher and Ohlin dealt with the concept of
comparative advantage that a country can gain by producing products that make use of
the factors that are present in abundance in the country.
The main basis of their theory is on a country’s production factors like land, labor,
capital, etc. They proposed that the approximate cost of any factor of resource is
directly related to its demand and supply. Factors which are present in abundance as
compared to demand will be available at a cheaper cost, and factors which are in great
demand and less availability will be expensive.
They proposed that countries produce goods and export the ones for which the
resources required in their production are available in a much greater quantity. Contrary
to this, countries will import goods whose raw materials are in shorter supply in their
own country as compared to the one from which they are importing. 
 For example, India has a large number of laborers, so foreign countries establish
industries that are labor-intensive in India. Examples of such industries are the garment
and textile industries.

4. Modern or Firm-Based Theory 

The emergence of modern or firm-based theories is marked after the period of
World War II. The founders of these theories were mainly professors of business
schools and not economists. These theories majorly came up after the rising popularity
of multinational companies.
The Country based classical theories were mainly focused on the country,
however, the modern or firm-based theories address the needs of companies. The
following are the modern or firm-based theories propounded by various business school
professors: 

4.1 Country similarity theory

Steffan Linder, a Swedish economist, was the founder of this theory.  The theory
marked its emergence in the year 1961 and explained the concept of in-train industry
trade. Linder suggested that countries that are in a similar phase of development
will probably have similar preferences. The suggestion proposed by Linder was that
companies first produce goods for their domestic consumption and later expand
production, thereby exporting those products to other countries where customers have
similar preferences.
Linder suggested that most of the trade in manufactured goods, in most
circumstances, will be between countries with similar per capita incomes, and that the
in-train industry trade will thus be common among them. This theory is generally more
applicable in understanding trade where buyers mainly decide on the basis of brand
names and product reputations. 

5. Product life cycle theory

This theory was propounded by Raymond Vernon, a business professor at
Harvard Business School, in the 1960s. The theory that originated in the field of
marketing proposed that a product life cycle has three stages, namely, new
product, maturing product, and standardized product.
The theory has a presumption that the production of a new product will
completely arise in the country where it was invented. This theory, up to a good extent,
helps in explaining the sudden rise and dominance of the United States in
manufacturing. This theory also explained the stages of computers, from being in the
new product stage in the 1970s and thereby entering into their maturing stage in the
1980s and 1990s.
In today’s scenario, computers are in a standardized stage and are mostly
manufactured in low-cost countries in Asia. However, this theory has not been able to
explain the current trading pattern where products are being invented and manufactured
in almost all parts of the world. 

6.Global Strategic Rivalry Theory

 Paul Krugman and Kelvin Lancaster were the founders of this theory. This
theory emerged around the 1980s. The theory majorly focused on multinational
companies and their strategies and efforts to gain a comparative advantage over
other similar global firms in their industry.
This theory acknowledges the fact that firms will face global competition and
prove their superiority. They must surely develop a competitive advantage over each
other. The ways through which the firms can gain competitive advantage were termed
as barriers to entry for that particular industry. These barriers are basically the obstacles
that a firm will face globally when they enter the market. The barriers that companies
and firms may try to optimize are: 
1. Mainly research and development,  
2. The ownership of intellectual property rights,  
3. Economies of scale,  
4. Unique business processes or methods, 
5. Extensive experience in the industry, and 
6. The control of resources or favorable access to raw materials.

7. Porter’s National Competitive Advantage Theory

The theory emerged in the 1990s with the aim of explaining the concept of
national competitive advantage. The theory proposes that a nation’s competitiveness
majorly depends upon the capability and capacity of the industry to come up with
innovations and upgrades.
This theory attempted to explain the reason behind the excessive
competitiveness of some nations as compared to others. The main determinants
proposed in this theory were local market resources and capabilities, local market
demand conditions, local suppliers and complementary industries, and local firm
characteristics. The theory also mentioned the crucial role of government in forming the
competitive advantage of the industry.

Specialization
Specialization, in economic terms, means focusing on one task rather than
multiple tasks, which allows workers to perfect that one task. This is a basic concept of
learning. When a person attempts a specific task for the first time, they may not be
proficient at it. The more time spent on practicing or learning a skill, the better an
individual gets at it. And the more efficient.

Specialization Leads to Economies of Scale

As labor is divided amongst workers, workers are able to focus on a few or even
one task. The more they focus on one task, the more efficient they become at this task,
which means that less time and less money is involved in producing a good. Or put
another way, the same time and the same money allows for the production of more
goods.
Once specialization occurs, resulting in economies of scale, a company is able
to reduce the price for its goods or services because it costs less to make their goods
or provide their services. This provides a competitive advantage in the market place.
Advantages (merits) of Specialization
1. Certain skill set: 
Advantages might be considered as something that can be imagined in the
beginning of one’s profession when we talk about them. Possessing a certain skill set
might be beneficial when looking for work. Nowadays, professions require a more
specialized skill set, thus it is beneficial to get those talents through education or work
experience.

2. Ascending growth: 
Growth in that sector would also result from having a certain ability or from
specialization in that field. They have opportunities to climb the corporate ladder and
advance their level of specialist knowledge. Depending on the importance and level of
expertise, each specialty has a distinctive quality of its own.

3. A strong package: 
A person who has specialized in a task is one who is proficient in carrying out
that work. Since there is no one to take their position, businesses are willing to pay if
they discover that individual to be truly skilled in that field. So, if you want to be
compensated, learn about market trends and focus on industries that provide high pay.

4. Definitions of excellence and quality: 

When a business claims to use experts for their job, it suggests that they are
concerned about the kind and caliber of the work being done. In the end, it improves the
quality of the job produced. In other words, each department should be proud of the
unique skill set that they have.

5. Engenders trust: 
Customers often believe that having professionals provide services means that
their work is done flawlessly. In addition, they are aware that the job will be of a high
standard. Specialists gain trust in their names by being known in this way.

6. Happy with their work: 

Specialists are persons with a certain skill set, and if that skill set is hard to come
by, then that person is usually quite proud of their specialty.
They frequently work carefully and respectfully since they take pleasure in their work.
Since they cannot be replaced, they frequently display their pride in the work they
accomplish.

7. Boosts productivity:
 It is typically discovered that assigning work to experts in the subject will result in
fewer mistakes. In addition to requiring time and resources, mistake correction also
lowers productivity. In this way, the person receives training to specialize in that task.
Therefore, having someone who can complete the task flawlessly will eventually result
in higher production, which immediately increases productivity.

8. Reduced waste costs: 

 When a portion of the work is handled by one person, that person focuses on
carrying out those activities accurately. As a result, quality control expenses are
reduced.
Since manufacturing facilities are more particular about the output quality, employing
specialist personnel would prevent the manufacture of faulty goods. It indicates less
waste.
9. Without supervision: 
Because specialization necessitates training, employees become proficient in
their particular tasks and display few errors. The worker would handle the task without
any supervision, which is another goal of the training. Employees who receive training
handle decision-making at a lower level.

Disadvantages (Demerits) of Specialization

1. It becomes dated: 
This frequently happens in the middle of a person’s career. The occupations
doing such duties become obsolete when a new trend emerges and the industry adjusts
to accommodate it. For instance, in every business during the former era, there were
demands for “talented typists.” However, this work profile is becoming less attractive
with the rise of laptops and personal computers.

2. Mastering one set of skills:

 It would eventually be difficult to advance your career if you just have experience
in one area of employment and one ability that you had mastered. This gets even more
challenging if employment opportunities shrink across the b

3. Management posts omitted: 

If you continue to concentrate on performing the specialized work, you will
ultimately lose out when a managerial position becomes available. People wouldn’t
choose you for a management position if you were an expert at a certain set of chores
since they wouldn’t have any bearing on the company.

4. Becomes monotonous: 
As you are aware, specialized employment enables a person to concentrate on a
single component of their job and accomplish the same task every day. With time, this
work gets monotonous and lacks any hard responsibilities. Boredom in the workplace
causes discontent and interest loss.

5. Unable to multitask: 
Being an expert at one thing might occasionally prevent someone from
multitasking. They would have found it challenging to multitask since they would have
been focusing on and functioning in only one part of the work.
These kinds of persons cannot be given multitasking job projects if they were taught
from the start.

6. Restriction to be followed: 
 These specialist individuals would not be permitted to occupy positions if they
become available in another sector or department where the job description would pay
more. They aren’t able to fill any openings that could occur because they are said to be
working for that specialism.

7. Company is harmed: 
If the professional working in that field is contributing to the company’s success,
then his or her disappearance would undoubtedly leave a void. Performance will
undoubtedly be impacted by this absence, and the business will eventually suffer.

8. Limited set of skills: 

Specialized employment implies having a certain skill set, as the name suggests.
If we looked more closely, we would see that the skill set is narrow and so appears
limited. The other group of workers with non-skill sets would be those with more skill
sets than specialists.

9. Finding a job is difficult: 

When employees specialize, it means they use certain abilities for a particular
purpose. As a result, workers receive training in carrying out tasks that are appropriate
for that particular firm. However, due to their restricted or specialized skill sets, many
individuals find it challenging to obtain employment when companies downsize or tend
to become leaner.

Conclusion
As a result, it is clear that labor specialization has both benefits and drawbacks.
Many businesses do not view them as being outmoded or as having any positive effects
on productivity. Specialization in the workplace must coexist with the freedom for
employees to transition between tasks or rearrange their priorities. In other words, job
rotation may be viewed as an option. You may boost employee morale by giving them
more jobs and responsibilities, empowering them, and widening the scope of their work,
among other methods. Even giving workers time for coffee breaks improves morale.

The Concept of Comparative Advantage

What Is Comparative Advantage?
Comparative advantage is an economy's ability to produce a particular good
or service at a lower opportunity cost than its trading partners. Comparative
advantage is used to explain why companies, countries, or individuals can benefit from
trade.
When used to describe international trade, comparative advantage refers to the
products that a country can produce more cheaply or easily than other
countries. While this usually illustrates the benefits of trade, some contemporary
economists now acknowledge that focusing only on comparative advantages can result
in exploitation and depletion of the country's resources.
 The law of comparative advantage is popularly attributed to English political
economist David Ricardo and his book On the Principles of Political Economy and
Taxation written in 1817, although it is likely that Ricardo's mentor, James Mill,
originated the analysis:
 Comparative advantage is an economy's ability to produce a particular good or
service at a lower opportunity cost than its trading partners.
 The theory of comparative advantage introduces opportunity cost as a factor
for analysis in choosing between different options for production.
 Comparative advantage suggests that countries will engage in trade with one
another, exporting the goods that they have a relative advantage in.
 There are downsides to focusing only on a country's comparative advantages,
which can exploit the country's labor and natural resources.
 Absolute advantage refers to the uncontested superiority of a country to
produce a particular good better.

Understanding Comparative Advantage

 Comparative advantage is one of the most important concepts in economic
theory and a fundamental tenet of the argument that all actors, at all times, can
mutually benefit from cooperation and voluntary trade. It is also a foundational
principle in the theory of international trade.
 The key to understanding comparative advantage is a solid grasp of
opportunity cost. Put simply, an opportunity cost is a potential benefit that
someone loses out on when selecting a particular option over another.
 In the case of comparative advantage, the opportunity cost (that is to say, the
potential benefit that has been forfeited) for one company is lower than that of
another. The company with the lower opportunity cost, and thus the smallest
potential benefit which was lost, holds this type of advantage.
 Another way to think of comparative advantage is as the best option given a
trade-off. If you're comparing two different options, each of which has a trade-off
(some benefits as well as some disadvantages), the one with the best overall
package is the one with the comparative advantage.

Diversity of Skills
 People learn their comparative advantages through wages. This drives people
into those jobs that they are comparatively best at. If a skilled mathematician
earns more money as an engineer than as a teacher, they and everyone they
trade with are better off when they practice engineering.
 Wider gaps in opportunity costs allow for higher levels of value production by
organizing labor more efficiently. The greater the diversity in people and their
skills, the greater the opportunity for beneficial trade through comparative
advantage.
 Example of Comparative Advantage
 As an example, consider a famous athlete like Michael Jordan. As a renowned
basketball and baseball star, Michael Jordan is an exceptional athlete whose
physical abilities surpass those of most other individuals. Michael Jordan would
 likely be able to, say, paint his house quickly, owing to his abilities as well as his
impressive height.
 Hypothetically, say that Michael Jordan could paint his house in eight hours. In
those same eight hours, though, he could also take part in the filming of a
television commercial which would earn him $50,000. By contrast, Jordan's
neighbor Joe could paint the house in 10 hours. In that same period of time, he
could work at a fast-food restaurant and earn $100.
 In this example, Joe has a comparative advantage, even though Michael Jordan
could paint the house faster and better. The best trade would be for Michael
Jordan to film a television commercial and pay Joe to paint his house. So long
as Michael Jordan makes the expected $50,000 and Joe earns more than $100,
the trade is a winner. Owing to their diversity of skills, Michael Jordan and Joe
would likely find this to be the best arrangement for their mutual benefit.
Comparative Advantage vs. Absolute Advantage
 Comparative advantage is contrasted with absolute advantage. Absolute
advantage refers to the ability to produce more or better goods and services
than somebody else. Comparative advantage refers to the ability to produce
goods and services at a lower opportunity cost, not necessarily at a greater
volume or quality.
 To see the difference, consider an attorney and their secretary. The attorney is
better at producing legal services than the secretary and is also a faster typist
and organizer. In this case, the attorney has an absolute advantage in both the
production of legal services and secretarial work.
 Nevertheless, they benefit from trade thanks to their comparative
advantages and disadvantages. Suppose the attorney produces $175 per hour
in legal services and $25 per hour in secretarial duties. The secretary can
produce $0 in legal services and $20 in secretarial duties in an hour. Here, the
role of opportunity cost is crucial.
 To produce $25 in income from secretarial work, the attorney must lose $175
in income by not practicing law. Their opportunity cost of secretarial work is high.
They are better off by producing an hour's worth of legal services and hiring the
secretary to type and organize. The secretary is much better off typing and
organizing for the attorney; their opportunity cost of doing so is low. It’s where
their comparative advantage lies.
 Comparative advantage is a key insight that trade will still occur even if
one country has an absolute advantage in all products.

Comparative Advantage vs. Competitive Advantage

 Competitive advantage refers to a company, economy, country, or individual's
ability to provide a stronger value to consumers as compared with its
competitors. It is similar to, but distinct from, comparative advantage.
 In order to assume a competitive advantage over others in the same field or
area, it's necessary to accomplish at least one of three things: the company
should be the low-cost provider of its goods or services, it should offer superior
goods or services than its competitors, and/or it should focus on a particular
segment of the consumer pool.
Comparative Advantage in International Trade
 David Ricardo famously showed how England and Portugal both benefit by
specializing and trading according to their comparative advantages. In this case,
Portugal was able to make wine at a low cost, while England was able to
cheaply manufacture cloth. Ricardo predicted that each country would
eventually recognize these facts and stop attempting to make the product that
was more costly to generate.
 Indeed, as time went on, England stopped producing wine, and Portugal
stopped manufacturing cloth. Both countries saw that it was to their advantage
to stop their efforts at producing these items at home and, instead, to trade with
each other in order to acquire them.
Advantages and Disadvantages of Comparative Advantage

Advantages
In international trade, the law of comparative advantage is often used to
justify globalization, since countries can have higher material outcomes by producing
only goods where they have a comparative advantage, and trading those goods with
other countries. Countries like China and South Korea have made major productivity
gains by specializing their economies in certain export-focused industries, where they
had a comparative advantage.
Following comparative advantage increases the efficiency of production by
focusing only on those tasks or products that one can achieve more cheaply. Products
that are more expensive or time-consuming to make can be purchased from
elsewhere. In turn, this will improve a company's (or a country's) overall profit margins,
since costs associated with less-efficient production will be eliminated.

Disadvantages
On the other hand, over-specialization also has negative effects, especially for
developing countries. While free trade allows developed countries to access cheap
industrial labor, it also has high human costs due to the exploitation of local workforces.
By offshoring manufacturing to countries with less stringent labor laws,
companies can benefit from child labor and coercive employment practices that are
illegal in their home countries.
Likewise, an agricultural country that focuses only on certain export crops may
find itself suffering from soil depletion and destruction of its natural resources, as well
as harm to indigenous peoples. Moreover, there are also strategic disadvantages to
over-specialization, since that country would find itself dependent on global food prices.

Pros and Cons of Comparative Advantage

Pros
 Higher Efficiency
 Improved profit margins
 Lessens the need for government protectionism
Cons
 Developing countries may be kept at a relative disadvantage
  May promote unfair or poor working conditions elsewhere
 Can lead to resource depletion
 Risk of over-specialization
 May incentivize rent-seeking

Who Developed the Law of Comparative Advantage?

The law of comparative advantage is usually attributed to David Ricardo, who
described the theory in "On the Principles of Political Economy and Taxation,"
published in 1817. However, the idea of comparative advantage may have originated
with Ricardo's mentor and editor, James Mill, who also wrote on the subject.

How Do You Calculate Comparative Advantage?

Comparative advantage is usually measured in opportunity costs, or the value of
the goods that could be produced with the same resources. This is then compared with
the opportunity costs of another economic actor to produce the same goods.
For example, if Factory A can make 100 pairs of shoes with the same
resources it takes to make 500 belts, then each pair of shoes has an opportunity cost
of five belts. If competitor factory B, can make three belts with the resources it takes to
make one pair of shoes, then factory A has a comparative advantage in making belts,
and factory B has a comparative advantage in making shoes.

What Is an Example of Comparative Advantage?

An interesting example of comparative advantages often arises for high-
powered executives, who may consider hiring an assistant to answer their emails and
perform certain secretarial functions. The executive may even better at performing
these duties than their assistant—but the time they spend doing secretarial work could
be spent more profitably by doing executive work. Likewise, even if the assistant is
mediocre at secretarial work, they would likely be even more ill-suited for executive
work. Together, they are ultimately more productive if they focus on their comparative
advantages.

The Bottom Line

Comparative advantage is one of the most important concepts in economics. In
classical economics, this idea explains why people, countries, and businesses can
experience greater collective benefits through trade and exchange than they can
produce alone. However, contemporary economists have also pointed out that these
gains can be one-sided, or result in exploitation of the weaker parties.

Activity 2
1Which of the theories of international trade & investment is most is of advantage to
countries? Why?
2. Discuss the advantages of specialization.
3. Explain the concept of comparative advantage.
 MODULE 3
The international monetary system
The Role of the International Monetary Fund (IMF)
Fixed and floating exchange rates
The impact of European currency (EURO)
Calculate foreign exchange rates

Objectives: At the end of the period, the students must be able to:
1. Discuss the international monetary system.
1. Explain the role of the International Monetary Fund (IMF)
2. Differentiate fixed from floating exchange rates.
3. Calculate foreign exchange rates.

The International Monetary System

The international monetary system refers to the operating system of the

financial environment, which consists of financial institutions, multinational
corporations, and investors.
 The international monetary system provides the institutional framework for
determining the rules and procedures for international payments, determination of
exchange rates, and movement of capital.
The major stages of the evolution of the international monetary system can be
categorized into the following stages.

The Era of Bimetallism

Before 1870, the international monetary system consisted of bimetallism, where
both gold and silver coins were used as the international modes of payment. The
exchange rates among currencies were determined by their gold or silver contents.
Some countries were either on a gold or a silver standard.

Gold standard
The international gold standard prevailed from 1875 to 1914. In a gold standard
system, gold alone is assured of unrestricted coinage. There was a two-way
convertibility between gold and national currencies at a stable ratio. No restrictions were
in place for the export and import of gold. The exchange rate between two currencies
was determined by their gold content.
The gold standard ended in 1914 during World War I. Great Britain, France,
Germany, and many other countries-imposed embargoes on gold exports and
suspended redemption of bank notes in gold. The interwar period was between World
War I and World War II (1915-1944).
During this period the United States replaced Britain as the dominant financial
power of the world. The United States returned to a gold standard in During the
intermittent period, many countries followed a policy of sterilization of gold by matching
inflows and outflows of gold with changes in domestic money and credit.

Gold exchange standard

The Bretton Woods System was established after World War II and was in
existence during the period 1945-1972. In 1944, representatives of 44 nations met at
Bretton Woods, New Hampshire, and designed a new postwar international monetary
system.
This system advocated the adoption of an exchange standard that included both
gold and foreign exchanges. Under this system, each country established a par value in
relation to the US dollar, which was pegged to gold at $35 per ounce. Under this
system, the reserve currency country would aim to run a balance of payments (BOPs)
deficit to supply reserves.
If such deficits turned out to be very large then the reserve currency itself would
witness crisis. This condition was often coined the Triffin paradox. Eventually in the
early 1970s, the gold exchange standard system collapsed because of these reasons.
From 1950 onward, the United States started facing trade deficit problems.
With development of the euro markets, there was a huge outflow of dollars. The
US government took several dollar defense measures, including the imposition of the
Interest Equalization Tax (IET) on US purchases of foreign stock to prevent the outflow
of dollars.
 The international monetary fund created a new reserve asset called special
drawing rights (SDRs) to ease the pressure on the dollar, which was the central reserve
currency. Initially, the SDR were modeled to be the weighted average of 16 currencies
of such countries whose shares in the world exports were more than 1%. In 1981, the
SDR were restructured to constitute only five major currencies: the US dollar, German
mark, Japanese yen, British pound, and French franc.
The SDR were also being used as a denomination currency for international
transactions. But the dollar-based gold exchange standard could not be sustained in the
context of rising inflation and monetary expansion. In 1971 the Smithsonian Agreement
signed by the Group of Ten major countries made changes to the gold exchange
standard.
The price of gold was raised to $38 per ounce. Other countries revalued their
currency by up to 10%. The band for exchange rate fluctuation was increased to 2.25%
from 1%. But the Smithsonian agreement also proved to be ineffective and the Bretton
Woods System collapsed.

Flexible Exchange Rate Regime

European and Japanese currencies became free-floating currencies in 1973. The
flexible exchange rate regime was formally ratified in 1976 by IMF members through the
Jamaica Agreement. The agreement stipulated that central banks of respective
countries could intervene in the exchange markets to guard against unwarranted
fluctuations. Gold was also officially abandoned as the international reserve asset. In
1985, the Plaza Accord envisaged the depreciation of the dollar against most major
currencies to solve US trade deficit problems.
In general, there are many flexible exchange rate systems. In a free-floating or
independent-floating currency, the exchange rate is determined by the market,
with foreign exchange intervention occurring only to prevent undue fluctuations. For
example, Australia, the United Kingdom, Japan, and the United States have free-
floating currencies. In a managed-floating system, the central monetary authority of
countries influences the movement of the exchange rate through active intervention in
the forex market with no preannounced path for the exchange rate.
Examples include China, India, Russia, and Singapore. In a fixed-peg
arrangement, the country pegs its currency at a fixed rate to a major currency or to a
basket of currencies. For example, many GCC countries such as UAE and Saudi Arabia
have pegged their currencies to the US dollar.
The IMF has implemented many reforms in recent years, designed to strengthen
its cooperative nature and improve its ability to serve its membership.
To mention a few:
 The IMF has increasingly become an open and transparent organization, as
demonstrated by the overwhelming amount of information now available on its
internet website. It is also encouraging transparency among its membership.
 It is taking action to strengthen economic governance. For instance, it is
promoting the use of standards and codes as vehicles for sound economic and
financial management and corporate governance.
 It is working to safeguard the stability and integrity of the international
financial system as a global public good. In particular, the joint IMF-World
 Bank Financial Sector Assessment Program (FSAP) is at the core of efforts to
strengthen financial sectors and combat money laundering in member
countries.
 It is encouraging true national ownership of reforms by streamlining the
conditions attached to IMF-supported programs. While conditionality remains
essential, countries must themselves take responsibility for implementing the
necessary reforms.
 Lastly, the IMF is an institution ready to listen and learn, and not just from its
member governments. It recognizes and values the role of civil society
organizations in articulating the moral foundations for collective action and
building grass roots support.

The Role of The International Monetary Fund (IMF)

Main Functions

The IMF employs three main functions – surveillance, financial assistance,

and technical assistance – to promote the stability of the international monetary and
financial system.

Surveillance: 
The IMF closely monitors each member country's economic and financial
developments and holds a policy dialogue with a member country on a regular basis
(also known as Article IV Consultation), usually once each year, to assess its economic
conditions with a view to providing policy recommendations.  The IMF also reviews
global and regional developments and outlook based on information from individual
consultations.  The IMF publishes such assessment on the multilateral surveillance
through the World Economic Outlook and the Global Financial Stability Report on a
semi-annual basis.

Financial Assistance:
The IMF lends to its member countries facing balance of payments problems in
order to facilitate the adjustment process and restore member countries' economic
growth and stability through various loan instruments or "facilities".  An IMF loan is
usually provided under an "arrangement," requiring a borrowing country to undertake
the specific policies and measures to resolve its balance of payments problem as
specified in a "Letter of Intent." 
Most IMF loans are primarily financed by its member countries through
payments of quotas.  Thus, the IMF's lending capacity is mainly determined by the total
amount of quotas.  Nevertheless, if necessary, the IMF may borrow from a number of its
financially strongest member countries through the New Arrangements to Borrow (NAB)
or the General Arrangements to Borrow (GAB)

Technical Assistance :
The IMF provides technical assistance to help member countries strengthen their
capacity to design and implement effective policies in four areas, namely, 1) monetary
and financial policies, 2) fiscal policy and management, 3) statistics and
4) economic and financial legislation.  In addition to technical assistance, the IMF
also offers training courses and seminars to member countries at the IMF Institute in
Washington D.C., and other regional training institutes (Austria, Brazil, China, India,
Singapore, Tunisia and United Arab Emirates).

The World Bank concentrates on long-term investment projects, institution-

building, and on social, environmental, and poverty issues. The IMF focuses on the
functioning of the international monetary system, and on promoting sound
macroeconomic policies as a precondition for sustained economic growth.

Fixed And Floating Exchange Rates

What is the difference between a fixed and a floating exchange rate?

A fixed exchange rate denotes a nominal exchange rate that is set firmly by the
monetary authority with respect to a foreign currency or a basket of foreign currencies.
By contrast, a floating exchange rate is determined in foreign exchange markets
depending on demand and supply, and it generally fluctuates constantly.

A fixed exchange rate regime reduces the transaction costs implied by exchange
rate uncertainty, which might discourage international trade and investment, and
provides a credible anchor for low-inflationary monetary policy.
On the other hand, autonomous monetary policy is lost in this regime, since the
central bank must keep intervening in the foreign exchange market to maintain the
exchange rate at the officially set level.
Autonomous monetary policy is thus a big advantage of a floating exchange rate.
If the domestic economy slips into recession, it is autonomous monetary policy that
enables the central bank to boost demand, thus 'smoothing" the business cycle, i.e.
reducing the impact of economic shocks on domestic output and employment. Both
types of exchange rate regime have their pros and cons, and the choice of the right
regime may differ for different countries depending on their particular conditions. In
practice there is a range of exchange rate regimes lying between these two extreme
variants, thus providing a certain compromise between stability and flexibility.
The exchange rate in the Czech Republic was pegged to a basket of currencies
until early 1996, then the peg was effectively eliminated through a substantial widening
of the fluctuation band, and now the Czech economy operates in the so-called managed
floating regime, i.e. the exchange rate is floating, but the central bank may turn to
interventions should there be any extreme fluctuations. 

Advantages of a floating exchange rate include a lesser need for reserves, the
avoidance of inflation, and monetary and fiscal bodies allowed to pursue internal
controls, such as full employment.

Fixed exchange rates work well for growing economies that do not have a stable
monetary policy. Fixed exchange rates help bring stability to a country's economy and
attract foreign investment. Floating exchange rates work better for countries that
already have a stable and effective monetary policy.
Floating Rate vs. Fixed Rate: An Overview
All of the volume traded in the currency markets trades around an exchange
rate, the rate at which one currency can be exchanged for another. In other words, it is
the value of another country's currency compared to that of your own.
If you are traveling to another country, you need to "buy" the local currency. Just
like the price of any asset, the exchange rate is the price at which you can buy that
currency. If you are traveling to Egypt, for example, and the exchange rate for U.S.
dollars is 1:5.5 Egyptian pounds, this means that for every U.S. dollar, you can buy five
and a half Egyptian pounds.
Theoretically, identical assets should sell at the same price in different countries,
because the exchange rate must maintain the inherent value of one currency against
the other.
Fixed exchange rates mean that two currencies will always be exchanged at the
same price while floating exchange rates mean that the prices between each currency
can change depending on market factors; primarily supply and demand.

KEY TAKEAWAYS
 A floating exchange rate is determined by the private market through supply and
demand.
 A fixed, or pegged, rate is a rate the government (central bank) sets and
maintains as the official exchange rate.
 The reasons to peg a currency are linked to stability. Especially in today's
developing nations, a country may decide to peg its currency to create a stable
atmosphere for foreign investment.

Fixed Rate
A fixed, or pegged, rate is a rate the government (central bank) sets and
maintains as the official exchange rate. A set price will be determined against a major
world currency (usually the U.S. dollar, but also other major currencies such as the
euro, the yen, or a basket of currencies).
In order to maintain the local exchange rate, the central bank buys and sells its
own currency on the foreign exchange market in return for the currency to which it is
pegged.
If, for example, it is determined that the value of a single unit of local currency is
equal to U.S. $3, the central bank will have to ensure that it can supply the market with
those dollars. In order to maintain the rate, the central bank must keep a high level
of foreign reserves.

Floating Rate
Unlike the fixed rate, a floating exchange rate is determined by the private
market through supply and demand. A floating rate is often termed "self-correcting," as
any differences in supply and demand will automatically be corrected in the market.
Look at this simplified model: if demand for a currency is low, its value will
decrease, thus making imported goods more expensive and stimulating demand for
local goods and services. This, in turn, will generate more jobs, causing an auto-
correction in the market. A floating exchange rate is constantly changing.
In reality, no currency is wholly fixed or floating. In a fixed regime, market
pressures can also influence changes in the exchange rate. Sometimes, when a local
currency reflects its true value against its pegged currency, an underground market
(which is more reflective of actual supply and demand) may develop.
A central bank will often then be forced to revalue or devalue the official rate so
that the rate is in line with the unofficial one, thereby halting the activity of the illegal
market.
In a floating regime, the central bank may also intervene when it is necessary to
ensure stability and avoid inflation; however, it is less often that the central bank of a
floating regime will interfere.

Special Considerations
Between 1870 and 1914, there was a global fixed exchange rate. This was
implemented by the four major industrial powers: Germany, Britain, France, and the
U.S. Currencies were linked to gold, meaning that the value of the local currency was
fixed at a set exchange rate to gold ounces.1
This was known as the gold standard. This allowed for unrestricted capital
mobility as well as global stability in currencies and trade; however, with the start of
World War I, the gold standard was abandoned.2

The Impact of European Currency (EURO)

What are the benefits of the euro?
The euro offers many benefits for individuals, businesses and the economies of the
countries that use it.
These include:
 the ease with which prices can be compared between countries, which boosts
competition between businesses, thereby benefiting consumers
 price stability
 the euro makes it easier, cheaper and safer for businesses to buy and sell within
the euro area and to trade with the rest of the world
 improved economic stability and growth
 better integrated and therefore more efficient financial markets
 greater influence in the global economy
 a tangible sign of a European identity.

Many of these benefits are interconnected. For example, economic stability is good
for a member country’s economy, as it enables the government to plan for the future.
But economic stability also benefits businesses by reducing uncertainty and
encouraging investment. This, in turn, benefits the public through increased
employment and better-quality jobs.

How does the euro produce these benefits?

The euro has eliminated the costs of exchange rate fluctuations within the euro
area. This protects consumers and businesses within the euro area from costly swings
in currency markets, which, in some countries, used to undermine confidence,
discourage investment and cause economic instability. Before the euro, the need to
exchange currencies meant extra costs, risks and a lack of transparency in transactions
between countries. Using a single currency makes doing business and investing in the
euro area easier, cheaper and less risky.
By making it easy to compare prices, the euro encourages trade and investment
of all kinds between countries. It also helps individual consumers and businesses to
secure the best prices.

Benefits worldwide
The scale of the single currency and the size of the euro zone also bring new
opportunities in the global economy. A single currency makes the euro zone a more
attractive region for non-EU countries to do business with, thus promoting trade and
investment.
Prudent economic management makes the euro an attractive reserve currency
for non-EU countries and gives the euro zone a more powerful voice in the global
economy. The euro is the world’s second most popular reserve currency.
The stability of the euro also makes it attractive for businesses around the world
that trade with Europe to accept prices quoted in euros. This saves European
businesses from the costs associated with shifts in exchange rates and the cost of
converting euros into other currencies. The euro is the currency of choice for almost
40% of global cross-border payments and for almost half the EU’s exports worldwide.
Scale and careful management also bring economic stability to the euro zone,
making it more resilient to external economic 'shocks', i.e. sudden economic changes
that may arise outside the euro zone and disrupt national economies, such as
worldwide oil price rises or turbulence on global currency markets. The size and
strength of the euro zone make it better able to absorb such external shocks without job
losses and lower growth.

Reaping the benefits

First, the euro zone economy benefits from prudent management. The EU’s
economic and fiscal rules, including the Stability and Growth Pact, a central component
of Economic and Monetary Union, promote economic stability and growth.  Second, the
euro is the key mechanism for maximizing the benefits of the single market, trade policy
and political cooperation. As such, it is an integral part of the economic, social and
political structures of today’s European Union.
The euro is the second most important currency in the world. Its strong
international role can shield our economy and financial system from foreign
exchange shocks, reduce reliance on other currencies and ensure lower costs for
EU firms.

Key European Union achievements and tangible benefits

Key achievements
Since 1957, the European Union has achieved great things for its citizens and the
world:
  a continent at peace
 freedom for its citizens to live, study or work anywhere in the EU
 the world’s biggest single market
 aid and development assistance for millions of people worldwide

How To Calculate Foreign Exchange Rates

If you’ve ever sent money overseas, you know how important it is to understand
a country’s local currency and how it relates to the money you have. This is the idea
behind how to calculate exchange rates and understand foreign currencies.
“Exchange rate” refers to how much of one currency you can trade for a different
currency. For example, you could trade about 1 USD for 0.83 EUR. Or in other words, 1
EUR is equal to about 1.21 USD.

How are exchange rates calculated?

Exchange rates are determined by foreign exchange trading (forex trading).
Forex trading is an international market for buying and selling currencies, and it’s about
25 times larger than all the world’s stock markets.
Forex trading includes small transactions, like when you travel internationally and
trade your currency for the local currency. It also includes large transactions, like when
a business secures an exchange rate for the future. Forex trading happens all day,
every day, and that’s why the exchange rate is always changing for most currencies.
These trades impact exchange rates because there is more money circulating in
different economies. Since about 88% of the world trade is in US dollars, most
exchange rate calculations are compared to this currency.

What are the different kinds of exchange rates?

There are two different kinds of exchange rates to be aware of around the world:
flexible and fixed exchange rates.

Flexible exchange rates

Flexible exchange rates, which are used by many developed countries, depend
on a country’s current supply and demand, and “self-correct” based on changes in the
economy. With a flexible exchange rate, if the demand for a currency is low, its value
will decrease. This makes imported goods more expensive and can stimulate the
economy as consumers turn to local goods and services, generating jobs that contribute
to a market correction.
Since this cycle happens often, a flexible exchange rate is always changing.
When a country has a flexible exchange rate, this also means that the government or
central bank doesn’t actively work to keep the exchange rate fixed or regulated. Instead,
the forex market influences the exchange rate. For example, as of February 2021, the
exchange rate was 1 USD to 0.83 EUR, but at the end of March 2020, it was about 1
USD to 0.91 EUR.

Fixed exchange rates

 Fixed exchange rates are set and maintained by a country’s government,
resulting in an official exchange rate. This set price is usually determined against a
major international currency, like the US dollar.
For a fixed exchange rate to work, the central bank buys and sells currency on
the forex market in return for the currency it’s compared against. For example, if a
country fixes their exchange rate equal to 2 USD, they then supply themselves with
enough US dollars to supply the market with that exchange rate. These reserves are
called foreign reserves and help regulate market fluctuations, inflation, and deflation,
and as a result, the country’s exchange rate.
As of February 2021, countries with a fixed exchange rate include Saudi Arabia,
Belize, Cuba, Hong Kong, Panama, United Arab Emirates, and a few others.
What factors affect exchange rates?
One of the most common questions about exchange rates is “why do exchange
rates change so frequently?” This is because they depend on several factors, such as
interest rates, money supply, and financial stability.

Interest rates
Interest rates, inflation, and exchange rates are closely related because they
directly influence each other. When financial institutions change the interest rate, this
impacts currency values. Higher interest rates mean that lenders receive a higher return
compared to other economies, which then motivates them to spend more money in that
country. This leads to an influx in foreign capital, which causes the exchange rate to
increase.
Decreasing interest rates have the opposite effect. As interest rates go down, so
do exchange rates. In short, higher interest rates make a country’s currency more
valuable, which drives investors to exchange their local currency for the higher-paying
one.

Money supply
Money supply, or how much cash a country has on hand, influences both
inflation and exchange rates. This is the money that the country’s central bank creates.
If there is too much money in circulation, this causes inflation. This also means that the
country’s currency isn’t worth as much because there is more of it.
When that currency is exchanged internationally, it’s not worth as much because
there’s an excess, resulting in a decreasing exchange rate. This is what economists
mean when they talk about how “strong” a currency is.

Financial stability
The country’s economic health plays a role in determining its exchange rate. If a
country has a strong economy, people will buy its goods and services. This results in
more international currency being injected into the local economy. On the flip side,
things like financial instability or political turmoil can make international investors
nervous and they may move their capital to more stable countries.

How to read an exchange rate

 Currency conversion calculations are presented in pairs, which means that one
currency is quoted against the other. For example, a 1 USD/CAD exchange rate means
that 1 USD is equal to about 1.26 CAD. Usually, exchange rates are presented as a
number, like 1.26, as in the case of the USD/CAD example.

How to calculate exchange rates

Currency conversion calculations can be tricky at first, but it really only requires a
simple calculation. Here is a step-by-step guide on how to calculate exchange rates:
1. Know the country’s exchange rate. You can find this information online or on
the Western Union app. If you’re traveling, the exchange rates are usually posted
at places like banks, airports, or currency exchange shops.
2. If you know the exchange rate, divide your current currency by the
exchange rate. For example, suppose that the USD/EUR exchange rate is 0.631
and you’d like to convert 100 USD into EUR.To accomplish this, simply multiply
the 100 by 0.631 and the result is the number of EUR that you will receive: 63.10
EUR. Converting EUR to USD involves reversing that process. Using the same
example, if you took your 63.10 EUR and multiplied it by 0.631, you end up with
the 100 USD you started with.
3. If you don’t know the exchange rate, you can use the following currency
conversion calculation to find it:
Starting Amount (Original Currency) / Ending Amount (New Currency) =
Exchange Rate
For example, if you exchange 100 USD for 80 EUR, the exchange rate would be
1.25.

Activity 3
1. Of what importance is the international monetary system?
2. What is its role? Is it advantageous or disadvantageous?
3. Differentiate fixed from floating exchange rates.
4. Calculate foreign exchange rates

MODULE 4

International Financial Markets

Different International Financial Markets

How A Foreign Exchange Market Function

Objectives: At the end of the period, the students must be able to:
1. Discuss the different International Financial Markets
2. Elucidate how a foreign exchange market function

International Financial Markets

The International Financial Market is the place where financial wealth is
traded between individuals (and between countries). It can be seen as a wide set of
rules and institutions where assets are traded between agents in surplus and agents in
deficit and where institutions lay down the rules.

What is international finance and why is it important?

True to its name, international finance encompasses any sort of monetary or
financial interactions between two or more countries. 
As different nations interact in terms of trade and finance, global finance has
become an integral part of the financial world. Those with knowledge of it are highly
sought-after players in financial economics. 
International finance covers the global framework of economies, financial
organizations, and regulations — with the focus on exchange rates and foreign direct
investment. 
It also encompasses the structure and operation of foreign exchange and offers
an understanding of how macroeconomic models are used to find the fair value of
currency exchange rates; order flow analyses along with the microstructure of exchange
rate markets; and how monetary policies operate under fixed and floating exchange rate
regimes. 

What makes international finance important? 

Thanks to rapid globalization it is much easier for countries to trade and invest
with each other than it was half a century ago. 
International finance helps maintain economic relations among different countries
by helping determine exchange rates which are based on the relative value of
currencies, along with following the IFRS (International Financial Reporting Standards)
system, which helps report financial issues across the world based on a single
accounting standard. 
There are also various international finance organizations such as the International
Finance Corporation (IFC), The World Bank, and the International Monetary Fund (IMF)
that can help regulate international finance as well as solve any disputes that arise
between countries. 
Through international finance, you can find exchange rates and inflation rates,
and learn about foreign markets and their economic status. 

What are the career opportunities in this field? 

Some of the most popular job categories available to those who work in global
finance include asset management, sales, strategic consulting, equity research, private
equity, structured finance, and trading. 
If you were to specialize in global finance, you could pursue the following roles: 
 International financial analyst  
 Investment adviser  
 Investment banker  
 Venture capitalist  
 Senior credit controller  
 Financial management consultant  
 Credit control manager  
 Chief financial officer 
  Chief executive officer 
 Managing director 

It is important to note that those that work in global finance don’t necessarily work
exclusively in financial world; you would be more than equipped to work in any field and
adapt your financial expertise to match the deliverables of the industry. 
International finance is the study of monetary interactions that transpire
between two or more countries. International finance focuses on areas such as
foreign direct investment and currency exchange rates.

How A Foreign Exchange Market Functions

The market basically converts one's currency to another. Credit Function: The
FOREX provides short-term credit to the importers in order to facilitate the smooth flow
of goods and services from various countries. The importer can use his own credit to
finance foreign purchases.

Foreign Exchange Market: Functions and Types

Foreign Exchange refers to the currencies of countries other than the domestic
currency of a given country. In simple terms, it is the aggregation of the foreign
currencies held by the country’s government, and Securities and bonds issued by
foreign companies and governments. The rate at which one currency is exchanged for
another is called the Foreign Exchange Rate or Foreign Rate of Exchange. It is the
price paid in domestic currency for buying a unit in foreign currency. For example, If 60
rupees are to be paid to get one dollar then the exchange rate, in that case, is $ 1: ₹
60.

What is Foreign Exchange Market?

Every nation has a unique currency that it uses for commerce and business, in
India, it’s Indian Rupee, but what about the global market? The lack of flexibility of the
currencies makes them a barrier to international trade. The Foreign Exchange Market
was formed to solve this problem. This is a specific kind of market where the currency
exchange rates are fixed. In absence of a foreign exchange market, the global economy
would suffer greatly.
The Foreign Exchange Market is the market in which the national currencies
are traded for one another.  It refers to the market for national currencies of different
countries in the world. It is the center of trade for the different currencies. 
In simple words, it is a market in which buying and selling of foreign currencies
take place. In this market buyers and sellers constitute people who wish to buy or sell
foreign exchange. The buyers can be individuals, firms, commercial banks (like the
State Bank of India), the central bank (Reserve Bank of India), commercial companies,
and investment brokers.
Sometimes there is a confusion that the foreign exchange market is a physical
place where we can go and trade the currencies of different countries. But the foreign
exchange market is not confined to a place, it is a system. Moreover, there are a large
number of foreign currencies like the Dollar, Pound, Yen, and many others, which can
be traded, converted, and exchanged in this market and not restricted to one or few
foreign currencies.
The exchange rate for all currencies is decided on the foreign exchange market,
which is a global market. Currency Market or Forex are other names for the foreign
exchange market. The players in this market can exchange, buy, sell, and speculate on
the currencies.

Functions of Foreign Exchange Market

1. Transfer Function: 
It is the primary function of the foreign exchange market. It facilitates the transfer
of purchasing power in terms of foreign exchange between the countries that are
involved in the transactions. Purchasing power (or buying power) is the number of
products and services that one unit of currency can purchase. The function is performed
through credit instruments like bills of exchange, bank drafts, and telephonic transfers.
Therefore, it involves sending money or foreign currencies from one nation to another to
settle their accounts.

2. Credit Function:
Just like domestic trade, foreign trade also depends on credit. The Credit
Function of the Foreign Exchange Market implies the provision of credit in terms of
foreign exchange for the export and import of goods and services. For this, bills of
exchange are generally used for making payments internationally. The duration of Bills
of Exchange is usually three months. The main purpose of credit is to help the importer
in taking possession of goods, sell them and obtain the money to pay the bills.

3. Hedging Function:
It implies to protection against risk related to fluctuations in the foreign exchange
rate. Under this system, buyers and sellers agree to sell and buy goods on a future date
at some commonly agreed rate of exchange. The basic purpose behind Hedging
Function is to avoid losses that might be caused because of variations in the exchange
rate in the future. 

Types of Foreign Exchange Market

A Foreign Exchange Market can be classified as a Spot Market and Forward
Market based on the period of transactions undertaken.

1.  Spot Market(Current Market):

Spot market refers to the market in which receipts and payments are made
immediately. In this market sales and purchase of foreign currency are affected by the
prevailing rate of exchange on the spot. Simply put, it refers to a market in which current
transactions in foreign exchange take place. The delivery of foreign exchange takes
place in a single moment. The rate at which current transactions take place is
called Spot Rate. 
 For example, if a person receives a gift of $50 from a relative abroad, and if the
current exchange rate is $1 = ₹60, then the account is credited with ₹3000.

The principles characteristics of a Spot Market are:

1. In the spot market, transactions take place on a daily basis.
2. The rate of exchange that is determined in the spot market is known as the Spot
Exchange Rate or Current Rate of exchange. The spot rate of exchange is the rate
that prevails at the time of making transactions.

Economic Integration among Countries

What Is Economic Integration?
Economic integration is an arrangement among nations that typically includes
the reduction or elimination of trade barriers and the coordination of monetary
and fiscal policies. Economic integration aims to reduce costs for both consumers and
producers and to increase trade between the countries involved in the agreement.1
Economic integration is sometimes referred to as regional integration as it often occurs
among neighboring nations.

Economic Integration Explained

When regional economies agree on integration, trade barriers fall and economic
and political coordination increases. 
Specialists in this area define seven stages of economic integration: a
preferential trading area, a free trade area, a customs union, a common market, an
economic union, an economic and monetary union, and complete economic
integration.2 The final stage represents a total harmonization of fiscal policy and a
complete monetary union.

Advantages of Economic Integration

The advantages of economic integration fall into three categories: trade
creation, employment opportunities, and consensus and cooperation.
1.More specifically, economic integration typically leads to a reduction in the
cost of trade, improved availability of goods and services and a wider selection of
them, and gains in efficiency that lead to greater purchasing power.
2.Economic integration can reduce the costs of trade, improve the availability of
goods and services, and increase consumer purchasing power in member nations
Political cooperation among countries also can improve because of stronger economic
ties, which provide an incentive to resolve conflicts peacefully and lead to
greater stability.

The Costs of Economic Integration

Despite the benefits, economic integration has costs. These fall into three
categories:
 Diversion of trade. That is, trade can be diverted from nonmembers to
members, even if it is economically detrimental for the member state.
  Erosion of national sovereignty. Members of economic unions typically are
required to adhere to rules on trade, monetary policy, and fiscal policies
established by an unelected external policymaking body.
 Employment shifts and reductions. Economic integration can cause
companies to move their production operations to areas within the economic
union that have cheaper labor prices. Conversely, employees may move to
areas with better wages and employment opportunities
 Because economists and policymakers believe economic integration leads
to significant benefits, many institutions attempt to measure the degree of
economic integration across countries and regions. The methodology for
measuring economic integration typically involves multiple economic indicators
including trade in goods and services, cross-border capital flows, labor
migration, and others. Assessing economic integration also includes measures
of institutional conformity, such as membership in trade unions and the strength
of institutions that protect consumer and investor rights.

Real-World Example of Economic Integration

 The European Union (EU) was created in 1993 and included 27 member states
in 2022.3 Since 1999, 19 of those nations have adopted the euro as a shared
currency.4 According to data from The World Bank, the EU accounted for
roughly 18% of the world's gross domestic product in 2020.5
 The United Kingdom voted in 2016 to leave the EU. In January 2020 British
lawmakers and the European Parliament voted to accept the United Kingdom's
withdrawal. The UK officially split from the EU on January 1, 2021

What is Economic Integration?

 Economic integration involves agreements between countries that usually include
the elimination of trade barriers and aligning monetary and fiscal policies, leading
to a more inter-connected global economy. Economic integration is consistent
with the economic theory, which argues that the global economy is better off
when markets can function in unison with minimal government intervention.

Understanding Economic Integration

 Economic integration, like the name implies, involves the integration of countries’
economies. Another term to describe it is globalization, which simply refers to the
inter-connectedness of businesses and trading among countries. An economy is
defined as a set of inter-related activities that determine how limited resources
are allocated. In the modern economy, all economies feature a form of a market
system. A market-based economy utilizes the economic forces of demand and
supply in order to distribute these limited resources.

 Traditionally, economies were thought of as separate for each region or country,

with each country managing its own separate economy and largely unrelated to
other countries. However, globalization allows the movement of goods, services,
capital between countries and blurred the distinctions between economies.
  Today, there is no economy that functions completely isolated from other
economies. There is a simple reason for such an occurrence – trade benefits all
economies in most cases. It allows for specializations of economies with
comparative advantages and can trade with other economies that possess
alternative comparative advantages.

Comparative Advantage Example

 For example, consider a country that happens to possess an abundance of oil
sands located within its borders. The country can extract the oil and trade it for
other resources that it lacks, perhaps food such as corn or wheat.
 Another country may enjoy optimal weather for growing such crops and therefore
can specialize in growing corn or wheat and trade it for oil to provide energy for
their society. It illustrates how trade can benefit all economies by taking
advantage of specialization and comparative advantages.

Stages of Economic Integration

 Economic integration is expected to improve the outcomes for all economies by
many economists and policymakers. Within economics, there are seven stages
that lead to complete economic integration.

Benefits of Economic Integration

 Economic integration is beneficial in many ways, as it allows countries to
specialize and trade without government interference, which can benefit all
economies. It results in a reduction of costs and ultimately an increase in overall
wealth.
 Trade costs are reduced, and goods and services are more widely available,
which leads to a more efficient economy. An efficient economy distributes capital,
goods, and services into the areas that demand them the most.
 The movement of employees is liberalized under economic integration as well.
Normally, employees would need to deal with visas and immigration policies in
order to work in another country. However, with economic integration, employees
can move freely, and it leads to greater market expansion and technology
sharing, which ultimately benefits all economies.
 Lastly, political cooperation is encouraged, and there are fewer political conflicts.
Political conflicts usually end with economic losses stemming from trade wars or
even military wars breaking out, resulting in extreme costs for all combatants.

Drawbacks of Economic Integration

 Nationalists, or people who believe that their country is superior to others, are
critical of economic integration. In order to appeal to nationalists, some countries
employ forms of protectionism, which leads to higher tariffs and less free trade
between other countries.

The notable feature of economic integration is the loss of individual central banks
who control monetary policy. It leads to less national sovereignty, and the
responsibilities of central banks are delegated to an external body instead. The external
control becomes troublesome in terms of managing a cohesive fiscal and monetary
policy among many different countries

Activity 4
1. Discuss the different International Financial Markets.
2. How does a foreign exchange market function?

MODULE 5
Economic Integration Among Countries
The Levels of Economic Integration
The Various Arguments of Economic Integration
The Organization of The European Community

Objectives: At the end of the period, the students must be able to:
1. Discuss the economic integration among countries.
2. the levels of economic integration.
3. Discuss the various arguments of economic integration.
1. Deliberate how the European Community was organized

Economic Integration Explained

When regional economies agree on integration, trade barriers fall and economic
and political coordination increases. 
Specialists in this area define seven stages of economic integration: a preferential
trading area, a free trade area, a customs union, a common market, an economic
union, an economic and monetary union, and complete economic integration.  The final
stage represents a total harmonization of fiscal policy and a complete monetary union.
 Economic integration, or regional integration, is an agreement among nations
to reduce or eliminate trade barriers and agree on fiscal policies.
 The European Union, for example, represents a complete economic integration.
 Strict nationalists may oppose economic integration due to concerns over a loss
of sovereignty.

Advantages of Economic Integration

 The advantages of economic integration fall into three categories: trade
creation, employment opportunities, and consensus and cooperation.
 More specifically, economic integration typically leads to a reduction in the cost
of trade, improved availability of goods and services and a wider selection of
them, and gains in efficiency that lead to greater purchasing power.
  Economic integration can reduce the costs of trade, improve the availability of
goods and services, and increase consumer purchasing power in member
nations

The Costs of Economic Integration

Despite the benefits, economic integration has costs. These fall into three categories:
 Diversion of trade. That is, trade can be diverted from nonmembers to
members, even if it is economically detrimental for the member state.
 Erosion of national sovereignty. Members of economic unions typically are
required to adhere to rules on trade, monetary policy, and fiscal policies
established by an unelected external policymaking body.
 Employment shifts and reductions. Economic integration can cause
companies to move their production operations to areas within the economic
union that have cheaper labor prices. Conversely, employees may move to
areas with better wages and employment opportunities
 Because economists and policymakers believe economic integration leads to
significant benefits, many institutions attempt to measure the degree of
economic integration across countries and regions. The methodology for
measuring economic integration typically involves multiple economic indicators
including trade in goods and services, cross-border capital flows, labor
migration, and others. Assessing economic integration also includes measures
of institutional conformity, such as membership in trade unions and the strength
of institutions that protect consumer and investor rights.

Real-World Example of Economic Integration

 The European Union (EU) was created in 1993 and included 27 member states
in 2022.3 Since 1999, 19 of those nations have adopted the euro as a shared
currency.4 According to data from The World Bank, the EU accounted for
roughly 18% of the world's gross domestic product in 2020.5
 The United Kingdom voted in 2016 to leave the EU. In January 2020 British
lawmakers and the European Parliament voted to accept the United Kingdom's
withdrawal. The UK officially split from the EU on January 1, 2021

The Various Arguments of Economic Integration

For instance, the economic argument for integration is to remove the restriction
in trade, allowing the economy to grow at a higher rate. In addition, economic
integration reduces the costs of trade and employment opportunities since labor can
move freely among the countries.
Economic integration, process in which two or more states in a broadly defined
geographic area reduce a range of trade barriers to advance or protect a set of
economic goals.
The level of integration involved in an economic regionalist project can vary
enormously from loose association to a sophisticated, deeply integrated, trans
nationalized economic space. It is in its political dimension that economic integration
differs from the broader idea of regionalism in general.
 Although economic decisions go directly to the intrinsically political question of
resource allocation, an economic region can be deployed as a technocratic tool by the
participating government to advance a clearly defined and limited economic agenda
without requiring more than minimal political alignment or erosion of formal
state sovereignty.
The unifying factor in the different forms of economic regionalism is thus the
desire by the participating states to use a wider, trans nationalized sense of space to
advance national economic interests.

Forms of economic integration

Although there are many different forms of economic integration, perhaps the
most convenient way to order the concept is to think of a continuum that ranges from
loose association at one end to an almost complete merging of national economies at
the other end.
Although it is far from a given that positive experiences in the simpler forms of
economic integration will lead to a deepening of the process to increasingly integrated
shared economic spaces, the more-complex forms incorporate and are founded on
the substantive elements of the earlier forms.
The significant point is that although economic integration is explicitly framed by
trading relationships, it acquires an increasingly political character as it reaches deeper
forms.

Simple free-trade area

The most basic type of economic integration is a simple free-trade area. In this
form, attention is focused almost exclusively on a reduction of the tariffs and quotas that
restrict trade.
Emphasis is placed almost entirely on increasing the exchange of goods. The
articulation of trans nationalized production chains, trade in services, labor mobility, and
more-sophisticated forms of economic integration are not an explicit goal and emerge
as merely tangential to the primary goal of securing access to foreign markets for
domestic firms.

Second-generation free-trade area

In a second-generation free-trade area, the basic nature of simple free trade is
expanded to include trade in non-goods such as services. Where a simple free-trade
area need only address the question of tariffs and quotas, the trade in services and a
widening of trade in goods raises questions of regulatory convergence and the
harmonization of rules of operation and governance.
At this stage, attention needs to be turned to such things as the transferability of
professional certifications as well as questions of labor mobility, particularly for the
highly skilled professions such as legal, accounting, technology, and medical services.
The increased interdependence between the participating economies that comes with
expanded trade in all economic areas and a measure of regulatory convergence can
lead to an increased distribution of production chains across national boundaries.

Customs union
 As national production structures trans nationalize across the regional space, the
next stage is to deepen regulatory harmonization to present a common stance to the
extra-regional market. The result is the formation of a customs union relying upon a
common external tariff.
One of the key attractions of this regulatory convergence between participating
economies is that it reduces the challenges of monitoring and taxing external inputs that
are used to produce goods and services that circulate within the region. Implicit in the
adoption of a common external tariff is a further harmonization of national rules and
regulations, particularly those relating to the control and flow of external trade into the
regional economic space.

Common market
The idea of a common market grows from the possibilities presented by the
adoption of a common external tariff. As trade flows increase and factor inputs imported
into the integrating economies begin to circulate freely, production chains crossing the
intra-regional national boundaries begin to form.
This results in sustained pressure to reduce the costs of transporting finished and
semi-finished goods between the states participating in the integration project. The
solution is the harmonization of border procedures, which in its ultimate form leads to
the virtual elimination of national boundaries as internal barriers to trade and the
formation of a free-flowing regional economic space.
A concomitant change with this complete opening of internal trade is a
liberalization of labor mobility, allowing the inhabitants of one member state to work in
all the other member states of the region.

Monetary union
With the evolution of a common market and the concomitant surge in intra-
regional trade comes a new source of expenses for business: the costs of transnational
transactions. Even though borders may be open to the free transit of goods and
services, the need to constantly engage in foreign exchange operations to settle
payments as well as the differing relative costs caused by different national economic
policies impose a constant financial and administrative expense on firms operating
within the region.
The solution and next stage in the integration progression is some form
of monetary union, be it through an agreed fixing of relative exchange rates or the more
commonly discussed adoption of a common currency.
At this point, the economic aspects of integration also begin to take on a strong
political flavor. Adoption of a common currency or monetary policy by all members of
the project also requires a strong convergence in macroeconomic policy, which imposes
external restraints on the domestic fiscal and expenditure policies that a government
may pursue.
The result is a gradual blurring of the political as well as economic lines that
separate the states participating in the integration project.

Economic community or union

 In an economic community or union, the logic of common external tariffs,
regulatory approximation, and harmonization of macroeconomic policy is taken to its full
conclusion through the construction of an overarching governance framework that
imposes a common economic policy system on all countries in the region.
In effect, the member states surrender a significant degree of
economic sovereignty to the whole in the expectation of significantly expanded
opportunities presented by a much larger, fully integrated economic
space facilitating the full mobility of finished products, factors of production, and labor.
The harmonization of regulations and procedures is facilitated through the
creation of an overarching legislative and legal system that trumps national laws and
rules and also ensures that economic actors will face the same treatment throughout
the region.

Justifications of economic integration

The extent to which a region will deepen its economic integration and adopt the
characteristics of a supranational state is partially influenced by the factors prompting
states to start the regionalization process. Four broad reasons for pursuing economic
integration can be identified.

Reactive regionalism
Reactive regionalism is also referred to as defensive regionalism, suggesting that
states choose to pursue economic integration to protect their shared interests from a
specific or nebulous external threat.
In a historical context, reactive regionalism was viewed by developing countries
as a technique for providing the large internal markets needed to
support nascent industrial sectors. Although the decline of import-substitution
industrialization strategies and the rise of neoliberalism have greatly reduced the
protectionist aspect of reactive regionalism, the idea of providing a common level of
shelter for internal producers does remain in integration projects such as the South
American trade bloc Mercosur.
The more common motive for contemporary economic integration projects lies in
the logic of defensive regionalism. Here the participating states are reacting to
perceived threats in the international economic environment.
In some instances, such as Canadian participation in the North American Free
Trade Agreement (NAFTA), the regional economic integration route was pursued to
prevent a country from becoming isolated in a global economic system that appeared to
be increasingly drifting toward a series of large economic blocs.
Other regional groupings, such as the Andean Community and Mercosur,
emerged partly as an attempt to use the expanded internal market as a lure to
attract foreign direct investment (FDI) in an increasingly competitive international
investment climate.
Either way, the common element is that the participating states are seeking to
use their combined economic mass and density to protect shared interests and
to mitigate external vulnerabilities.

Peace and security

 The most prevalent example of an economic integration emerging as part of an
effort to ensure peace and security is the European Union (EU).
As the neo functionalist school suggests, the idea is to increase economic
interpenetration between erstwhile hostile countries, seeking to raise the level of
interdependence to the point where armed conflict and sustained mutual isolation
become economically unsupportable.
This underlying rationale can either emerge as a consensus position between
participating states, as was partly the case in Argentine-Brazilian approximation in the
1980s and the formation of the South Asian Association for Regional Cooperation
(SAARC), or be suggested as a solution to simmering hostilities by mediating actors as
an effective method for diffusing potential conflicts, as has sometimes been the case
with the South American infrastructure integration program launched in 2000.

Efficiency
The defensive character of many integration projects is in some cases eclipsed
by a desire to reduce transaction costs within a regional space that is seeing growth in
transnational production structures. Here the example of the Association of Southeast
Asian Nations (ASEAN) is instructive, with a sustained rise in the regional distribution
of production structures creating pressure for increased logistical and regulatory
cooperation to facilitate the exchange of production factors.
Significantly, an efficiency-seeking rationale to economic integration will not
necessarily bring about pressure for labor mobility and often completely rejects the sorts
of political approximations implicit in the deeper forms of economic integration.
The profit-making potential of economic cooperation within the region remains
the dominant factor, with only tangential attention being given to notions of social or
political integration.

Externalization
Although rarely explicitly framed as the need to externalize the rationale for
politically contentious policies, economic integration has emerged as a device used on
the domestic political stage.
In South America the pursuit of an economic integration project was one
justification used by pro-democracy factions in Argentina and Brazil in the late 1980s to
neutralize lingering calls for a return to authoritarianism.
Democratic governments in developing countries have also used the need to
adhere to regional commitments as the justification for the pursuit and implementation
of the Washington Consensus model of neoliberalism.
Particularly important in this respect has been the reduction of state supports for
local industries, the lowering of high tariff walls, and the privatization of state-owned
firms. The pattern is thus one of domestic governments placing the blame for some of
the politically difficult neoliberal economic programs pursued in the 1990s on the need
to meet the country’s regional commitments, with the integration project being
presented as the source of long-term and sustainable economic advantages as well as
a collectively improved insertion into the international economy.

The political factor

 Although economic integration leads to regionalism as a method of organizing
interstate relations that focuses on economic questions, it is in the end a politically
motivated concept.
States do not fall into economic regionalism by accident. Rather, they engage in
long, sustained, and highly technical discussions to carefully delimit the policy and
geographical boundaries of the region.
Management of the region, irrespective of the extent to which it has resulted in
economic integration, also emerges as a potential source of sustained political tension
between member states. Different levels of relative economic strength, sophistication,
and global competitiveness provide a basis for divergent views over how the integration
project should operate and how it should evolve over time.
Particularly contentious can be the role of the anchor state, the state with the
large market that is often present in an economic integration project and effectively
provides the membership rents to the other members by absorbing an increased
proportion of their exports. The point is that, even though an economic region is
founded on and discussed in terms of the technocratic language of economics, the
power relations and equations typically found in international relations remain,
although manifest in different and sometimes indirect form.

The formation and pursuit of economic integration can also present new
international challenges for participating states. Developing states engaged in a
defensive regionalist project to improve their collective negotiating power with
predominant states in the global political economy can be faced with a divide-and-
conquer strategy in interregional and multinational negotiations.
This places additional strains on the anchor state to maintain the solidity of the
region. In some instances, this is not a particularly significant challenge, because the
benefits of collective negotiation in international forums quickly outweigh the economic
benefits offered by the group. In some respects, this reflects the EU’s quiet strategy of
encouraging economic integration and regionalism as a strategy for internally driven
development and enhanced political stability in developing areas.

The Organization of The European Community

The European Community (EC) was formed in 1957 by six European countries
with the goal of providing economic stability and preventing future wars.

Aims
The aims of the European Union within its borders are:
 promote peace, its values and the well-being of its citizens
 offer freedom, security and justice without internal borders, while also taking
appropriate measures at its external borders to regulate asylum and immigration
and prevent and combat crime
 establish an internal market
 achieve sustainable development based on balanced economic growth and price
stability and a highly competitive market economy with full employment and
social progress
 protect and improve the quality of the environment
  promote scientific and technological progress
 combat social exclusion and discrimination
 promote social justice and protection, equality between women and men, and
protection of the rights of the child
 enhance economic, social and territorial cohesion and solidarity among EU
countries
 respect its rich cultural and linguistic diversity
 establish an economic and monetary union whose currency is the euro

The aims of the EU within the wider world are:

 uphold and promote its values and interests
 contribute to peace and security and the sustainable development of the Earth
 contribute to solidarity and mutual respect among peoples, free and fair trade,
eradication of poverty and the protection of human rights
 strict observance of international law

Values
 The European Union is founded on the following values:
Human dignity
Human dignity is inviolable. It must be respected, protected and constitutes the
real basis of fundamental rights.

Freedom
Freedom of movement gives citizens the right to move and reside freely within the
Union. Individual freedoms such as respect for private life, freedom of thought, religion,
assembly, expression and information are protected by the EU Charter of Fundamental
Rights.

Democracy
The functioning of the EU is founded on representative democracy. A European
citizen automatically enjoys political rights. Every adult EU citizen has the right to stand
as a candidate and to vote in elections to the European Parliament. EU citizens have
the right to stand as a candidate and to vote in their country of residence, or in their
country of origin.

Equality
Equality is about equal rights for all citizens before the law. The principle of
equality between women and men underpins all European policies and is the basis for
European integration. It applies in all areas. The principle of equal pay for equal work
became part of the Treaty of Rome in 1957.

Rule of law
The EU is based on the rule of law. Everything the EU does is founded on
treaties, voluntarily and democratically agreed by its EU countries. Law and justice are
upheld by an independent judiciary.
 The EU countries gave final jurisdiction to the European Court of Justice - its
judgments have to be respected by all.

Human rights
Human rights are protected by the EU Charter of Fundamental Rights. These
cover the right to be free from discrimination on the basis of sex, racial or ethnic origin,
religion or belief, disability, age or sexual orientation, the right to the protection of your
personal data, and the right to get access to justice.

Activity 5
1. Discuss the economic integration among countries.
2. Explain the levels of economic integration.
3. Discuss the various arguments of economic integration.
4. How was the European Community organized?

MODULE 6

Trade and investment policies

The Goals and Function of NAFTA

The Role of Foreign Aid in International Trade and Investment

Objectives: At the end of the period, the students must be able to:
1. Explain the trade and investment policies.
4. Deliberate on the role of foreign aid in international trade and investment.
3.Discuss the goals and function of GATTand NAFTA.

Trade and Investment Policies

The aim is to further hasten implementation of liberalization to help the
impoverished and developing nations.

What is Foreign Trade and Investment?

 Foreign trade is critical to any prosperity of a nation.
 As it offers goods and services to meet human needs, trade can be considered a
social activity.
 Each country must purchase the goods and services it requires from other
countries, that it cannot produce, and sell the excess produce to other countries.
 Foreign trade is the process of purchasing essential commodities and services
from other countries and selling surplus goods and services to other countries.

The trade policy reforms aimed at:

(i) the dismantling of quantitative restrictions on imports and exports.
(ii) (ii) reduction of tariff rates.
(iii) (iii) removal of licensing procedures for imports. Liberalization led to economic
growth by increasing the level of investment in the country.

Investing vs. Trading: What's the Difference?

Investing and trading are two very different methods of attempting to profit in
the financial markets. Both investors and traders seek profits through market
participation. In general, investors seek larger returns over an extended period through
buying and holding. Traders, by contrast, take advantage of both rising and falling
markets to enter and exit positions over a shorter time frame, taking smaller, more
frequent profits.
 Investing takes a long-term approach to the markets and often applies to such
purposes as retirement accounts.
 Trading involves short-term strategies to maximize returns daily, monthly, or
quarterly.
 Investors are more likely to ride out short-term losses, while traders will attempt
to make transactions that can help them profit quickly from fluctuating markets.
Investing
 The goal of investing is to gradually build wealth over an extended period of time
through the buying and holding of a portfolio of stocks, baskets of stocks, mutual
funds, bonds, and other investment instruments. 
 Investors often enhance their profits through compounding or reinvesting any
profits and dividends into additional shares of stock.
 Investments often are held for a period of years, or even decades, taking
advantage of perks like interest, dividends, and stock splits along the way. While
markets inevitably fluctuate, investors will "ride out" the downtrends with the
expectation that prices will rebound and any losses eventually will be recovered.
Investors typically are more concerned with market fundamentals, such as price-
to-earnings ratios and management forecasts.
 Anyone who has a 401(k) or an IRA is investing, even if they are not tracking the
performance of their holdings on a daily basis. Since the goal is to grow a
retirement account over the course of decades, the day-to-day fluctuations of
different mutual funds are less important than consistent growth over an
extended period.

Trading
 Trading involves more frequent transactions, such as the buying and selling of
stocks, commodities, currency pairs, or other instruments. The goal is to
generate returns that outperform buy-and-hold investing.
 While investors may be content with annual returns of 10% to 15%, traders
might seek a 10% return each month. Trading profits are generated by buying at
a lower price and selling at a higher price within a relatively short period of time.
The reverse also is true: trading profits can be made by selling at a higher price
and buying to cover at a lower price (known as "selling short") to profit in falling
markets.
  While buy-and-hold investors wait out less profitable positions, traders seek to
make profits within a specified period of time and often use a protective stop-
loss order to automatically close out losing positions at a predetermined price
level. Traders often employ technical analysis tools, such as moving averages
and stochastic oscillators, to find high-probability trading setups.
 A trader's style refers to the timeframe or holding period in which stocks,
commodities, or other trading instruments are bought and sold.

Traders generally fall into one of four categories:

 Position Trader: Positions are held from months to years.
 Swing Trader: Positions are held from days to weeks.
 Day Trader: Positions are held throughout the day only with no overnight
positions.
 Scalp Trader: Positions are held for seconds to minutes with no overnight

Trade policy is the set of agreements, regulations, and practices by a government that
affect trade with foreign countries.

Key Takeaways
 Trade policy is a government’s stance on international trade, or a combination of
laws and practices that affects imports and exports.
 Trade policies can include regulations, tariffs, and quotas.
 Some nations want to encourage more trade and pursue open trade policies with
certain other nations, while others want to restrict trade and set policies that
protect local industries from competition.
 Trade policies can have a number of benefits, including economic growth or
lower costs of goods.

The Role of Foreign Aid in International Trade And Investment

What Are the Different Types of Foreign Aid?

In 2020, the United States provided foreign aid of various kinds to over a
hundred countries in the world.
For American taxpayers, the cost of foreign aid amounted to $43.5 billion in
2020 and $43 billion in 2019.1 Foreign aid is not the only kind of foreign assistance,
but it might be the most controversial. Some of the different types of foreign aid include
bilateral aid, military aid, multilateral aid and humanitarian assistance.

KEY TAKEAWAYS
 Governments of developed countries often engage in investment and assistance
to less developed countries, to the tune of several billions of dollars each year.
 This assistance is intended to promote global economic and political stability, to
encourage growth and development, and to protect allies around the world.
 This aid typically takes the form of foreign direct investment (FDI), humanitarian
aid, and foreign trade incentives.
  Foreign aid can be used to accomplish the political aims of a government,
allowing it to obtain diplomatic recognition, to gain respect for its role in
international institutions, or to improve the accessibility of its diplomats to foreign
countries

Types of Foreign Development Assistance

There are three primary forms of international aid, as well as various sub-types.
The first primary type is private foreign direct investment (FDI) from multinational or
transnational corporations.
These are typically equity holdings of foreign assets by non-residents of the
recipient country. For example, American companies may engage in FDI by buying a
controlling interest in a Nigerian company. FDI reached a peak of approximately $3
trillion globally in 2007 and has since declined for several geopolitical and
macroeconomic reasons. Global FDI peaked back up to $2.75 trillion in 2016, fell to $1
trillion in 2018, and rose $1.7 trillion by the end of 2019.3
The second primary type is what people normally think of when they hear the
term "foreign aid." These are official development tools designed and funded by
government agencies or international nonprofits to combat the problems associated
with poverty. Humanitarian efforts spearheaded by governments are almost
exclusively done by wealthier nations that are also members of the Organization for
Economic Co-operation and Development (OECD).4 Each year, OECD countries
spend between $100 billion and $150 billion in foreign aid, with 2020 rising to a record
$161.2 billion in response to the COVID-19 crisis in developing countries.

The third primary type, foreign trade, is much larger and much less intentional.
By all accounts, openness to foreign trade is the single leading indicator for
developmental progress among poor countries, perhaps because free-trade policies
tend to go hand-in-hand with economic freedom and political stability. An excellent
breakdown of this relationship can be seen in the Index of Economic Freedom provided
by The Heritage Foundation

Disbursements vs. Aid Received

One of the most critical issues in the foreign-aid conversation is disbursement.
Most disbursements are measured in terms of money given, such as how many dollars
were donated or how many low-interest loans were extended. Many foreign-aid
bureaucracies define success on the basis of nominal monetary disbursements. Critics
counter that dollars of funding do not always translate to effective assistance, so
measuring simply in money terms is insufficient.

Foreign-aid disbursements face many hurdles, including local corruption and

alternative domestic agendas. A 2015 report from the Stockholm International Peace
Research Institute found that billions in aid to Afghanistan had been wasted or stolen
by "kleptocrats," who used the money to suppress entrepreneurs and even to purchase
expensive villas.

Bilateral Aid
 Bilateral aid is the dominant type of state-run aid. Bilateral aid occurs when one
government directly transfers money or other assets to a recipient country. On the
surface, American bilateral aid programs are designed to spread economic growth,
development and democracy. In reality, many are given strategically as diplomatic tools
or handsome contracts to well-connected businesses.

Most problematic bilateral aid disbursements are simple, direct cash transfers.
Such foreign aid to Africa has been "an unmitigated economic, political, and
humanitarian disaster," as written by Zambian-born economist and World
Bank consultant Dambisa Moyo in her book Dead Aid: Why Aid Is Not Working and
How There Is a Better Way to Help Africa.  Foreign governments are often corrupt and
use foreign aid money to bolster their military control or to create propaganda-style
education programs.

Military Aid
Military aid can be considered a type of bilateral aid, with one twist. It normally
requires one nation to either purchase arms or sign defense contracts directly with the
United States. In some cases, the federal government purchases the arms and uses
the military to transport them to the recipient country. The country that receives the
most military aid from the United States, and the most aid in general, is Israel. For
fiscal year 2020, the American government bankrolled the Israeli military to the tune of
$3.3 billion.

Multilateral Aid
Multilateral aid is like bilateral aid, except it is provided by many governments
instead of one. A single international organization, such as the World Bank, often pools
funds from various contributing nations and executes the delivery of the aid. Multilateral
assistance is a small part of the U.S. Agency for International Development's foreign
aid programs. Governments might shy away from multilateral aid because it is more
challenging to make strategic decisions when several other donors are involved.

Humanitarian Assistance
Humanitarian assistance can be thought of as a targeted and shorter-term
version of bilateral aid. For example, humanitarian aid from wealthy nations poured into
the coastal regions in South Asia after a 9.0 magnitude earthquake triggered a tsunami
in the Indian Ocean, killing more than 200,000 people.9 Because it tends to be higher-
profile than other types of aid, humanitarian efforts receive more private funding than
most other types of aid.

The Goals and Function of GATT and NAFTA

The GATT is the General Agreement on Tariffs and Trade. The WTO is the
World Trade Organization. GATT was an international treaty with a temporary
international existence, whereas the World Trade Organization is a permanent body
whose authority has been ratified by its many member nations.
 The North American Free Trade Agreement (NAFTA), which was enacted in
1994 and created a free trade zone for Mexico, Canada, and the United States, is the
most important feature in the U.S.-Mexico bilateral commercial relationship.

Much has been written about two important international trade agreements, the
General Agreement on Tariffs and Trade, commonly known as GATT, and the North
American Free Trade Agreement (NAFTA). Yet consumers remain in need of more
education about these agreements and the effects they can have on us every day.

What is free trade and why are these agreements important to the everyday
consumer?
One objective is to promote economic growth in the U.S. and other countries
by eliminating barriers to trade and investment. Decreasing trade barriers can lead
to increased exports and the creation of jobs to support expanded trade.

What is Free Trade?

Many of us participate in international trade every day as we purchase goods and
services that have crossed international borders to reach us. Such trade is considered
"free" or "open" when goods and services can move into markets without restrictions
and prices are determined by supply and demand. Nations sometimes erect barriers to
this free movements of goods. Quotas may limit the quantity of products imported, and
tariffs raise the price through import taxes. Non-tariff barriers create obstacles to selling
foreign goods by establishing special requirements such as registration or labeling.

Why is free trade good for consumers?

The United States' government seeks to increase free trade by entering into
agreements with other nations for a number of reasons. One objective is to promote
economic growth in the U.S. and other countries by eliminating barriers to trade and
investment. Decreasing trade barriers can lead to increased exports and the creation of
jobs to support expanded trade. It's estimated that each additional $1 billion in U.S.
exports creates more than 19,000 jobs. For example, in the first three years of the U.S.-
Canadian Free Trade Agreement more than 264,000 jobs were created in the U.S. due
to increased exports to Canada.

Consumers and producers also benefit from an increased variety of goods and
services, lower prices and better quality. Greater competition provides us with choice,
value, and jobs.

GENERAL AGREEMENT ON TARIFFS AND TRADE

� In 1947, the General Agreement on Tariffs and Trade (GATT) was created to
liberalize and regulate the international trading system.

� The original 23 GATT countries, or contracting parties as they are called, has
increased to more than 100 countries in 1993. Developing countries comprise about
two-thirds of the membership.
� A number of basic principles form the foundation of the GATT including:
--"trade without discrimination" is embodied in the famous phrase "most- favored-
nation," meaning that each GATT country must be treated equally by all contracting
parties;
--"protection through tariffs" as opposed to other measures such as quotas where
protection of domestic industries is necessary;
--"a stable basis for trade" through tariff schedules which list the level of tariffs on
particular items;
--settlement of disputes through consultation, conciliation and, as a last resort, dispute
settlement procedures.

� Since GATT was created, there have been eight "rounds", or series of negotiations,
of trade talks. The current Uruguay Round was begun in 1986. Although it was originally
hoped that the round would be completed by 1990, that deadline was not met. It was
extended because of problems with rules concerning agricultural reform. The planned
deadline is December 15, 1993 with the agreement to be signed in April 1994.

� The Uruguay Round negotiations fall into four broad categories:

--agriculture;
--market access (tariffs and non-tariff measures);
--"new" areas of services, trade-related intellectual property rights (patents and
copyrights), and trade-related investment measures;
--GATT rules necessary to protect and guarantee market access and concessions
negotiated such as dispute settlement and safeguards for import relief.

� The goal of the Uruguay Round is to cut import duties by one third, reduce protection
for agriculture and textiles, and ease restrictions on international trade in services like
banking and insurance. These reforms should expand the world economy by an
estimated $200 billion annually.

Activity 6
1. Explain the trade and investment policies.
2. 2. What is the role of foreign aid in international trade and investment?
3. 3. Are the goals and function of GATT and NAFTA advantageous?
 MODULE 7
Politics and laws
The reasoning behind the regulation of international business behavior
The Foreign Corrupt Practices Act
The role of international law in the conduct of international business

Objectives: At the end of the period, the students must be able to:
1. Explain the reasons behind the regulation of international business behavior.
2. Discuss the Foreign Corrupt Practices Act.
1. Deliberate the role of international law in the conduct of international business.

Politics and Laws

The Reasoning Behind the Regulation of International Business Behavior

International business is an essential part of a growing global economy. The
integration of national economies into a global economic system – otherwise known as
globalization – has been one of the most important developments over the last century,
prompting an extraordinary swell in international trade, commerce and production. 
This connectedness of markets and peoples have produced global value chains
that account for a sizable share of trade growth, global gross domestic product and
employment in both developed and developing countries. 
As such, international business has become a vital condition for economic and
social development – especially for low-income countries. However, the ways in which
this business is conducted can have a significant impact on the fortunes and futures of a
nation.
Why do we need international business laws?
International business law comprises the various legal aspects of conducting
business across borders, including business transactions, entity formation and funding,
intellectual property protection, regulatory compliance, dispute resolution and
international trade policy. They are put in place to regulate the business operations of a
company and their supply chain across different nations. 
Upholding international laws is meant to protect against exploitation of a thriving
economy or the oppression of a more vulnerable nation. Consequently, the impact of
law-making must be carefully considered; the recent political crisis sparked by the Prime
Minister’s proposed changes to the negotiated Northern Ireland Protocol is a prime
example of this.
Trade or commerce is often at the CenterPoint of these considerations, as the
economic impact of a certain policy or transaction can be widespread. Multiple
jurisdictions must be consulted. Trade agreements provide rules that assimilate and
support fair and lawful trade between respective countries, and – ultimately – make
business transactions easier.
International commercial law consists of a body of legal rules, conventions,
treaties, domestic legislation and commercial customs that governs international
business transactions. These laws facilitate mutually beneficial cooperation between
respective countries, spanning economics, licensing, tariffs and taxes, and many other
elements of business.

Why is international trade so important?

On a business scale, international trade is essential for increasing revenue,
broadening a customer base and ensuring a longer product lifespan. Companies can
also benefit from currency exchange fluctuations and gain access to a wider pool of
potential employees. The majority of Fortune 500 corporations operate locations
overseas, while all boast an international client list. 
The impact of the Covid-19 crisis has highlighted the importance of globalization.
Following the pandemic, businesses (both big and small) are increasingly relying on
international trade to improve commercial viability, with 34% citing a desire to expand
internationally and 51% of business leaders influenced to change their view on the
value of exports.

Going global: Things to consider

For any company contemplating global expansion, the following are legal
questions it will need to consider.
 Labour and employment law: If a business hires or subcontracts
overseas, it is subject to the respective country’s labour and employment
laws. Consulting legal counsel is essential in helping companies with
compliance and risk mitigation.

 International trade compliance: Whenever a business transaction

crosses borders, it invokes the national security and economic interests of the
respective countries. This area of business law spans the navigation of
 imports, exports and sanctions. It’s also of great importance to have an
understanding of corrupt nations and which countries are off limits (such as
the trade sanctions taken against Russia during the Ukrainian crisis).

 Corporate structure: If a business is setting up a branch or subsidiary

overseas, where and how it chooses to establish a new business carries
costs, capital requirements and tax consequences.

 Taxes: Before going global, a corporation will want to carefully examine

whether the foreign country has a tax treaty with their domestic nation, and
the particular tax consequences of conducting business there.

 Intellectual property: Spanning patents, copyrights, trademarks or trade

secrets, intellectual property is a valuable asset. Securing and enforcing these
rights can be costly. However, contractual arrangements including licences
and employment agreements can be established before venturing overseas to
mitigate risks and lower the expense.

 Finances: The movement of money carries risk and complexity. An

organization must adhere to any applicable foreign currency exchange
controls. The employment of a legal advisor can assist in keeping payments
secure.

 Termination of a business: Before setting up shop overseas, it’s best to

consider an exit strategy if all goes wrong. It can be a complicated and
expensive process to close an international venture. Government approval
may be needed and there can be significant tax consequences as well as
employee rights compliance.

The Role of International Business Lawyers

International business lawyers advise, advocate for, or represent a client’s
business interests regarding global transactions. They typically have a specialised
education. 
These legal advisors can offer cross-border counsel on compliance with
international trade rules. For example, they can assist corporations in obtaining the
correct exporting licensing and advise on customs classifications. They will also conduct
internal investigations and represent organizations through international disputes or
when action is taken against any violations. 
To be a successful international business lawyer, you must have a strong grasp
of economics and well-developed negotiation skills. The demand for international
business lawyers and advisors is certain to spike as UK companies navigate the
consequences of Brexit and aim to boost commercial viability following the coronavirus
pandemic.

Why should I study international business?

 Business success requires a global perspective. As companies continue to
increase conduct on a global scale, anyone looking to enter an area of business
management should have a good understanding of global governance, international
agreements, foreign policy, various international business practices and the strategic
decision-making of multinational enterprises. 

The Foreign Corrupt Practices Act

U.S. Foreign Corrupt Practices Act. FCPA makes it unlawful for a U.S. person or
company to offer, pay, or promise to pay money to any foreign official for the
purpose of obtaining or retaining business.

 Under the Foreign Corrupt Practices Act (FCPA), it is unlawful for a U.S. person
or company to offer, pay, or promise to pay money or anything of value to any
foreign official for the purpose of obtaining or retaining business.   

 A U.S. person or company may also be any officer, director, employee, or agent
of a company or any stockholder acting on behalf of the company.  And a foreign
official may be a foreign political party or candidate for foreign political office. 

 Also covered by the FCPA is the authorization of any money, offer, gift, or

promise authorizing the giving of anything of value to any person while knowing
that all or a portion of it will be offered, given, or promised—directly or indirectly—
to any foreign official for the purposes of assisting the U.S. person or company in
obtaining or retaining business.  

 “Knowing” includes the concepts of conscious disregard and willful blindness.  

 The FCPA also covers foreign persons or companies that commit acts in
furtherance of such bribery in the territory of the United States, as well as U.S. or
foreign public companies listed on stock exchanges in the United States or which
are required to file periodic reports with the U.S. Securities and Exchange
Commission.  

 The FCPA accounting provisions require such publicly listed companies to make

and keep accurate books and records and to devise and maintain an adequate
system of internal accounting controls. The accounting provisions also prohibit
individuals and businesses from knowingly falsifying books and records or
knowingly circumventing or failing to implement a system of internal controls.
U.S. persons or companies, or covered foreign persons or companies, should
consult an attorney or use the Department of Justice Opinion Procedure when
confronted with FCPA issues.  

Examples of FCPA accounting violations include failing to implement internal
controls, to keep accurate books and records, to conduct appropriate audits
of payments, and to implement sufficient anti-bribery compliance policies.
What the FCPA prohibits 
A violation of the FCPA consists of a payment, offer, authorization, or promise to
pay money or anything of value: 

 to a foreign government official (including a party official or manager of a state-

owned concern, or other instrumentality of a foreign government), or to any
other person, knowing that the payment or promise will be passed on to a
foreign official or instrumentality
 with a corrupt motive

 for the purpose of …

o influencing any act or decision of that person, 
o inducing such person to do or omit any action in violation of his lawful
duty, 
o securing an improper advantage, or 
o inducing such person to use his influence to affect an official act or
decision in order to assist in obtaining or retaining business for or with,
or directing any business to, any person. 

The Role of International Law in The Conduct of International Business

The purpose of international laws is to permit countries as much authority as
possible over their own international business affairs, while maximizing economic
benefits of trade and working relationships with other nations.

International Law
International law relates to the policies and procedures that govern relationships
among nations (Clarkson, Miller, & Cross, 2018). These are crucial for businesses for
multiple reasons. First, there is not a single authoritative legislative source for global
business affairs, nor a single world court responsible for interpreting international law
(Cheeseman, 2016, p. 903). There is also not a global executive branch that enforces
international law, which leaves global business affairs particularly vulnerable.

Secondly, if a nation violates an international law and persuasive tactics fail, then
the countries that were violated, or international organizations tasked with overseeing
global trade, may act. Often these actions use force to correct the offenses and may
include economic sanctions, severance of diplomatic relations, boycotts, or even war
against the offending nation (Clarkson, Miller, & Cross, 2018, p. 439).

The purpose of international laws is to permit countries as much authority as

possible over their own international business affairs, while maximizing economic
benefits of trade and working relationships with other nations. Since many countries
have historically allowed governance by international agreements when conducting
global business, there exists an evolving body of international laws that facilitate global
trade and commerce.
U.S. Constitutional Clauses
There are two important clauses in the U.S. Constitution related to international
law. First, the Foreign Commerce Clause enables Congress to “regulate commerce
with foreign nations” (Cheeseman, 2016, p. 904).
This clause permits U.S. businesses to actively negotiate and implement taxes or
other regulations as they relate to international commerce. However, businesses cannot
unduly burden foreign commerce. For example, General Motors, which is based in
Michigan, cannot suggest that the state impose a 50 percent tax on foreign-made
automobiles sold in the state, while not imposing the same tax on U.S.-made vehicles.
Michigan can, however, impose a 10 percent tax on all automobile sales in the state to
offset the costs of foreign trade and commerce.
The second important clause related to international law is the Treaty Clause,
which states that the president has the power “by and with the advice and consent of
the senate” to create treaties with other nations (Clarkson, Miller, & Cross, 2018, p.
440).
This clause restricts treaties to federal authority, meaning that states do not have
the power to enter a treaty with another nation. For example, the United States and
Mexico can sign a treaty to reduce trade barriers between both nations, but the state of
Texas cannot sign a treaty with Mexico to reduce trade barriers between Texas
businesses and Mexico. Additionally, any treaties established with other countries
become U.S. law, and any conflicting law is null and void.
International Customs
Customs are general practices between nations that guide their business
relationships. According to the Statute of the International Court of Justice, international
customs are “accepted as law” (Clarkson, Miller, & Cross, 2018, p. 439). While
customary international law (CIL) is not written, nor does it require ratification to become
binding, CIL nonetheless provides guidelines for how nations conduct business affairs
(Bradley & Gulati, 2010, p. 204).
One example of a custom is the international protection of ambassadors. For
thousands of years, ambassadors have been protected while serving diplomatic
missions. For this reason, countries protect foreign ambassadors with the
understanding that any harm caused to ambassadors would be a violation of
international law.

International Treaties
Treaties and other agreements between nations are authorized and ratified by
the countries that acknowledge their legality. There are two different types of
agreements: bilateral, which is formed by two nations; and multilateral, which is formed
by several nations.
The Peru-United States Trade Promotion Agreement is an example of a bilateral
agreement. It was signed in 2006, ratified by Peru the same year, and ratified by the
United States in 2007. This bilateral agreement is considered beneficial to the United
States because it improves access to Peruvian goods, while promoting security and
democracy in the South American country.
The North American Free Trade Agreement, or NAFTA, is an example of a
multilateral agreement. It was ratified in 1994, when Mexico joined the previous trade
agreement between the United States and Canada. In September 2018, the Trump
administration successfully completed re-negotiations with Mexico and Canada that
lasted over one year. Among other aims, these negotiations worked to increase auto
industry wages for workers in Mexico and modify pharmaceutical regulations with
Canada.

International Organizations
International organizations are comprised of officials who represent member
nations that have established a treaty to oversee shared interests, including trade and
commerce. The U.S. participates in more than 120 bilateral and multilateral
organizations around the world. International organizations adopt resolutions that
standardize behavior and create uniform rules related to trade and commerce.
Two of the most significant international organizations established in the
twentieth century that significantly impact U.S. trade and commerce are the United
Nations and the European Union.

United Nations
The United Nations (UN) was created as a multilateral treaty in 1945. The UN’s
organizational goals include maintaining global peace and security, promoting economic
and social cooperation, and protecting human rights, especially related to women and
children (Cheeseman, 2016, p. 905).
The UN General Assembly includes representatives from each member nation.
As of 2018, the UN acknowledges 195 sovereign states, with all but two participating as
full members. These two, Palestine and the Vatican City, are classified as “observer
states.” Six additional countries are not UN members, but are recognized as a country
by at least one UN member country: Abkhazia, Kosovo, Northern Cypress, South
Ossetia, Taiwan, and Western Sahara.

The UN Security Council includes five permanent members and 10 countries

selected by the General Assembly to serve two-year terms. The five countries that hold
permanent membership are China, France, Russia, the United Kingdom, and the United
States (Cheeseman, 2016, p. 558).
This Council is primarily responsible for overseeing global peace and security
measures. The World Bank is a UN organization, financed by contributions from
developed countries and headquartered in Washington, D.C. Its primary functions
include providing money to developing countries to fund projects that relieve suffering,
including building roads and dams, establishing hospitals, developing agriculture, and
other humanitarian efforts. The World Bank provides both grants and long-term low
interest rate loans to countries, often granting debt relief for outstanding loans
(Cheeseman, 2016, p. 559).
The United Nations Commission International Trade Law is one of the most
important international organizations to date, establishing the 1980 Convention on
Contracts for the International Sale of Goods (CISG), which will be discussed further in
the next section.

European Union
 The European Union (EU) is a regional international organization that includes
many countries in Europe. It was established to create peace across the region and
promote economic, social, and cultural development (Cheeseman, 2016, p. 561). As of
2018, there are 28 countries affiliated with the EU, although the United Kingdom has
begun steps to withdraw its membership. Additionally, Macedonia is actively seeking a
path toward EU membership, although as of September 2018, the country’s citizens
remain divided.
The EU organization has established a treaty for its members that creates open
borders for trade among member nations, especially for capital, labor, goods, and
services. The impact on U.S. commerce is significant, as the EU represents more than
500 million people and a gross community product that exceeds that of the United
States, Canada, and Mexico combined (Cheeseman, 2016, p. 561).

Sovereignty
National sovereignty defines a nation. While clearly defined borders and
independent governments also set parameters for a nation, sovereignty is an important
legal principle that allows nations to enter negotiated treaties with other countries and
honor territorial boundaries. It is among the most important international law principles,
thus greatly impacting international trade and commerce.

Since the 1800s, most established nations allowed for absolute sovereignty
among the global community. However, by the 1940s, that allowance was significantly
reduced, as countries revisited sovereignty in light of globalization, transportation, and
communication advances, and the rise of international organizations (Goldsmith, 2000,
p. 959). Consequentially, doctrines of limited immunity were created that established
guidelines for how countries may prosecute, or hold foreign nationals accountable,
during international trade and commerce dealings.

A doctrine of sovereign immunity states that countries are granted immunity

from lawsuits in courts of other countries (p. 569). Although the United States initially
granted absolute immunity to foreign governments from lawsuits in U.S. courts, in 1952,
the United States adapted federal law to qualified immunity, which is the immunity
regulation adopted in most Western nations.
This law led to the Foreign Sovereign Immunities Act of 1976, allowing U.S.
governance over lawsuits against other nations in the United States in either federal- or
state-level courts. Simply stated, a foreign country is not immune to lawsuits in the
United States when the country has waived its immunity, or if the commercial activity
against which the lawsuit is intended causes a direct effect in the United States.

Activity 7
1. Explain the reasons behind the regulation of international business behavior.
2. Is the Foreign Corrupt Practices Act advantageous? Why?
What is the role of international law in the conduct of international business?
 MODULE 8
The Cultural Challenge
The Role of Culture in International Business
Identify Various Elements of Culture

Objectives: At the end of the period, the students must be able to:
1. Explain the role of culture in international business.
2. Identify various elements of culture.

The Cultural Challenge

The Role of Culture in International Business

What Is Cultural Awareness?
Cultural awareness understanding that our own culture differs from one
individual and group to the next, and specifically from our target language.
Being culturally aware helps us recognize and have an appreciation for other’s values,
customs and beliefs and meet it without judgement or prejudice.
As we encounter new languages and cultures we begin to make comparisons
and realize that our own behaviors, values and beliefs are not the general norm found
elsewhere in the world.

Why Is Cultural Awareness Important?

Cultural awareness is key when we communicate with people from other
cultures. Since we use language to communicate, our knowledge of foreign languages
gives us ‘access’ to different societies and cultures. We become mediators between
cultures.
The most important reason why we should be culturally aware is so we have an
increased awareness of people all over the world. This helps us develop a deeper
understanding of our own and other people’s cultures, while broadening the mind and
increasing tolerance.

Expressing Respect
When we are culturally aware we know what is considered inappropriate or
offensive to others. For example, incorrect body language and can lead to
misunderstandings. Even something as simple as nodding your head in agreement
can be misunderstood in places such as Greece, Bulgaria, and Albania where shaking
one's head can actually mean yes.
In Western culture we’re taught that it’s polite to look someone straight in the
face when talking to someone, however, in Japan this is considered disrespectful.
Being culturally aware isn’t just for those learning a foreign language either. As an
Australian who swapped her life in Melbourne for a life in Rome and then again for
London (where I’m currently based), I learned that even between English speaking
countries our cultures can differ and that these differences can surface in
unsuspecting ways.
During the past 5 years of living in the UK, I’ve accidentally ruffled a few
feathers and learned some important cultural lessons the hard way.
Here are 7 times learning cultural awareness changed my life way more than any
vocab table ever could

Culture is essential in international business because it influences how

multinational and cross-cultural teams interact and collaborate. It dictates the
business world's values, etiquettes, thinking patterns, decision-making, practices, and
processes.

What are the major cultural factors that affect international business?
The major socio-cultural factors that significantly impact international businesses
are culture, etiquette, religion, language, customer preferences, education level,
customs and taboos, and attitude towards foreign goods and services.

Role Of Culture in International Business

Culture is a system of shared beliefs, customs, values that all the members of the
society use to cope with their world and with one another, and that are transmitted from
generation to generation through learning. Culture is learned by values and behaviors
shared by a group of people that are dynamic in nature.
Culture is about the human need for meaning. Culture is a knowledge shared by
large group of people. Culture is vast and dynamic. Every country differs in culture due to
their heritage or the various types of individuals that reside within the country.
Countries have various forms of individuals and societies some are immigrants
and some are nationals every individual or a group of society showcase a different type of
culture. The differences a business leader faces while conducting business in his home
country and host country and what are the challenges he faces while being exposed to a
new culture in the host country and how he tries to solve it by understanding the various
cultural differences among both the host and the home country.

What is Culture?
It is the total of knowledge, beliefs, behavior, values, attitudes, etc. and is present
in countries, companies and also within societies. Culture is a heritage and also a way of
living life that keeps people together. Without culture, no society can exist. A person is
born in the environment of culture. Understanding the role of culture in international
business is very important as it influences how people think, speak and behave. For a
business deal to be successful in an international country, knowing that particular country
's culture is necessary.

What are the characteristics of Culture?

Culture is shared: Culture cannot be kept by one single person, it has to be
shared between people who belong to a group. It is commonly shared and practiced by a
large group or some population.
The culture of every society is unique in its own way and is not same for e.g. the
traditions and values in USA are not the same as the traditions and values in China.

How does Culture affect International Business?

It is important to understand the culture of a country as it influences how people
within that country interact with each other. It guides decision making, values, thinking
patterns and behavior in the business world. Every country is different from one another
and has unique regional and national characteristics. If any future foreign business deal
or partnership were to be a success, it would center on the awareness and respect for
those characteristics of culture.
When culture is addressed properly it can aggressively build magnificent cross
cultural business relations but if they are ignored and not thought of as being anything
important, the lack of cultural awareness can lead to a breakdown in the communication
process and thus hampering business relationships.
Cultural differences will have a direct impact on the chance to succeed at
International Business and improving the level of knowledge of international cultural
difference in business can help in building international competencies as well as enabling
competition.

Businesses are going global but why are they failing?

Technology and globalization have made global expansion far more accessible
for businesses around the world over the past decade.
However, just because a business has the resources to go global, whether or not
they can stay global is the question we should all be asking ourselves.
In order for the latter to happen, businesses must learn to traverse the complex
waters of cultural differences. Unfortunately, many companies often choose to dive
headfirst into these waters without first developing the skills needed to keep them afloat.
This short-sightedness can have costly results.
Understanding international cultural differences in business is integral to success
abroad. By taking the time to learn about another culture, business professionals
can show respect to their counterparts and assist in building lasting and trusting
relationships.
It helps employees understand the dynamics of their organization, find a
common purpose between colleagues, adapt to working practices, share ideas
and communicate feedback and concerns. A strong culture can also have an
external impact, and it can influence an organization’s brand perception.

Why are cultural differences important?

It helps dispel negative stereotypes and personal biases about different
groups. In addition, cultural diversity helps us recognize and respect “ways of being”
that are not necessarily our own. So that as we interact with others we can build bridges
to trust, respect, and understanding across cultures.

The most important reason why we should be culturally aware is so we have an
increased awareness of people all over the world. This helps us develop a deeper
understanding of our own and other people's cultures, while broadening the mind and
increasing tolerance.

Identify Various Elements of Culture

The major elements of culture are material culture, language, aesthetics,
education, religion, attitudes and values and social organization.

What is culture
Much has been written on the subject of culture and its consequences. Whilst on
the surface most countries of the world demonstrate cultural similarities, there are many
differences, hidden below the surface. One can talk about "the West", but Italians and
English, both belonging to the so called "West", are very different in outlook when one
looks below the surface. The task of the global marketer is to find the similarities and
differences in culture and account for these in designing and developing marketing
plans. Failure to do so can be disastrous.
Terpstran9 (1987) has defined culture as follows:
"The integrated sum total of learned behavioral traits that are manifest and shared by
members of society"
Culture, therefore, according to this definition, is not transmitted genealogically. It
is not, also innate, but learned. Facets of culture are interrelated and it is shared by
members of a group who define the boundaries.
Often different cultures exist side by side within countries, especially in Africa. It
is not uncommon to have a European culture, alongside an indigenous culture, say, for
example, Shona, in Zimbabwe. Culture also reveals itself in many ways and in
preferences for colors, styles, religion, family ties and so on. The color red is very
popular in the west, but not popular in Islamic countries, where sober colors like black
are preferred.
 Much argument in the study of culture has revolved around the "standardization"
versus "adaption" question. In the search for standardization certain "universals" can be
identified. Murdock7 (1954) suggested a list, including age grading, religious rituals and
athletic sport. Levitt5 (1982) suggested that traditional differences in task and doing
business were breaking down and this meant that standardization rather than adaption
is becoming increasingly prevalent.
Culture, alongside economic factors, is probably one of the most important
environmental variables to consider in global marketing. Culture is very often hidden
from view and can be easily overlooked. Similarly, the need to overcome cultural
myopia is paramount.

Approaches to the study of culture

Keegan3 (1989) suggested a number of approaches to the study of culture
including the anthropological approach, Maslow's approach, the Self- Reference
Criterion (SRC), diffusion theory, high and low context cultures and perception. There
are briefly reviewed here.

Anthropological approach
Culture can be deep seated and, to the untrained can appear bizarre. The
Moslem culture of covering the female form may be alien, to those cultures which
openly flaunt the female form. The anthropologist, though a time-consuming process,
considers behavior in the light of experiencing it at first hand. In order to understand
beliefs, motives and values, the anthropologist studies the country in question
anthropology and unearths the reasons for what, apparently, appears bizarre.

Maslow approach
In searching for culture universals, Maslow's 6 (1964) hierarchy of needs gives a
useful analytical framework. Maslow hypothesized that people's desires can be
arranged into a hierarchy of needs of relative potency. As soon as the "lower" needs are
filled, other and higher needs emerge immediately to dominate the individual. When
these higher needs are fulfilled, other new and still higher needs emerge.

Maslow hierarchy of needs

Physiological needs are at the bottom of the hierarchy. These are basic needs to
be satisfied like food, water, air, comfort. The next need is safety - a feeling of
wellbeing. Social needs are those related to developing love and relationships. Once
these lower needs are fulfilled "higher" needs emerge like esteem - self-respect - and
the need for status improving goods. The highest order is self-actualization where one
can now afford to express oneself as all other needs have been met.
Whilst the hypothesis is simplistic it does give an insight into universal truisms. In
Africa, for example, in food marketing, emphasis may be laid on the three lower-level
needs, whereas in the developed countries, whilst still applicable, food may be bought
to meet higher needs. For example, the purchase of champagne or caviar may relate to
esteem needs.
The self-reference criterion (SRC)
 Perception of market needs can be blocked by one's own cultural experience.
Lee (1965)4 suggested a way, whereby one could systematically reduce this perception.
He suggested a four-point approach.
a) Define the problem or goal in terms of home country traits, habits and norms.
b) Define the problem or goal in terms of the foreign culture traits, habits and norms.
c) Isolate the SRC influence in the problem and examine it carefully to see how it
complicates the pattern.
d) Redefine the problem without the SRC influence and solve for the foreign market
situation.
The problem with this approach is that, as stated earlier, culture may be hidden
or non-apparent. Uneartherning the factors in b) may, therefore, be difficult.
Nonetheless, the approach gives useful guidelines on the extent for the need of
standardization or adaption in marketing planning.

Diffusion theory
Many studies have been made since the 1930's to assess how new innovations
are diffused in a society. One of the most prolific writers was Everett Rogers 8. In his
book, "Diffusion of Innovations" (1962) he suggested that adoption was a social
phenomenon, characterised by a normal distribution.

Figure 3.2 Adopter categories

In this case the innovators are a small percentage who like to be seen to lead,
then the others, increasingly more conservative, take the innovation on. The adoption
process itself is done in a series of stages from awareness of the product, through to
interest, evaluation, trial and either adoption or rejection (in the case of non-adopters).
The speed of the adoption process depends on the relative advantage provided by the
product, how compatible or not it is with current values or experiences, its complexity,
divisibility (how quickly it can be tried) and how quickly it can be communicated to the
potential market.
In international marketing an assessment of the product or service in terms of
these latter factors is very useful to the speed of its adoption. Most horticultural
products, for example, have no problem in transfer from one culture to another, however
specific types may have. It is unlikely that produce like "squash" would sell well in
Europe, but it does in Zimbabwe.

High and low context cultures

Hall2 (1977) has suggested the concept of high and low context cultures as a way
of understanding different cultural orientations. In low context cultures messages have
to be explicit, in high context cultures less information is required in the verbal message.
In low context cultures, for example like Northern Europe, a person's word is not to be
relied on, things must be written. On the other hand, in high context cultures, like Japan
and the Middle East, a person's word is their bond. It is primarily a question of trust.

Perception
Perception is the ability to see what is in culture. The SRC can be a very
powerful negative force. High perceptual skills need to be developed so that no one
misperceive a situation, which could lead to negative consequences
Many of these theories and approaches have been "borrowed" from other
contexts themselves, but they do give a useful insight into how one might avoid a
number of pitfalls of culture in doing business overseas.
Consumer products are likely to be more culturally sensitive than business to
business products, primarily because technology can be universally learned. However
there are dangers in over generalizations. For example, drink can be very universal and
yet culture bound. Whilst appealing to a very universal physiological need - thirst -
different drink can satiate the same need. Tea is a very English habit, coffee American
but neither are universals in African culture. However, Coca Cola may be acceptable in
all three cultures, with even the same advertising appeal.

Nationalism
Nationalism is a cultural trait which is increasingly surfacing. The break-up of
Yugoslavia and the USSR are witness to the fact. In Western, developed countries a
high degree of interdependence exists, so it is not so easy to be all that independent. In
fact, blocs like NAFTA and the EU are, if anything, becoming more economically
independent. However, less developed countries do not yet have the same
interdependence in general, and so organizations need to reassess their contribution to
the development of nations to make sure that they are not holding them "to hostage".
Culture is a very powerful variable and cannot be ignored. Whilst "universals" are
sought there is still a need to understand local customs and attitudes. These are usually
no better understood than by the making use of in country personnel.

The elements of culture

The major elements of culture are material culture, language, aesthetics,
education, religion, attitudes and values and social organization.
Material culture
Material culture refers to tools, artifacts and technology. Before marketing in a
foreign culture it is important to assess the material culture like transportation, power,
communications and so on. Input-output tables may be useful in assessing this. All
aspects of marketing are affected by material culture like sources of power for products,
media availability and distribution. For example, refrigerated transport does not exist in
many African countries. Material culture introductions into a country may bring about
cultural changes which may or may not be desirable
Language
Language reflects the nature and values of society. There may be many sub-
cultural languages like dialects which may have to be accounted for. Some countries
have two or three languages. In Zimbabwe there are three languages - English, Shona
and Ndebele with numerous dialects. In Nigeria, some linguistic groups have engaged
in hostile activities. Language can cause communication problems - especially in the
use of media or written material. It is best to learn the language or engage someone
who understands it well.

Aesthetics
Aesthetics refer to the ideas in a culture concerning beauty and good taste as
expressed in the arts -music, art, drama and dancing and the particular appreciation of
color and form. African music is different in form to Western music. Aesthetic
differences affect design, colors, packaging, brand names and media messages. For
example, unless explained, the brand name FAVCO would mean nothing to Western
importers, in Zimbabwe most people would instantly recognize FAVCO as the brand of
horticultural produce.

Education
Education refers to the transmission of skills, ideas and attitudes as well as
training in particular disciplines. Education can transmit cultural ideas or be used for
change, for example the local university can build up an economy's performance.
The UN agency UNESCO gathers data on education information. For example, it
shows in Ethiopia only 12% of the viable age group enroll at secondary school, but the
figure is 97% in the USA.

Religion
Religion provides the best insight into a society's behavior and helps answer the
question why people behave rather than how they behave.

Attitudes and values

Values often have a religious foundation, and attitudes relate to economic
activities. It is essential to ascertain attitudes towards marketing activities which lead to
wealth or material gain, for example, in Buddhist society these may not be relevant.
Also "change" may not be needed, or even wanted, and it may be better to relate
products to traditional values rather than just new ones. Many African societies are risk
averse, therefore, entrepreneurialism may not always be relevant. Attitudes are always
precursors of human behavior and so it is essential that research is done carefully on
these.

Social organization
Refers to the way people relate to each other, for example, extended families,
units, kinship. In some countries kinship may be a tribe and so segmentation may have
to be based on this. Other forms of groups may be religious or political, age, caste and
so on. All these groups may affect the marketer in his planning.
There are other aspects of culture, but the above covers the main ingredients. In
one form or another these have to be taken account of when marketing internationally.

Hofstede's contribution
One of the most prolific writers on culture is Hofstede, a Dutchman. Working with
two colleagues Franke and Bond 1 (1991) he sought to explain why "culture" could be a
better discriminator than "material" or "structural conditions" in explaining why some
countries gain a competitive advantage and others do not.
They noted that in Michael Porter's 1990 book on the "Competitive Advantage of
Nations" he popularized the idea that nations have competitive advantage over others.
Unfortunately, he stopped short of the key question as to why certain nations develop
competitive advantage and others do not. In their study Hofstede, Franke and Bond
sought to answer that question in research entitled "Cultural Roots of Economic
Performance". They hypothesized that differences in cultural values, rather than in
material and structural conditions (the private and state control) are ultimate
determinants of human organization and behavior, and thus of economic growth.
They took two examples of 18 and 20 nations, comparing rich countries like the
USA, UK, Canada and Australia, to poor countries like India, Pakistan and Thailand and
those on the rich/poor dividing line like Hong Kong, Taiwan and Singapore. Nigeria and
Zimbabwe were in the study.
In order to understand the results a word of explanation is needed on what the
authors mean by "cultural variables". There are as follows:
· "Power distance" - Society's endorsement of inequality, and its inverse as the
expectation of relative equality in organizations and institutions
· "Individualism" - The tendency of individuals primarily to look after themselves and
their immediate families and its inverse is the integration of people into cohesive groups
· "Masculinity" - An assertive or competitive orientation, as well as sex role distribution
and its inverse is a more modest and caring attitude towards others
· "Uncertainty Avoidance" - Taps a feeling of discomfort in unstructured or unusual
circumstances whilst the inverse show tolerance of new or ambiguous circumstances
· "Confucian Dynamism" - Is an acceptance of the legitimacy of hierarchy and the
valuing of perseverance and thrift, all without undue emphasis on tradition and social
obligations which could impede business initiative.
· "Integration" - Degree of tolerance, harmony and friendship a society endorses, at the
expense of competitiveness: it has a "broadly integrative, socially stabilizing emphasis"
· "Human Heartedness" - Open-hearted patience, courtesy and kindness.
· "Moral Discipline" - Rigid distancing from affairs of the world.
· In the research work these variables were called "constructs" or "indices".
 Now, the results of the research have a revealing, and sobering effect on
economies seeking economic growth via structural or material changes viz:
a) "Confucian dynamism" is the most consistent explanation for the difference
between different countries' economic growth. This index appears to explain the relative
success of East Asian economies over the past quarter century.
b) "Individualism" is the next best explanatory index. This is a liability in a world in
which group cohesion appears to be a key requirement for collective economic
effectiveness.
c) In extrapolations on the data after 1980 economic growth seems to be aided by
relative equality of power among people in organizations (lower power distance) and by
a tendency towards competitiveness at the expense of friendship and harmony (lower
integration).
In conclusion, therefore, "better" economic growth can be explained more by
culture than structural or material changes. Economic power, from this study, comes
from "dynamism" - the acceptance of the legitimacy of hierarchy and the valuing of
perseverance and thrift, all without undue emphasis on tradition and social obligations
which could impede business initiative; "individualism" - the tendency of individuals
primarily to look after themselves and their immediate families (its inverse is the
integration of people into cohesive groups) and finally a tendency towards
competitiveness at the expense of friendship and harmony.

Whilst debatable, this research may attempt to explain why the Far East, as
compared to say Africa, has prospered so remarkably in the last ten years. The cultural
values of the populations of the East may be very different to those of Africa. However,
further evidence is required before generalization can be made.
Culture has both a pervasive and changing influence on each national market
environment. Marketers must either respond or change to it. Whilst internationalism in
itself may go some way to changing cultural values, it will not change values to such a
degree that true international standardization can exist. The world would be a poorer
place if it ever happened.

Summary
Along with "economics", "culture" is another so called "environmental
uncontrollable" which marketers must consider. In fact, it is a very important one as it is
so easy to misread a situation and take decisions which subsequently can prove
disastrous.
The study of culture has taken many forms including the anthropological
approach, Maslow's hierarchy of needs, the self-reference criterion, diffusion theory,
high and low context culture, and perception approaches. "Culture" itself is made up of
a number of learned characteristics including aesthetics, education, religion and
attitudes and values. One of the principal researchers on culture and its consequences
is Hofstede, who, as a result of his studies, offers many insights and guides to
marketers when dealing with diverse nationalities. Ignoring differences, or even
similarities, in culture can lead to marketers making and executing decisions with
possible disastrous results.
Activity 8
1. What is the role of culture in international business?
2. Discuss the various elements of culture.

MODULE 9
Starting International Operations
various entry strategies used by firms to initiate international business activity
-indirect exporting and importing
-advantages and disadvantages of licensing

Objectives: At the end of the period, the students must be able to:
1. Identify the various entry strategies used by firms to initiate international
business activity.
2. Differentiate indirect exporting and importing.
1. Discuss the advantages and disadvantages of licensing.

Various Entry Strategies Used By Firms To Initiate International Business Activity

MARKET ENTRY METHODS

When you know the scale of entry, you will need to work out how to take your
business abroad. This will require careful consideration as your decision could
significantly impact your results. There are several market entry methods that can be
used.

Exporting
Exporting is the direct sale of goods and / or services in another country. It is
possibly the best-known method of entering a foreign market, as well as the lowest risk.
It may also be cost-effective as you will not need to invest in production facilities in your
chosen country – all goods are still produced in your home country then sent to foreign
countries for sale.
However, rising transportation costs are likely to increase the cost of exporting in
the near future.The majority of costs involved with exporting come from marketing
expenses. Usually, you will need the involvement of four parties: your business, an
importer, a transport provider and the government of the country of which you wish to
export to.

Licensing
Licensing allows another company in your target country to use your property. The
property in question is normally intangible – for example, trademarks, production
techniques or patents.
The licensee will pay a fee in order to be allowed the right to use the property.
Licensing requires very little investment and can provide a high return on investment.
The licensee will also take care of any manufacturing and marketing costs in the foreign
market.

Franchising
Franchising is somewhat similar to licensing in that intellectual property rights are
sold to a franchisee.
However, the rules for how the franchisee carries out business are usually very
strict – for example, any processes must be followed, or specific components must be
used in manufacturing.

Joint venture
A joint venture consists of two companies establishing a jointly-owned business.
One of the owners will be a local business (local to the foreign market). The two
companies would then provide the new business with a management team and share
control of the joint venture.
There are several benefits to this type of venture. It allows you the benefit of local
knowledge of a foreign market and allows you to share costs. However, there are some
issues – there can be problems with deciding who invests what and how to split profits.

Foreign direct investment

Foreign direct investment (FDI) is when you directly invest in facilities in a foreign
market. It requires a lot of capital to cover costs such as premises, technology and staff.
FDI can be done either by establishing a new venture or acquiring an existing company.

Wholly owned subsidiary

A wholly owned subsidiary (WOS) is somewhat similar to foreign direct
investment in that money goes into a foreign company but instead of money being
invested into another company, with a WOS the foreign business is bought outright. It is
then up to the owners whether it continues to run as before or they take more control of
the WOS.
Piggybacking
Piggybacking involves two non-competing companies working together to cross-
sell the other’s products or services in their home country. Although it is a low-risk
method involving little capital, some companies may not be comfortable with this
method as it involves a high degree of trust as well as allowing the partner company to
take a large degree of control over how your product is marketed abroad.

What are market entry strategies?

Market entry strategies are methods companies use to plan, distribute and
deliver goods to international markets. The cost and level of a company's control over
distribution can vary depending on the strategy it chooses. Companies usually choose a
strategy based on the type of product they sell, the value of the product and whether
shipping it requires special handling procedures. Companies may also consider their
current competition and consumer needs.

To select an effective strategy, companies align their budgets with their product
considerations, which often improves their chances of increasing revenue. The three
primary factors that affect a company's choice of international market entry strategy are:

 Marketing: Companies consider which countries contain their target market and

how they would market their product to this segment.

 Sourcing: Companies choose whether to produce the products, buy them or

work with a manufacturer overseas.
 Control: Companies decide whether to enter the market independently or
partner with other businesses when presenting their products to international
markets.
Why are market entry strategies important?

Market entry strategies are important because selling a product in an

international market requires precise planning and maintenance processes. These
strategies enable companies to stay organized before, during and after entering new
markets. Since every company has its own goals for entering an international market,
having the option to choose from various types of strategies can give a company the
opportunity to find one that fits its needs.

10 market entry strategies for international markets

Here are 10 market entry strategies you can use to sell your product internationally:
1. Exporting
Exporting involves marketing the products you produce in the countries in which
you intend to sell them. Some companies use direct exporting, in which they sell the
product they manufacture in international markets without third-party involvement.
Companies that sell luxury products or have sold their goods in global markets in the
past often choose this method.
 Alternatively, a company may export indirectly by using the services of agents,
such as international distributors. Businesses often choose indirect exporting if they're
just beginning to distribute internationally. While companies pay agents for their
services, indirect exporting often results in a return on investment (ROI) because the
agents know what it takes to succeed in the markets in which they work.

2. Piggybacking
If your company has contacts who work for organizations that currently sell
products overseas, you may want to consider piggybacking. This market entry strategy
involves asking other businesses whether you can add your product to their overseas
inventory. If your company and an international company agree to this arrangement,
both parties share the profit for each sale. Your company can also manage the risk of
selling overseas by allowing its partner to handle international marketing while your
company focuses on domestic retail.

3. Countertrade
Countertrade is a common form of indirect international marketing.
Countertrading functions as a barter system in which companies trade each other's
goods instead of offering their products for purchase. While legal, the system does not
have specific legal regulations like other forms of market entry do. This means
companies may solve problems like ensuring other companies understand the value of
their products and attempting to acquire goods at a similar level of quality.
Countertrading is a cost-effective choice for many businesses because the practice may
exempt them from import quotas

.
4. Licensing
Licensing occurs when one company transfers the right to use or sell a product to
another company. A company may choose this method if it has a product that's in
demand and the company to which it plans to license the product has a large market.
For example, a movie production company may sell a school supply company the right
to use images of movie characters on backpacks, lunchboxes and notebooks.

5. Joint ventures
Some companies attempt to minimize the risk of entering an international market
by creating joint ventures with other companies that plan to sell in the global
marketplace. Since joint ventures often function like large, independent companies
rather than a combination of two smaller companies, they have the potential to earn
more revenue than individual companies. This market entry strategy carries the risk of
an imbalance in company involvement, but both parties can work together to establish
fair processes and help prevent this issue.

6. Company ownership
If your company plans to sell a product internationally without managing the
shipment and distribution of the goods you produce, you might consider purchasing an
existing company in the country in which you want to do business. Owning a company
established in your international market gives your organization credibility as a local
business, which can help boost sales. Company ownership costs more than most
market entry strategies, but it has the potential to lead to a high ROI.

7. Franchising
A franchise is a chain retail company in which an individual or group buyer pays
for the right to manage company branches on the company's behalf. Franchises occur
most commonly in North America, but they exist globally and offer businesses the
opportunity to expand overseas. Franchising typically requires strong brand recognition,
as consumers in your target market should know what you offer and have a desire to
purchase it. For well-known brands, franchising offers companies a way to earn a profit
while taking an indirect management approach.

8. Outsourcing
Outsourcing involves hiring another company to manage certain aspects of
business operations for your company. As a market entry strategy, it refers to making
an agreement with another company to handle international product sales on your
company's behalf. Companies that choose to outsource may relinquish a certain
amount of control over the sale of their products, but they may justify this risk with the
revenue they save on employment costs.

9. Greenfield investments
Greenfield investments are complex market entry strategies that some
companies choose to use. These investments involve buying the land and resources to
build a facility internationally and hiring a staff to run it. Greenfield investments may
subject a company to high risks and significant costs, but they can also help companies
comply with government regulations in a new market. These investments typically
benefit large, established organizations as opposed to new enterprises.

10. Turnkey projects

Turnkey projects apply specifically to companies that plan, develop and construct
new buildings for their clients. The term "turnkey" refers to the idea that the client can
simply turn a key in a lock and enter a fully operational facility. You might consider this
market entry strategy if your clients comprise foreign government agencies.
International financial agencies usually manage arrangements between companies and
their overseas clients to ensure the companies provide high-quality service and the
client pays the full amount due.

Indirect Exporting and Importing

Exporting and Importing – Meaning, Advantages and Disadvantages

Exporting goods and services refer to sending them from the home country to a
foreign country. Similarly, Importing goods and services means purchasing or bringing
them from the foreign market to the home country. This is the easiest way a firm can get
into international business, as it requires almost no investment in setting up a
production unit in a foreign country, only distribution channels are made to successfully
import or export goods.

There are two ways a firm can export or import:

 Direct Exporting/Importing: In Direct Exporting/Importing, a firm directly
deals with the customer/supplier of the foreign country and performs all the
formalities, including shipment and financing of goods and services.

 Indirect Exporting/Importing: In Indirect Exporting/Importing, a firm deals

with the customer/supplier with the help of middlemen. They do not directly
deal with the customers/suppliers. With the help of middlemen, most of the
formalities and work are done, such as export houses or purchasing
businesses or offices of overseas customers, or wholesale importers in the
case of import operations.

Advantages of Importing and Exporting:

 1. Easiest and Simplest: 
Exporting and Importing is the easiest way to enter into the international
market as compared to any other modes of entry. Here, there is no need to set
up and manage any business unit abroad, which makes the process easier.

 2. Less Investment: 
Less investment is required in the case of exporting/importing as it is not
mandatory for the enterprise to set up a business unit in the country they are
dealing with.
 3. Less Risky: 
If there is no investment or very less investment required in
exporting/importing in the foreign country, the firm is free from many risks
involved in foreign investment.

 4. Availability of Resources:
 As the resources are unevenly scattered around the globe, it is very
important for every country to export/import goods around the globe, as no
nation can be 100% self-sufficient.

 5. Better Control: 
Exporting/Importing can provide better control over the trade, as there is
very less involvement in the foreign country. Everything is controlled by the
home country and there is no need to set up a unit in the foreign country.

Disadvantages of Importing and Exporting:

 1. Extra Cost: Since goods are to be sent to different nations, there is some
extra cost, incurred in packaging and transportation of goods, which is a major
limitation.
 2. Regulations: Different countries have different policies for foreign trade, and
sometimes it becomes difficult for a company to comply with the rules and
regulations of each country they are dealing with.
  3. Domestic Competition: The companies involved in exporting/importing
have to face severe competition in the domestic country due to the presence of
domestic sellers.
 4. Country’s Reputation on Stake: Goods that are exported to different
countries are subject to quality standards. If any goods that are of low quality
are exported to any other country, the reputation of the home country becomes
questionable.
 5. Documentation: Exporting/Importing requires obtaining licenses and
documentation for foreign trade from every country, which can become
frustrating at times.
 6. Multitasking: Managing business across different countries involves a lot of
multitasking, which can be hectic for a company.

Meaning of indirect import - a situation in which a company buys products

from someone in another country using an intermediary (= a person or organization
that arranges business agreements), or a product that is bought in this way: The direct
or indirect import of diamonds from the Advantages and Disadvantages of Indirect
Exporting
 
Indirect exporting is the process of selling products to an intermediary, who will
then sell your products directly to customers or importing wholesalers. When looking for
an intermediary to help you with indirect exporting, the easiest way is to find one in your
own country. Some of the advantages of selling your products to an intermediary are
that you are normally not responsible for collecting payment from overseas customers,
nor are you responsible for coordinating the shipping logistics. 
Export Management
An example of an intermediary is an export management company (EMC). Good
EMCs will function as an extension of your sales and service presence. 
Most export management companies specialize in exporting a specific range of
products to a defined customer base in a particular country or region. For example, an
EMC might specialize in the exporting of office supplies to healthcare facilities in
European countries. 

EMCs will carry out every aspect of the exporting process:

 Identifying international markets for your product or service
 Locating overseas customers
 Arranging and maintaining relationships with agents and distributors
 Handling the preparation and negotiation of all logistics, from communication
and documentation, to actual shipping
 Setting up proper distribution channels for your business

Freight forwarders might be able to provide you with a list of EMCs that use their
service, which can help create stronger relationships throughout your supply chain. 
Along with helping you find an EMC, a freight forwarding company can give you advice
on export costs, route planning, contracting insurance, preparation and presentation of
Trade Documents, and more. 
Trading Companies
Export trading companies (ETC) are very similar to EMCs – the key difference
being that ETCs are often very demand-driven, in that the market will compel them to
buy specific commodities, which they then supply to long-standing customers.
For example, a customer might send a request to their ETC to find them a
supplier of organic tomato sauce who can guarantee a supply of thirty containers per
month for a specific period of time. From there, the export trading company will look for
a reputable manufacturer that can handle the demand at a price that works for both the
ETC and the customer. Once all of the numbers are in order, the ETC will arrange for
the transport of the goods to the customer through an international shipping company. 

Intermediaries
Selling to an intermediary in the country where your customers are is another
option for indirect exporting. In this case, you won’t know who your end-customers are,
and you will usually be responsible for collecting payment from the overseas customer
and for coordinating the shipping and logistics. 
In some cases, the intermediary may request that they be responsible for the
shipping of goods from your country to theirs – in which case, you would simply need to
have your shipment ready by a specific date. 

Advantages of Indirect Exporting

 Low risk involved with getting started
 Export process is relatively hands-off
 Increased focus on domestic business while others take care of international
markets
 Depending on which type of intermediary you go with, you may not have to
concern yourself with shipment and other logistics

Disadvantages of Indirect Exporting

 Higher overhead costs, which means less profit for you
 You are not fully in control of your foreign sales
 Lack of direct contact with your customers overseas, which means you may
have to do additional research on tailoring offerings to their market
 Intermediary could be selling a very similar product, which might include
directly competitive products

Conclusion
Your decision to use an indirect exporting model will largely depend on your
goals, resources, and the type of business and industry you are in.
By working with a trusted logistics company with knowledge of the ins and outs of
indirect exporting, you can be sure that your interests are protected.

Advantages And Disadvantages of Licensing

What Is Licensing? Advantages and Disadvantages

 One of the most passive and lucrative ways to make money is licensing your
product, idea or service. In fact, it can be considered one of the fastest ways to become
a millionaire. In this article, I will talk more about licensing and what you need to know
about it.

Licensing is a legal agreement made between a licensor and a licensee.

The licensor is the owner of a product, idea or service. The licensee is the
organization that will manufacture, market, and sell a product, service, or idea. In
exchange for the rights to the product or idea, the licensor will receive a royalty. 

Why Licensing is a Great Option

Often, licensing is a more lucrative choice for certain products and industries,
especially when considering the costs of starting a new business (both time and
money), and because licensing gets your product or or service in front of an already
established customer base and much wider audience (Abedi, 2018).  
Let’s say, for example, that you’ve invented a snack cup for kids that not only
prevents spilling, but also contains multiple compartments for a variety of snacks.
Your design is simple enough that kids can choose the snack they want, and just
complex enough to prevent goldfish and cheerios from spilling all over the floor. You
could certainly start your own business and create an in-depth marketing plan to reach
your target audience and sell your product.  
But, if you market your idea to an already established, well-known company who
already has a presence within your target market, it is likely that you will do much better
in the long run, and you avoid the risk and responsibility associated with starting your
own company (“Getting Started as an Entrepreneur,” 2019).  If your product does well,
licensing can bring in quite a bit of income with little to no effort on your part. And, the
company benefits too – they’re also making a substantial profit with a new product line,
something companies need in order to continue to compete in the marketplace.  
Still, there are certainly pros and cons to both alternatives, so it’s important to weigh
your options carefully if you do decide to license your product or idea and take some
necessary steps before entering into a contracted relationship with a licensee. 

The Purpose of Licensing

The main purpose of licensing is two-fold. On one hand, well-established
companies have access to capital, expertise, and experience in an already established
market.  (“Product Licensing,” n.d.). As a startup business, you will need to either seek
investment from others to fund the production of your product or put forth your own
money to do so. This can take a considerable amount of time and expense – and, it can
be risky.  
Secondly, a larger, profitable company will be able to manufacture in greater quantities
and market your product on a much larger scale – to a much wider audience –
something smaller, independent companies are not as equipped to do (Weston, 2019).
In essence, the reason a licensing deal seems like an obvious choice is because
you collect a percentage of the revenue generated, and you do not have to do any of
the work. You can sit back, relax, and check your mailbox for that ever-elusive return on
your investment as the funds begin to roll in. 
  
Patent Protection for Ideas and Inventions
With licensing, you are essentially selling your intellectual property, your ideas. 
So, before you enter into an agreement, you’ll first want to check to ensure that your
product is eligible to be protected by a patent – and register with the United States
Patent & Trademark Office. There are various types of patents, most commonly utility
and design – the former specific to the functional aspect of your product, and the latter
to the aesthetic appearance or design. A patent protects you by ensuring that others
cannot make, use, or sell your invention without penalty (Purvis, n.d.).
An additional purpose of a licensing agreement is to ensure that the rights of both
you, the licensor, as well as the licensee are protected by law. By entering into a
contracted relationship, your patented technology or product cannot be violated by the
licensee (the company to which you are entering an agreement) without penalty.  The
licensee is also protected and permitted to use your patented technology, idea, or
product for as long as your agreement allows, provided you are given the established
royalty fee at the agreed upon time (“All Kinds of License Agreement Templates,” n.d.).

Advantages and Disadvantages of Licensing

One of the biggest advantages for a licensor is that it allows you, the creative
genius behind your invention, to continue to do what you love: come up with new ideas
for innovative products or services. You won’t have to worry about starting or running
your own business, or the manufacturing and marketing necessary to become
profitable. And, having already forged relationships with well-established companies can
open the door for further opportunities down the line.
  
Advantages to Licensing Disadvantages to Licensing

You will not need to incur the costs of

You will likely lose control over your product,
producing, promoting, packaging, or
including promotion, packaging, and selling.
selling your product.  

The licensee already has knowledge

You will only receive a portion of the profits
and know-how as it pertains to breaking
from the sale of your product, as outlined in
into an already established market, so
your agreement.  
there is no risk to you.

If your product does not sell well, you will not

Depending on the terms of your
receive royalty payments; or, it may take a
agreement, your royalty payments can
while until you receive a payment, depending
last a very long time.
on your agreement

Much of the decision pertaining to whether or not you choose to license is

dependent upon your goals.  If you prefer to have complete control over your invention,
including branding, promotion, and packaging or design, you may not want to go the
licensing route because you will likely lose control over these aspects.  
 If, however, you’d prefer not to risk financial loss if your product does not do well,
and you are more interested in creating other new products or technologies, licensing
can certainly benefit you more so than starting your own company.  

Types of Licensing Agreements

The most common type of agreement for independent entrepreneurs will fall
under the patent license category (“All Kinds of License Agreement Templates,” n.d.). In
the simplest of terms, you are allowing some entity to use your intellectual property –
your idea or invention – which you have taken steps to protect via a patent.  You are
essentially granting permission to reproduce what you have created, whether that is a
tangible product or design, or an intangible idea.  

Licensing agreements can also come in the form of trademark agreements,

copyright material, technology licenses, and trade secret agreements.  

Many times, licensing categories overlap and are not mutually exclusive.  Most
importantly, the agreement should include the description of the product or service
being licensed, the license grant, which provides license for use of the intellectual
property or asset, the obligations of both parties, and most importantly, the agreement
of financial arrangements, both minimum payments and royalties on sales as well as the
minimum sales target and timeline (“All Kinds of License Agreement Templates,” n.d.).

  
Examples of Licensing Agreements
Type of
License Definition Example
Agreement

The licensee gains the right to use Tangible products or ideas

Patent
your patented intellectual property created by a company or
License
(IP) for a fee (royalty). independent entrepreneur

The licensee gains rights to utilize Design, artwork, fictional

Trademark
your trademark in connection with characters for use on other
License
specific goods and services. products

Copyright The licensee gains rights to use

Educational resources and
Material material developed or created by a
materials; branding or logos
License licensor.

Trade Secrets The Licensee is required to disclose Formulas, patterns, information

use of trade secret information that or processes, etc., as well as
is deemed secret and has designs, prototypes, programs
 commercial value over other
and/or codes
businesses or organizations.

The licensee is granted permission Computer programs and the

to use the licensor’s technology or code therein (the code, as
Technology or
software programs, and will often stipulated by the licensor, may
Software
also receive related services or may not be altered, as
License
(training, maintenance, and specified by the owner of the
support). technology)

Licensing with the Right Company

All companies are not created equal in this equation.  It’s important to do your
research if you do plan to license. You want to ensure that the company you market
your invention to is one who will best be able to produce, market, and sell you product
or service (“Getting Started as an Entrepreneur,” 2019).  Find out about the company’s
sales, product lines, and market and determine how you will fit into their structure.  
The company should also have products in the same category. If we go back to
the example from earlier about a snack cup for kids, you may consider seeking a
licensing agreement with an established baby or toy company who is already successful
in the market. You don’t want to compete with products the company is already
producing, but rather add to the value of the existing product line (“Getting Started as an
Entrepreneur,” 2019). In this way, you are much more likely to land a lucrative deal. 

Licensing Versus Franchising

Where new services are considered, it’s a little bit different that the process of
obtaining a licensing deal for a product or idea. A franchise, unlike a license agreement,
refers to granting rights of use for service companies or business models rather than
products. While similar in idea, the two are not quite the same. 
The main difference lies in the idea that licensing refers to granting another entity
permission to utilize your invention, idea, or technology in order to create a product that
will benefit (via revenue) both parties in the agreement. It is generally a one-time
transfer of intellectual property. A franchise, on the other hand, involves ongoing
assistance and a mutual relationship between two parties (Sharma, n.d.).
As the owner of the business model and branding for your service, you would be
deemed the “franchisor.” A “franchisee” is the person or persons who will then sell your
service to an additional customer base in a separate location. The franchisee is granted
permission to use your business model, as well as your name and branding, in order to
profit from selling your service as an independent branch of a parent company (Sharma,
n.d.). As the franchisor, you exact a fee from the franchisee for use of your service idea.
The simplest example of a franchise agreement can be seen in the fast-food
industry.  If you walk into any McDonalds or Dunkin Donuts, you will see a very similar if
not exact business model, branding, and product line. These details are dictated by the
franchisor. While the franchisee runs the day-to-day business operations, the franchisor
has considerable control over the process. In this way, the franchisor retains more
control over the service than a licensor would over the manufacture of a product
(Sharma, n.d.).
Advantages and Disadvantages of Franchising
The benefits of franchising are similar to that of licensing. The franchisor does
not incur the cost of developing branch locations – that is the responsibility of the
franchisee, though there is generally required some level of training and support. The
risk in expansion is lowered exponentially, especially as it pertains to entering global
markets Sharma, n.d.).   
The reverse disadvantage, however, can occur in the management of quality
control. It is much more difficult for the franchisor to oversee the quality of the service.
However, the ideal situation is that the brand name itself represents the quality
customers can expect, no matter the location (Sharma, n.d.). 
Licensing and franchising are both simple and simultaneously complex. A lot
goes into the end result, and the decisions about how to proceed should be made with
caution. It is generally recommended that you seek the assistance of an attorney who is
well versed in areas of licensing agreements to ensure that your agreement is properly
negotiated.  

Activity 9
1. Identify the various entry strategies used by firms to initiate international business
activity.
2. Differentiate indirect exporting and importing. Which of the two is more
advantageous? Why?
Discuss the advantages and disadvantages of licensing.

MODULE 10

International Logistics
International logistics
The Usefulness of Free Trade Zones

Objectives: At the end of the period, the students must be able to:
1. Identify the international logistics.
2. Explain the usefulness of free trade zones

International Logistics
What is international logistics? International logistics is a process that involves
the transportation of finished goods through an international supply chain. It
consists of cross-border shipping and international distribution to efficiently deliver
goods to end users across the globe.

What international logistics involves

 Though it’s never been easier for direct to break into new markets, establishing
an international ecommerce adds an extra level of complexity.
From the types of products, you can sell and transport overseas, to additional costs of
shipping, there is much more involved in inbound when building a global brand.

Here is an overview of what international logistics involve.

1. Handling of goods
If you’re looking to expand into new markets, you will need to evaluate your
current physical of goods. For instance, if you’re storing inventory and shipping orders
from a single warehouse location in your home country, you will have to calculate how
much it will be to ship an international order overseas (taking landed costs into
consideration).
There are several options here: you can still ship international orders from your
home country, but you might want to move or expand into a warehousing location that
will reduce shipping costs to reach the border before it gets sent overseas. 
Or, if you’re seeing a large volume of orders from a different country, you can
store some inventory in a fulfillment within that country and have orders picked, packed,
and shipped from there.
Global fulfillment reduces many common customs and tariff issues since
inventory is already stored within the country and can be shipped domestically.

2. Mode of transportation
Depending on your budget and delivery timelines, you can choose from different
modes of transportation to carry your goods to the customer: parcel orfreight shipping,
and air, sea, or ground shipping. To make the right decision, you have to consider time,
cost, and reliability of each and determine what works for your margins.
Based on where you ship from and where you’re shipping to, most often several
modes of transportation are involved in delivering an order to an international
destination — especially if you’re dealing with cross-border shipping.
3. Transportation process
As the shipper, you send goods to freight forwarders. They liaise with multiple
carriers to find the best shipping options (via freight forwarding). Next, the goods are
loaded onto trucks, planes, or ships and sent on their way to the end customer. At the
destination port, after customs clearance, the goods are unloaded and transported to a
specific customer address. 
The transportation process for international orders can get tricky. Delivery times
vary, depending on where you’re shipping to, and many times is slow, since orders are
being shipped to another country to different governing bodies and sometimes via
several modes of transportation. 
To make sure all goes smoothly, double check shipping documentation and the
product that you’re shipping meets the country’s trade rules and regulations.
Lastly, it’s important that you make estimated last times and any duties they will incur
clear with your customers, and then communicate with your customers on any order
updates as they wait for their package to arrive. 

4. Customs and import duties

 With global, you will deal with additional fees, including customs and
import (taxes). An import duty is a tax placed on imports by customs authorities in the
destination country of the shipment. These duties vary by country and are dictated by
the value of the goods being imported.
All global orders need to be cleared through customs of the country they are
entering; this involves quite a bit of paperwork. You must include the right details (e.g.,
tariff codes, dollar value, and product descriptions), so orders don’t get held up.
As the shipper, you are responsible for communicating these additional fees to
your customers. If a customer is not aware upfront of the additional duties they will have
to pay to receive their package, they may never claim it and you are liable for packages
that get held up at customs.
That’s why some ecommerce brands choose DDP shipping (delivery duty paid),
in which the seller takes responsibility for all risk and fees of shipping goods until they
reach their destination. This way, you won’t risk orders getting sent back when a
consumer refuses to pay additional duties and fails to receive the package when it
enters their destination country.

What are the challenges of international logistics?

Expanding into international markets can be challenging for several reasons, and
it mostly all comes down to logistics. Here are the common challenges that hold
ecommerce businesses back from going global.

Time-consuming
If not managed properly, international logistics can be a huge headache for ecommerce
companies. Every aspect of the cross-border supply chain, from choosing the right
carrier partners to tracking the flow of goods and calculating international shipping costs
and transit times, takes a lot of time and energy. 

Late shipments
Not only can shipping far from your home country increase transit times, other
issues such as customs can cause delays in delivery. No matter where your customers
reside, fast and affordable shipping is expected. And chances are, if you’re selling
ahigh-demand product overseas, there is going to be competition. 
But there are solutions to reduce cross-border shipping delays. One way is
tostore inventory within the country you’re shipping to, which reduces transit times
significantly, saves you on shipping costs, and allows you to worry less about
international orders getting held up at customs. 
This will not only save you money, but it will also help you meet customer
expectations no matter where they live.
International customs & taxes
Each product has a tariff code associated with it for customs. When you ship the
goods internationally, you will need to ensure that the right codes are assigned to each
SKU, and taxes and other import costs are calculated accurately. 
If not managed correctly, your business could face legal action and costly delays if you
accidentally assign the wrong code, undervalue shipments, or fill in the wrong details in
your customs paperwork. To ensure there are no delays at the border, double check all
your documentation. 

Poor returns management

Returns are often an unavoidable part of a growing ecommerce business. But handling
returns can get tricky, especially with international orders. Return delays will not only
frustrate your customers, but it can also result in profitability cuts in terms of reverse-
logistics costs.
If you invest time into creating an efficientreturns management process, it can highly
benefit your business. In fact,92% of shoppers are willing to purchase from the retailer
again if they find the returns process to be easy. 
6 tips to nailing international logistics
To reduce headaches, save money, and make shipping worldwide worth the
investment, here are some tips and best practices that will help you optimize your
international logistics operations.
1. Check how your products are classified
It’s important to check that all of the products that you wish to sell and ship
internationally are allowed to cross and enter foreign borders. Many countries restrict
the types of products that can be imported from other countries (even a single
ingredient found in your product can cause issues at customs). 

2. Choose the right packaging

Choosing the right packaging is always important, no matter where you’re shipping to.
But with international orders, you’re dealing with packages being in transport for much
longer than a domestic delivery, so pay extra attention to packaging.
Before shipping overseas, check the dimensions of your different order sizes.
Dimensional may likely apply to your shipments and cause the shipping cost to
increase, so entering weight and dimensions helps ensure accuracy of the amount
charged. It’s a best practice to round up on weights at the pound or ounce level.
You will also want to make sure that fragile are packed well with the right amount
of dunnage, and can safely be transported and delivered damage-free, whether orders
are being delivered via truck, plane, and/or boat. Rough, long trips through different
climates can also damage items easily. Some items will also need additional certain
packaging requirements to go overseas.

3. Calculate international shipping costs

Every online retailer wishes to sell globally. But before letting your customers
know that you offer free international shipping, make sure it’s a viable option. To assess
the feasibility of international shipping, you need to calculate based on package
measurements, shipment type, weight, international destination, etc. 
When expanding internationally, make sure you do thorough research on import
laws, taxes, and import (which can be different for each country) to determine how much
it will cost you.
Being proactive in calculating shipping costs can also help you determine which
international markets are not feasible for you unless you increase your average.
4. Update your website and shipping policy
If you’re looking to ship to different countries, it might be worth updating your
website to include new shipping destinations and any additional information related to
your international shipping.
An international shipping policy should include mention of shipping costs and
methods and estimated delivery times, and specifies additional shipping fees and taxes
— and whether or not the customer is responsible for paying them.
Depending on the size of your business, you may want to open unique online
stores tailored for each country or region. Another option is to optimize your current
website for international buyers with a multi-language translator tool or create
landing and tailored for different countries or regions.

Finally, some other considerations include:

 Tell your customers in that country that you’ll be fulfilling locally (e.g., if
you’re expanding in Europe with a facility in the EU, this applies to all countries in
the EU). This can help reduce cart abandonment previously attributed to the
perceived pains of international shipping like expensive shipping, long delivery
times, and having to pay customs and other import duties.
 Update your checkout to show local rates and estimated delivery times, and
make sure your store is in local currency.
 Mitigate consumer confusion and increase conversion by making sure product
pricing and shipping rates in your UK store are shown in local currency.

5. Estimate shipping times and international tracking

By letting customers know when to expect their package, you can easily manage
their expectations. Make sure you have order set up that will offer customers real-time
updates. 

6. Find an international logistics partner

As mentioned earlier, establishing an international logistics strategy is time-
consuming. That’s why many international ecommerce brands invest in an international
logistics partner to outsource fulfillment and automated shipping. 

7. Reach international customers

The biggest benefit of commissioning a well-known logistics solutions company is
that it allows you to reach all of your customers, wherever they are in the world. Thanks
to their existing relationships with international freight specialists, you also gain access
to more carrier options and shipping destinations than ever before. The primary
objective of an international logistics strategy is to deliver your products to your
customers at the promised time and the least possible cost.

What does international logistics involve?

Establishing an international e-commerce supply chain brings several complexities,
particularly for direct-to-customers (DTC) brands. It’s never been easier for DTC brands
to get into the international market. When building a global brand, you need more than
just a varying range of products to sell overseas, additional costs of international
shipping, and inbound and outbound logistics.
Here’s an overview of all aspects that international logistics involves:
Handling of goods
It’s crucial to evaluate your current physical distribution of goods if you want to
expand your business operations into the international market. For instance, you will
have to calculate how much it will cost you to ship an international order overseas if
you’re storing inventory and shipping orders from a single warehouse in your local
region.
There are several options available to tackle the situation. You can ship
international orders from your home country. However, you might want to move to a
warehousing location that can reduce shipping costs to reach the border before it gets
sent overseas.
Furthermore, you can store some inventory in a fulfillment center within a country
from where you are receiving maximum orders. Eventually, you can have orders picked,
packed, and shipped from the fulfillment center. It also reduces several common
customs and tariff issues since inventory is stored within a country and can be shipped
domestically. 

Mode of transportation
You have plenty of modes of transportation available, depending on your budget
and delivery timelines — air, sea, or ground shipping, and parcel or freight shipping.
You can make the right decision only if you carefully evaluate the cost, time, and
reliability of each mode of transportation. Furthermore, it would help if you determined
which one’s the best for your margins. Most transportation modes involve delivering an
order to an international destination, mainly when dealing with cross-border shipping.

The process of goods transportation

Merchants send goods to freight forwarders, who then liaise with multiple carriers
to find the ideal shipping option. The goods are then transported via different modes of
transportation to the end consumers.
At the destination, the goods are unloaded and transported to the customer’s
address after clearing customs. The transportation process for international orders is
quite complicated, with varying delivery times. Delivery times are often slow, depending
on where you are shipping to. Furthermore, different governing bodies are involved
since the orders are shipped from one country to another. You should double-check
your shipping documentation, and that the goods you’re shipping meet the country’s
trade rules and regulations for the smooth completion of the transportation process.
Lastly, it’s crucial to estimate last-mile delivery times and inform your customers of order
updates.

Customs and import duties

 When shipping goods internationally, you will have to deal with additional costs,
including customs and import duties. These duties vary from country to country and
depend highly on the value of the imported goods. Furthermore, clearing customs of a
country requires significant paperwork. Furthermore, it’s your responsibility as the
shipper to inform your customers about additional fees. If your customers are not aware
of the additional costs, they may never claim the order, and you shall be liable for goods
that get held up at customs.

Advantages of international logistics for e-commerce stores

Establishing an international e-commerce supply chain brings several
complexities, particularly for direct-to-customers (DTC) brands. It’s never been easier
for DTC brands to get into the international market. When building a global brand, you
need more than just a varying range of products to sell overseas, additional costs of
international shipping, and inbound and outbound logistics.

Here’s an overview of all aspects that international logistics involves:

Competitive pricing
Maintaining smooth international logistical functions is your key to staying
competitive. E-commerce businesses have relied on global logistics for several years
since manufacturing goods cost less, even though they have to pay an additional
transportation cost. Businesses with the cheapest supplies available in enormous
volumes dominate the market. Eventually, low-cost bearing allows companies to offer
special deals and discounts to customers.

Wider product ranges

A global supply chain can help businesses bring in more products to customers.
Furthermore, e-commerce businesses can explore multiple niches with effective
international logistics processes.

Reach new customers

International logistics is not only about a particular supply chain. Selling your
products globally allows you to tap into a completely new market segment. However,
you’ll need to conduct proper research before going global. Furthermore, you’ll also
need to figure out the most effective shipping strategies – whether you ship international
orders from your warehouse, or invest in an overseas warehouse in your new market.

Customs and import duties

When shipping goods internationally, you will have to deal with additional costs,
including customs and import duties. These duties vary from country to country and
depend highly on the value of the imported goods. Furthermore, clearing customs of a
country requires significant paperwork. Furthermore, it’s your responsibility as the
shipper to inform your customers about additional fees. If your customers are not aware
of the additional costs, they may never claim the order, and you shall be liable for goods
that get held up at customs.
Challenges of international logistics for e-commerce stores
Impact of global events
A global supply chain will have consequences resulting from international events.
Global events can impact your fulfillment process. Furthermore, the COVID-19
pandemic proved that closing a factory in one region could affect e-commerce
businesses overnight.
Evaluating risk factors in your supply chain is a good start, but unexpected global
events can still affect your logistics processes. However, if you diversify your global
supply chain into multiple countries, you can protect your business from global
upheavals.

Counterfeiting and theft of goods

Counterfeiting is quite prevalent, and customer confidence is low, hampering a
business’s ability to sell its products. Apart from fake goods entering the supply chain,
goods pass through multiple hands in transit, often increasing the possibilities of theft.
Furthermore, it’s pretty tricky for businesses to figure out when the theft might have
occurred. The fact that they receive information about the shipment of their goods only
days after they have already arrived at their end destination makes it worse.

Time-consuming
International logistics functions can prove challenging for e-commerce
businesses if not managed properly. Moreover, every aspect of a global supply chain
takes up a lot of time and effort, from tracking the flow of goods to calculating
international shipping costs and transit times.

Late shipments
Shipping orders far from your home country not only increase transit times, but
customs can also cause delivery delays. Customers expect fast, affordable, and reliable
shipment and delivery irrespective of their location. Furthermore, high-demand products
come with high competition. However, there are several ways of reducing delays in
cross-border shipment delays. If you store inventory within the country you’re shipping
to, it can significantly reduce transit times, save shipping costs, and have fewer
instances of goods getting held up at customs. Moreover, it allows you to easily meet
customer expectations.

International customs and taxes

Each product has a tariff code for custom compliance. When you ship goods
internationally, you must ensure the proper codes are assigned to all SKUs (stock
keeping units). Furthermore, all taxes and other costs must be calculated accurately.
If you don’t manage international customs and taxes carefully, you can face legal
actions, severe losses, and costly delays. Double-checking all your documentation is
the primary requirement.

The Usefulness of Free Trade Zones

 An FTZ offers a unique opportunity to defer, reduce or eliminate customs
duties on your products, which can result in significant cost savings. Customs duties
only come into effect when your products leave the FTZ and enter the local market. If a
product is re-exported, no duties are due.

What are the benefits of using a Foreign-Trade Zone?

Port of Albany
The benefits and advantages associated with Foreign-Trade Zone use will vary
depending upon the type of operation involved and authority granted by the Foreign-
Trade Zones Board and Customs. Zones may provide some or all of the following
benefits.

Duty Exemption
There are no duties or quota charges on re-exports (exception applies for exports
to Canada and Mexico under NAFTA). By using a Foreign-Trade Zone companies avoid
the lengthy Customs duty drawback process. Users that destroy goods in an FTZ do not
pay duty on the goods the destroy and that can benefit a company with fragile imports
or with manufacturing processes that result in large amounts of scrap.

Duty Deferral
Customs duties and federal excise tax are deferred on imports until they leave
the zone and enter the U.S. Customs territory. (Zone merchandise may move in-bond,
Zone-to-Zone transfers without payment of duty.) Unlike bonded warehouses or
temporary importing under bond programs, there is no limit on the length of time that
merchandise may remain within the Zone.

Duty Reduction (Inverted Tariff)

When finishing a production though FTZ manufacturing authorization and that
production has a lower US Harmonized Tariff rate than the rates on foreign inputs,
it may be enter U.S. Customs territory at the duty rate that applies to its final condition.
FTZ Users do not owe duty on labor, overhead, or profit due to zone production
operations.

Merchandise Processing Fee (MPF) Reduction

FTZ Users only pay MPF on goods entering U.S. Customs territory. Zone users
are able to file a single entry for all goods shipped from a zone in a consecutive seven
day period instead of one entry file for each shipment (excluding merchandise subject to
live entry). MPF fees are charged at 0.3464% of the Total Estimated Value (TEV) of the
shipment, with a minimum fee of $25 and a maximum fee of $485 per entry. Fewer
entry filings can also reduce Brokerage fees.

Quota Avoidance
In most instances, imports subject to quota may be retained within a Foreign-
Trade Zone once a quota has been reached allowing zone users access to potentially
discounted inputs and the ability to admit merchandise as soon as a new quota year
starts. Additionally, except for certain textiles, inputs subject to quota may be
manipulated or manufactured while in the zone into a product not subject to a quota.

Streamlined Logistics
Upon approval from Customs, users can take advantage of direct deliver to an
FTZ. Users may also request permission to break and affix Customs seals. A single
entry may be filed for seven consecutive days’ worth of entries and exports.
Other Cash Flow Benefits
Harbor Maintenance Fee is paid quarterly instead of at the time imports arrive.
Merchandise Processing Fees are paid at the time goods leave the zone.

Other Benefits
Better inventory control and security lead to better compliance with CBP
requirements; Customs supervision may result in lower security and insurance costs.
Duty payable on FTZ merchandise does not need to be included in the calculation of
insurable value, again lowering insurance costs. Reduced transportation costs may also
result from streamlined logistics.

What are the benefits of a Foreign-Trade Zone versus a Bonded Warehouse?
A Foreign-Trade Zone is outside U.S. Customs territory and users file Customs
entries when removing goods from the Zone. The benefits of using an FTZ differ from
some of the opportunities that a bonded warehouse offers.  Firms using an FTZ may file
weekly entries, saving on administrative work and potentially MPF. Bonded
Warehouses users are within the Customs territory and must file entries at the time
goods enter the warehouse.

FTZ Users Do Not Need a Customs Bond

An FTZ Bond covers all admissions in an FTZ whereas regulations require a
Customs Bond for goods in a Bonded Warehouse.

Users Can Place Both Foreign and Domestic Merchandise Within An FTZ
Users may place foreign and domestic products within an FTZ but may only
place foreign merchandise in a Bonded Warehouse. FTZ users may store goods
indefinitely in an FTZ, however Bonded Warehouse users may only store merchandise
for a maximum of 5 years.

Users Can Manufacture Goods In An FTZ

Foreign-Trade Zone users, upon approval from the FTZ Board, may engage in
manufacturing and firms may benefit from inverted tariff and scrap, thereby lowering
duty. Regulations do not permit manufacturing in a Bonded Warehouse and the total
value of the merchandise at the time goods enter the Warehouse provides the basis for
duty. Users pay duty on the value of the entire shipment including any damaged goods
or scrap.

An FTZ Has Full Control Of Merchandise Allowing Uninterrupted Access

 FTZ users generally have free movement of goods in and out of an FTZ.
Customs has primary control of goods within a Bonded Warehouse.  Bonded
Warehouse users can only inspect and transfer goods during regular working hours.
Regulations limit goods movement in a Bonded Warehouse and require specific
Customs authorization for every movement.

Activity 10
1. Identify the different international logistics.
2.Explain the usefulness of free trade zones

MODULE 11
International Marketing
How a foreign target market is selected
The pricing strategy for export items
Analysis for estimating market potential

Objectives: At the end of the period, the students must be able to:
1. Discuss how a foreign target market is selected.
2. Identify the pricing strategy for export items.
3. Analyze market potential
International Marketing

How A Foreign Target Market Is Selected

The international market selection process requires segmentation and market
target strategies. This process of dividing a market into distinct subsets (segments) of
consumers with common needs. Segmentation can be demographic, psychographic,
geographic, and benefit segmentation.
The international market selection process requires segmentation and market
target strategies. This process of dividing a market into distinct subsets (segments) of
consumers with common needs.  Segmentation can be demographic, psychographic,
geographic, and benefit segmentation.
During segmentation, an organization should consider measurability (the degree
to which the size, purchasing power of a market segment can be measured),
Accessibility (the degree to which a market segment can be reached and served),
Substantiality/profitability (the degree to which a market segment is sufficiently large or
profitable) and actionability (the degree to which effective programs can be designed for
attracting and servicing a given market segment).

Market coverage strategies:

1.Undifferentiated
This strategy focuses on what is common in consumer needs in the marketplace and
is affected by presenting one product for all markets or presenting all of a company’s
products in one market. The market is treated as a whole.

2.Multi-segment (Differentiated)
A differentiated marketing strategy is one where a company develops several
different brands to meet the unique needs of each of the consumer segments. A
company that produces breakfast cereals, for example, may produce a sweet cereal
aimed at children, an organic cereal for the health-conscious, and high-fiber cereal for
dieters.

3. Concentration
The concentrated marketing approach is based on a decision to achieve maximum
penetration in one or more segments to the exclusion of the rest of the market. Instead
of spreading itself thinly in many parts of the world, it decides to concentrate its forces
on a few clearly defined areas. The company may be able to attain a strong position in
this market by concentrating its resources and competencies over it. 

4. Niche
Niche market coverage concentrates on a market segment that is not
satisfactorily served or which is ignored by the major players. Such a strategy avoids
direct and immediate competition with major firms

Steps for the International Market Selection:

 Market selection plays a crucial role at the international level. Market selection is
based on a thorough evaluation of the different markets regarding certain well-defined
criteria, given the company resources and objectives. The following are the steps
involved in the market selection process:

(a) International Marketing Objectives: The first step in the market selection process
is to determine or ascertain the export marketing objectives of the organization. The
market selected to serve a particular international marketing objective need not
necessarily be the best suited to achieve some other international marketing objective.

(b) Parameters for Selection: For proper evaluation and selection of the markets, it is
essential to lay down the parameters and criteria for evaluation. The different
parameters for the selection of a market are a firm's resources, international
environment, market situation, nature of competition, government policy, etc.

(c) Preliminary Screening: The objective of the preliminary screening is to eliminate

the markets which are not potential. The parameters used for the preliminary screening
may vary from product to product. However, parameters like the size of the population,
per capita income, and structure of the economy, infrastructural factors, and political
conditions are commonly used.

(d) Short Listing of Markets: Preliminary screening enables the elimination of markets

that do not meet consideration at the very outset. There would be a large number of
markets left even after the preliminary screening. They are further screened with the
help of more information than was used at the preliminary screening stage

(e) Evaluation and Selection: The shortlisted markets are further evaluated regarding
the cost-benefit analysis and feasibility study. They are then, ranked based on their
overall attractiveness. Of the markets, the best one is chosen for the launching of
product considering the company’s resources and external environment

(f) Test Marketing: Initially, the market is tested on a smaller scale by launching the
product in a part of the markets. This provides feedback to the producer about the
market. At the same time, it helps the producer in assessing the overall response of the
consumers from a specific market, after tested success, the production can be
undertaken on a mass scale.
(g) Commercial Production: Once the product is tested in the selected market, the
company goes ahead with mass production. Minor modifications, if any, are introduced
in the product mix during this stage.

Setting up Export Promotion Organisations to help with IMS

Export promotion organizations of each country tr to promote the export of their
country. In Zimbabwe, ZIMTRADE offers great help in easing Zimbabwean product
sales abroad. They provide information through advertisements, seminars, and public
relations. They do not do this to help a particular firm. Their objective is to promote
Zimbabwean products abroad creating awareness of potential markets, marketing to
outside markets, and improving perceptions on the quality of Zimbabwean goods.
In conclusion, the international market selection process is different in small and
medium-sized businesses and large-scale enterprises. In some cases, it is simply a
reaction to a stimulus provided by a change agent. Government agencies, chambers of
commerce, and other change agents may also bring foreign opportunities to an
organization’s attention. It is noteworthy that international market selection will not
always be a logical and gradual sequence of activities, but an iterative process involving
multiple feedback loops. 

Pricing U.S. Products for Export 

As in the domestic market, the price at which a product or service is sold directly
determines your company’s revenues. Your firm’s market research should include an
evaluation of all variables that may affect the price range for your product or service. If
your company’s price is too high, the product or service will not sell. If the price is too
low, export activities may not be sufficiently profitable or may actually create a net loss. 
  
 Traditional components for determining proper pricing are costs, market demand,
and competition. Each component must be compared with your company’s
objective in entering the foreign market. An analysis of each component from an
export perspective may result in export prices that are different from domestic
prices.  
 There are additional costs that are typically borne by the importer. These include
tariffs, customs fees, currency fluctuation, transaction costs (including shipping),
and value-added taxes (VATs). These costs can add substantially to the final
price paid by the importer, sometimes resulting in a total that is more than double
the price charged in the United States. U.S. products often compete better on
quality, reputation, and service than they do on price—but buyers consider the
whole package. 

Pricing Considerations  
As you develop your export pricing strategy, these considerations will help determine
the best price for your product overseas:  
 What type of market positioning (i.e., customer perception) does your company
want to convey from its pricing structure?  
 Does the export price reflect your product’s quality?  
 Is the price competitive?  
 What type of discount (e.g., trade, cash, quantity) and allowances (e.g.,
advertising, trade-offs) should your company offer its foreign customers?  
 Should prices differ by market segment?  
 What should your company do about product-line pricing?  
 What pricing options are available if your company’s costs increase or
decrease?  
 Is the demand in the foreign market elastic or inelastic?  
 Is the foreign government going to view your prices as reasonable or
exploitative?  
  Do the foreign country’s antidumping laws pose a problem? 

Key Elements of Pricing Analysis  
Foreign Market Objectives  
An important aspect of your company’s pricing analysis is the determination of
market objectives. For example, is your company attempting to penetrate a new market,
seeking long-term market growth, or looking for an outlet for surplus production or
outmoded products? Marketing and pricing objectives may be generalized or tailored
to particular foreign markets. For example, marketing objectives for sales to a
developing nation, where per capita income may be one-tenth of that in the United
States, necessarily differ from marketing objectives for sales to Europe or Japan. 

Costs  
The actual cost of producing a product and bringing it to market is key to determining
if exporting is financially viable.  
 Cost-plus method is when the exporter starts with the domestic manufacturing
cost and adds administration, research and development, overhead, freight
forwarding, distributor margins, customs charges, and profit. However, the effect
of this pricing approach may be that the export price escalates into an
uncompetitive range once exporting costs have been included.  
 Marginal cost pricing is a more competitive method of pricing a product for
market entry. This method considers the direct out-of-pocket expenses of
producing and selling products for export as a floor beneath which prices cannot
be set without incurring a loss. For example, additional costs may occur because
of product modification for the export market. Costs may decrease, however, if
the export products are stripped-down versions or made without increasing the
fixed costs of domestic production. 
 Other costs should be assessed for domestic and export products according to
how much benefit each product receives from such expenditures, and may
include:  
 Fees for market research and credit checks  
 Business travel expenses  
 International postage and telephone rates  
 Translation costs  
 Commissions, training charges, and other costs associated with foreign
representatives  
 Consultant and freight forwarder fees  
 Product modification and special packaging costs  
After the actual cost of the export product has been calculated, you should formulate an
approximate consumer price for the foreign market.  

Market Demand  
For most consumer goods, per capita income is a good gauge of a market’s
ability to pay. Some products (for example, popular U.S. fashion labels) create such a
strong demand that even low per capita income will not affect their selling price.
Simplifying the product to reduce its selling price may be an answer for your company in
markets with low per capita income. Your company must also keep in mind that
currency fluctuations may alter the affordability of its goods.  
 
Competition  
In the domestic market, U.S. companies carefully evaluate their competitors’
pricing policies. You will also need to evaluate competitor’s prices in each potential
export market. If there are many competitors within the foreign market, you may have to
match the market price or even underprice the product or service for the sake of
establishing a market share. If the product or service is new to a particular
foreign market, however, it may actually be possible to set a higher price than is feasible
in the domestic market. 

Pricing Summary 
 It’s important to remember several key points when determining your product’s price:  
 Determine the objective in the foreign market.  
 Compute the actual cost of the export product.  
 Compute the final consumer price.  
 Evaluate market demand and competition.  
 Consider modifying the product to reduce the export price.  
 Include “non-market” costs, such as tariffs and customs fees.  
 Exclude cost elements that provide no benefit to the export function, such as
domestic advertising. 

The Pricing Strategy for Export Items

What determines a successful export pricing strategy? The key elements
include assessing your company's foreign market objectives, product-related
costs, market demand, and competition. Other factors to consider are transportation,
taxes and duties, sales commissions, insurance, and financing.

What is Export Pricing?

Determining the right price to sell your export product (or service) at seems like a
very simple task – just follow the market sentiment/pricing model, right? Export pricing
could be one of the most complicated – and crucial – decisions you will take when
starting out as an exporter. Market prices may not always accurately depict the true
value of your product and setting a price that helps you stand out from other suppliers is
also important. Additionally, finding out the total cost of manufacturing your product is
comparatively easy, but many more considerations come into play when you try to
decide on the mark-ups to include in your final cost. There can be a plethora of factors
that influence the final price of a product, like:
 The manufacturing cost of the product
 The demand for the product in the target market
 The amount the buyers are willing to pay in their domestic currency
 Your competitors’ pricing
 The importing country’s tariffs
 The supply chain involved in the trade
 Internal factors like procurement frequency, delivery speed, product range, etc.
  The objective of the exporter concerning the product

Cost of the Product - How is it Calculated

As an exporter, you will have to add up all the expenses that you bear, up to the
point your product reaches your buyer. If you are a merchant exporter, for example, this
will start with the price you paid to buy the product and include all the costs you have
borne along the way to your buyer receiving the final delivery, including storage,
shipping and transportation, customs, duties, tariffs, etc. In the case of manufacturer
exporters, the cost starts with the production of the product.
Production costs can be fixed (cost of assets like machinery, wages, etc.) or
variable (seasonal storage costs, transportation, etc.). If you decide to include the
(often-capital-intensive) fixed component into your product’s price, your final figure
might shoot up significantly. But not including it might also mean you’re not recovering
your investment fast enough. You need to pick the strategy that you feel works better for
your product based on your market demand, expected volumes, sales and revenue
expectations, etc.
Thus, your product will have a base price at which you purchased or
manufactured it (the ex-factory price in the latter case, for example). During the export
process, you are likely to face many additional costs.

However, your costs may also reduce thanks to facilities and assistance in the
form of rebates, cashback, exemption of taxes and excise duties, cheap import options,
export credit, etc. These savings will eventually reduce your final “cost of goods sold”,
so this can impact the pricing of your product. However, several of these benefits are
post-facto in nature, so whether you should incorporate them you’re your pricing
strategy beforehand should be a carefully thought-out and considered option.

The final cost of the product will also significantly be influenced by the incoterms chosen
for the trade, for instance an export transaction under DAP is likely to cost far lesser as
compared to an export transaction under CIF as the responsibilities for cost, insurance
and freight is borne by the seller under the latter.

Various pricing strategies are adopted by exporters – yours will be shaped by your
profit expectations and other factors that could influence your product’s price. Some
export pricing strategies that you can consider are:

 Market-driven pricing is the most common approach to export pricing. Under

this strategy, you keep your product’s price flexible and responsive to market
conditions like demand and supply, inflation etc. This is particularly useful for
commodities/products for well-established and stable markets; but remember too
much exposure to market forces can also cause instability in your pricing.

 Skimming pricing involves you charging a higher price for your product to

recover preliminary expenses and reap high profits but decreasing it to increase
market share. Again, this is better adopted with products with established
 markets or high demand, as customers in a new market might not be open to
paying high prices initially.

 Penetration pricing requires you to charge a low price to penetrate the market

and weed out competition. This policy is often used for items of mass
consumption and is also called ‘dumping’.

 Pre-emptive pricing is like penetration pricing, except the exporter’s sole aim
here is to discourage competition. Pre-emptive pricing may mean fixing your
price lower than the cost of the product, on the assumption that in the long run,
market domination will help generate profits. Both penetration and pre-emptive
pricing are high-risk strategies, but if effectively managed, this can have high
payoffs in the form of market domination and virtual monopolies.

 Marginal cost pricing is best adopted when the exporter considers only variable
or direct costs in determining the price. If you have no plans of recovering fixed
and/or preliminary costs from your sales and shipments, you can adopt marginal
cost pricing which allows for lower product prices at the risk of a slower journey
to breakeven and profits.

 Competition-based pricing is a variant of market-based pricing useful in

markets with a ‘price leader’. Here, ‘price followers’ fix their price based on the
leader’s pricing policy. This is a relatively easy pricing strategy to adopt but can
leave you vulnerable to sudden fluctuations in the leader’s prices.

Balancing Strategy with Influencing factors

Pricing strategies make the exercise of export pricing clear and methodical.
However, as an exporter, you cannot limit yourselves to the specific guidelines of just
one pricing strategy while turning your back on the dynamics of the international market.
Customer expectations, demand-supply positions, fluctuations in purchasing power of
the local currency, changes in the supply chain, etc. are all aspects that need your
attention on an ongoing basis. These will influence your strategy’s optimization over
time.
Remember – charging too much can alienate your buyers, while charging too low
may drive your business into heavy losses. Finding the right balance involves constant
monitoring of market factors and tweaking your price accordingly. Also remember to
have a buffer in your mark-up so that you can offer a special price in case of bulk
orders.
Use these factors and strategies to determine an optimal price for your product and gain
a hold on your target market, essential factors in ensuring the success of your export
business.
Pro-Tips
 Export pricing is a great opportunity to identify duplicate and unnecessary
expenses in your supply chain and find opportunities to streamline distribution
channels.
 For certain products, a slab-based pricing strategy may also make sense (where
you offer varying prices in different volume-based slabs of purchase orders).
Generally, being willing to lower the price on bulk orders is a sound strategy to
adopt – so long as your importers don’t try to abuse it.
 Currency fluctuations may also be a good factor to consider in your pricing
strategy when selling to high-risk markets, to protect you from sharp falls in your
trading currency and cover possible losses.

Warnings
 Don’t base your export price on your commodity’s domestic selling price. The two
are inherently different, and not necessarily linked.
 Don’t rigidly follow a pricing strategy, as that could make it difficult to adjust to
changes in the market or to adopt a different strategy.
 Although not directly related to pricing, make sure your terms and conditions are
clear and you understand your cost components thoroughly. Overlooked
components can force you to unexpectedly raise your price, adversely affecting
profitability.

Analysis For Estimating Market Potential

Market potential analysis is a strategic tool to identify market opportunities
and invest resources where they will have the greatest return in the long run .
Market potential analysis is not used for short-term forecasting, but can help to target
markets with high growth potential in the future

What is market analysis? 

Market analysis is a detailed assessment of your business’s target market and
competitive landscape within a specific industry. This analysis lets you project the
success you can expect when you introduce your brand and its products to consumers
within the market. Market analysis includes quantitative data such as the actual size of
the market you want to serve, prices consumers are willing to pay, and revenue
projections, as well as qualitative data such as consumers’ values, desires, and buying
motives.
 
Conducting a market analysis can benefit you in several ways by helping you to: 
 Spot trends and opportunities in your industry 
 Differentiate your business from competitors 
 Reduce the risks and costs of launching a new business (or pivoting an existing
one) 
 Tailor products and services to your target customers’ needs 
 Analyze successes and failures 
 Optimize your marketing efforts 
 Reach new market segments
  Monitor your business’s performance
 Pivot your business in new directions

In researching this topic, you may come across terms with similar meanings, including
market research and marketing analytics. Here are some distinctions: 
 Market research is the process of gathering information about a target market,
including its customers’ needs and behaviors, in order to market products to it
effectively.
 Marketing analytics is the process of studying the metrics of specific marketing
efforts, such as landing page sign-ups and social media engagement, in order to
increase return on investment.

Here, we focus on market analysis as one component of a thorough business plan.

Continue reading to begin conducting your market analysis and lay a strong foundation
for your business. 

How to do a market analysis in 6 steps

1. Research your industry. 
The purpose of this step is to gain an understanding of your industry at large, so
that you know how to enter it, can spot trends, and compete with other brands. 
Here are questions to get you started:
 What statistical information can you gather about your industry from sources like
the US Bureau of Labor Statistics, BMI Research, and professional associations? 
 How many businesses are in this industry?
 What’s the size of the market in terms of the number of potential customers?
 How much revenue does the industry generate?
 What are the industry standards by which companies and consumers operate?
 What external factors have bearing on how businesses in this industry operate,
including laws and regulations, new technologies, world events, and economic and
social change?  
 Where do you spot opportunities to innovate within the industry?

2. Investigate the competitive landscape.

This next step takes you from broad industry insights to looking specifically at brands
you’ll be competing against as you seek to attract potential customers in your target
market. Here are questions to guide your process:
 What brands are the most well known in your industry? Who sets the trends and
captures the attention of customers? 
 What are these brands’ offers, price points, and value propositions? 
 What sales tactics, technologies, and platforms do these brands use to create a
customer journey?
 How do these brands use content to educate and engage an audience? 
 What can you learn from customer reviews of these brands?
3. Identify market gaps. 
With insights into how competing brands fare, you’re in a good position to find
market gaps, differentiate your products and services, and stand out within your industry. 
Market gaps are needs that are currently not being filled by existing brands. For example,
in the online education industry, you might find that learners are interested in topics that
existing courses do not cover, in which case you could develop a course to fill this need. 

Here are some questions to help you identify market gaps:

 Looking back at your industry research findings, what will external factors like
social change and new laws mean for developing products and services? 
 Ask consumers directly: “What do you want or need that you currently can’t find?”
 How specifically do competitors’ products and services fall short? 
 In what ways would you be able to create better products and services, given your
strengths and expertise?

4. Define your target market.

Now that you know your industry, the competitive landscape, and market gaps you
can fill, the next thing to do is get specific about the kinds of customers you want to serve.
Define your target market according to the characteristics that make individual consumers
more likely to purchase products and services from you:
 Of the potential customers in your industry, which specific market segment can
you target effectively? 
 How can you describe this segment according to their demographics (age,
ethnicity, income, location, etc.) and psychographics (beliefs, values, aspirations,
lifestyle, etc.)? 
 What are their daily lives like? 
 What problems and challenges do they experience? 
 What words, phrases, ideas, and concepts do consumers in your target market
use to describe these problems when posting on social media or engaging with
your competitors?  
 What are the features and benefits of your offers, and how will these provide
solutions to your target market’s needs? 
 What kind of marketing messaging can you use to appeal to this target market in
order to exhibit empathy and understanding? 

5. Identify barriers to entry. 

As you’re getting to know your target market and tailoring your offers and messaging to
consumers, it’s important to have a clear sense of factors that might prevent you from
entering your market successfully. That way, you can devise a strategy to address
challenges. 
Here are some questions to make barriers to entry more visible: 
 What are the startup costs of building your business, including product
development, technology, suppliers, patents, and certifications? 
 What legal requirements will you need to fulfill before launching? 
 What political, economic, and social factors might affect customers behavior and
their likelihood of purchasing your offerings?
 How much do your top competitors spend on their advertising to earn the loyalty of
customers? 
  What will you need to do to present your offerings as better alternatives in terms of
value, price, and ease of purchase?

6. Create a sales forecast. 

Sales forecasting is the process of estimating future sales so that you can make
confident business decisions or secure funding from investors and lenders. You may find
it useful to create forecasts for specific increments of time, such as the next three months,
six months, or year. 
To generate a sales forecast, answer these questions:
 What products and services do you intend to sell?
 How many units do you expect to sell during each increment of time, based on
your market size and the behaviors of your target market?
 What prices will you assign to each product or service?
 What is the cost of producing and advertising each offering? 

Use this formula to quantify your forecast:

(No. of units to sell X price for each unit) – (cost per unit X No. of units) = sales forecast

Your market analysis checklist 

Use this checklist, along with the steps above, to guide your market analysis process. 
1. Research your industry.
Gain a holistic understanding of everything happening in your industry and prepare to
navigate it. 
2. Investigate competitors.
Know who the big players are and how you can differentiate your brand. 
3. Identify market gaps.
Find unsolved problems and unmet desires in your market. 
4. Define your target market.
Know your customers’ unique characteristics and tailor your offers and marketing
accordingly. 
5. Identify barriers to entry.
Know what stands in your way and address challenges head on. 
6. Create a sales forecast.

Activity 11
1. How is a foreign target market selected?
2. Identify the pricing strategy for export items.
3. Analyze market potential.

MODULE 12
International Human Resources
 The objectives of human resource management in an international firm
How the HR function changes as a firm goes global
How the HR function changes as a firm goes global.

Objectives: At the end of the period, the students must be able to:
1. Discuss the objectives of human resource management in an international
firm.
2. Explain how the HR function changes as a firm goes global.
1. Elucidate how the HR function changes as a firm goes global.

International Human Resources

The Objectives Of Human Resource Management In An International Firm
These HRM objectives are concerned with supporting employees to reach
their personal goals. It may involve introducing initiatives around recognition and
reward for good work, skills training, compensation or implementing policies to ensure a
healthy work-life balance.

HRM objectives can be grouped into the following categories: 

1. Personal  
These HRM objectives are concerned with supporting employees to reach their
personal goals. It may involve introducing initiatives around recognition and reward for
good work, skills training, compensation or implementing policies to ensure a healthy
work-life balance. 
2. Organizational 
These objectives are aligned with the overarching business strategy and are therefore
concerned with hiring the right talent, facilitating growth, driving profit and/or
implementing policies. These are high-priority objectives for HR professionals. 
3. Functional 
These might relate to helping staff communicate effectively or collaborate across
departments. Essentially functional objectives seek to ensure slick and effective ways of
working across business functions. 
4. Societal 
These objectives are focused on upholding a business’s legal and ethical
responsibilities to its employees and society at large. For example, HRM teams should
ensure a company’s adherence to labor laws around equal opportunities and equal
pay. 
 
What are the main objectives of IHRM?
These include: 
1. Recruiting and retaining staff with the specific skillset and global mindset to take
on international assignments and meet the business’s strategic goals. 
2. Training and developing staff in both hard and soft skills. Cross-cultural and local
market training is particularly important for expatriate workers who must
acclimatize to their new environment. 
 3. Compliance with international laws. International HR Managers must fully
understand and comply with the labour and tax laws of each country it operates
in. Failure to do so could result in major legal and/or financial penalties for the
business. 
 
What are the different approaches to IHRM?  
Multinational corporations (MNCs) take different approaches to IHRM, starting
with the way they choose to structure their HRM functions. 
This might be: 

1. Centralized 
A structure in which all HR administration is conducted centrally, typically from a
business’s headquarters. According to Mercer, 50% of MNCs control HR centrally.
Generally speaking, HR policies won’t vary significantly across subsidiaries. 
 
2. Decentralized 
HR administration is handled regionally, and policies and procedures reflect local
differences. Mercer reports that 15% of MNCs follow a decentralized structure.  

3. Hybrid 
Finally, Mercer report that the hybrid structure is used by 35% of MNCs and
involves a mix of both centralized and decentralized HR management. 
MNCs also have different approaches to international recruitment which is typically
influenced by the HR structure they have adopted.  

For international roles, MNCs might choose to hire: 

1. Home country nationals: employees from the country where the business’s
headquarters are located. These employees will be relocated overseas on an
‘expatriate assignment’.
2. Host country nationals: employees from the country where the company has
set up a subsidiary.
3. Third country nationals: employees who work in either the home or host
country for the company, but who aren’t nationals of either. 

Multinational corporations may also choose to combine these approaches, adopting

a ‘geocentric’ style of recruitment that involves hiring the most suitable candidate for the
job, irrespective of their current location.  
 
What are the main challenges of International HRM?
International expansion can offer huge opportunities for businesses looking to take
advantage of the global economy. However, as we’ve flagged many times in this blog,
managing staff beyond national borders comes with a unique set of challenges. Here
are just a few: 
 Failed expatriate assignments 
According to research by INSEAD, failure rates for expatriate assignments span 10-
50% across industries. Those relocating to emerging economies experience higher
rates of failure compared to those who move to developed countries. Commonly cited
reasons for failure include culture shock, isolation and domestic issues (i.e., spouses or
children struggling to settle in the host country).  
 Ethical dilemmas 
There can be conflicts between the ethics of a company in its home country and the
laws and practices of the host countries. For example, western companies have strict
child labour laws but may also have factories in countries overseas where this is
permitted. International HRM teams must therefore work with senior leaders to define
the business’s ethical code and strategize ways to promote consistent behavioral
standards across international offices. 
 Navigating host countries’ laws and practices 
As discussed, International HR Managers have their work cut out understanding and
complying with the various local labor and tax laws of each host country. However,
understanding the cultural practices and communication preferences within these
countries (and ensuring expatriates share this knowledge) is extremely important. Doing
so will minimize the risk of friction between employees and business partners.  

Recruitment and Onboarding Process

Attracting, hiring and retaining a skilled workforce is perhaps the most basic of
the human resources functions. There are several elements to this task including
developing a job description, interviewing candidates, making offers and negotiating
salaries and benefits. Although a complex task for any business, it is made more
complex in the international arena due to differences in educational systems from one
country to the next and, of course, difference in languages.
Companies that recognize the value of their people place a significant amount
of stock in the recruitment function of HR, no matter where in the world hiring takes
place. There is good reason for this – having a solid team of employees can raise the
company's profile, help it to achieve profitability and keep it running effectively and
efficiently.

On-the-Job Training 
Even when an organization hires skilled employees, there is normally some
level of on-the-job training that the human resources department is responsible for
providing. This is because every organization performs tasks in a slightly different
way. One company might use computer software differently from another, or it may
have a different timekeeping method. Whatever the specific processes of the
organization, human resources have a main function in providing this training to the
staff.
The training function is amplified when the organization is running global
operations in a number of different locations. Multiple sessions in numerous
international locations may be called for, although online webinars and training tools
can sometimes effectively reach anywhere on the globe. Having streamlined
processes across all locations makes communication and the sharing of resources a
much more manageable task.
Continuing Professional Development
Closely related to training is HR's function in professional development. But
whereas training needs are centered around the organization's processes and
procedures, professional development is about providing employees with opportunities
for growth and education on an individual basis. Development often entails moving an
employee between departments so that he or she gains skills in multiple areas. For an
international operation, this may also mean moving employees across boundaries.
Many human resource departments also offer professional development
opportunities to their employees by sponsoring them to visit conferences, external
skills training days or trade shows. The result is a win-win: it helps the employee feel
like she is a vital and cared-for part of the team and the organization benefits from the
employee's added skill set and motivation.

Benefits and Compensation

While the management of benefits and compensation is a given for human
resources, the globalization of companies in the twenty-first century has meant that
HR must now adapt to new ways of providing benefits to an organization's employees.
Non-traditional benefits such as flexible working hours, paternity leave, extended
vacation time and telecommuting are ways to motivate existing employees and to
attract and retain new skilled employees. Balancing compensation and benefits for the
organization's workforce is an important HR function because it requires a sensitivity
to the wants and needs of a diverse group of people.

Ensuring Legal Compliance

The final function of human resource management is perhaps the least
glamorous but arguably of utmost importance. Ensuring legal compliance with labor
and tax law is a vital part of ensuring the organization's continued existence. The
federal government as well as the state and local government where the business
operates impose mandates on companies regarding the working hours of employees,
tax allowances, required break times and working hours, minimum wage amounts and
policies on discrimination.

This task becomes very much more complex when different laws in different
countries need to be taken into account as well. Being aware of these laws and
policies and working to keep the organization completely legal at all times is an
essential role of human resources.
Thanks to globalization, companies must train their employees to function in
different countries with their regional offices. In fact, globalization in human resource
management demands HR departments to develop exclusive strategies for
recruiting, training, retaining, and motivating expats.

Impact of Globalization on Human Resource Management

In the era of globalization, HR management is slowly shifting from its previously
assigned traditional tasks, such as administration, transactional, and personnel roles.
But as modern businesses face several complex hurdles, their HR departments must
also make a few adjustments to adapt. 
This transformation directly stems from globalization and competition trends in
human resource management. Today, businesses want their HR Management to add
value to the strategic utilization of employee programs. 
In the face of global competition, the decision-making system in organizations
has become complicated. They need advanced HR systems that can interpret the data
to deliver business insights, anticipate future requirements, and devise strategies to
cater to pressing needs. The challenge becomes further aggravated as there’s a
significant shortage in the global talent supply compared to its long-term demand.
Hence, the next-generation of organizations will likely suffer from the lack of highly
skilled workers as the skill gap will deepen over time. 
Considering the impact of globalization on HR practices, companies will need to
prioritize investment in human capital over financial capital. After all, effective HR
management is the foremost determinant of whether or not a company can become a
global leader. 

Major Areas of Impact of Globalization on Human Resource Development

Due to globalization in human resource management, modern HR managers
must conceive strategies catering to both local and remote employees. For instance, a
Germany-based business hiring people in Europe and Asia must ensure that its HR
strategy adheres to local and international standards while being culturally appropriate. 
Hence, the impact of globalization on human resource management pushes HR
management to rethink their core strategies. 

Labor laws
Globalization's impact on HR management is directly related to a country’s labor
laws. For example, the minimum wage in Canada will vary from that in the US. In the
same way, Australia and China's rules on employee benefits and compensation differ.
The minimum working hours in Malaysia, India, Britain, and Hong Kong will depend on
the country-specific labor laws. 
So, global organizations must keep such factors in mind while drafting their HR
strategies. Their HR management must possess a thorough knowledge of the domestic
and international labor laws of the relevant countries. Violation of labor laws can lead to
severe legal issues. 

Recruitment
Employers recruiting foreign employees can vouch for the rapid change in the
hiring dynamics. Different countries have varying names and follow unique evaluating
criteria for educational qualifications and certificates. For example, you want to hire a
candidate for a position with a minimum educational requirement of an MBA degree.
The evaluation method for the MBA degree will vary from country to country, ranging
from the degree name to the grades or credits offered in the course. 
Thus, HR departments must be aware of the country’s evaluation criteria for
educational qualifications from where they are hiring and judge candidates accordingly. 
Training
Companies usually offer extensive training to new recruits, detailing their job
responsibilities and the company policies. However, the impact of globalization on HR
practices demands distinct training modules for a global workforce. For example, if an
employer transfers a local employee overseas, they must train them per offshore work
expectations and culture.

Expatriation
Thanks to globalization, companies must train their employees to function in
different countries with their regional offices. In fact, globalization in human resource
management demands HR departments to develop exclusive strategies for recruiting,
training, retaining, and motivating expats. 

Communication
Communication procedures are a prime example of how globalization is
influencing human resource management. The varying time zones pose a severe
problem for multinational companies operating in different countries. For instance, while
the regional head office in one country wraps up work, an office in another country
might just start its workday. 
Consequently, the HR department must design specific communication
strategies to establish synchronized coordination among the different regional head
offices, keeping in mind remote employees as well.

Major Challenges of Globalization in Human Resource Management

Since globalization brings numerous global tenets together, modern businesses
face multiple challenges. HR departments must tackle these issues efficiently to help
businesses flourish and stay competitive. 

Some of the major challenges of globalization in human resource management

include: 
Attracting and retaining talent
With ample entrepreneurship opportunities and employment prospects available
today, employees choose organizations having an excellent work culture and pro-
employee stance. Hence, the best way to attract talent in this era of globalization in
human resource management is to comprehend their workplace expectations during the
interview. To retain employees, HR teams must create effective engagement plans,
provide them with ample scope for growth, and help them strike a work-life balance.
 
Privacy and Security
A company’s employees and data are the responsibility of the HR department.
As countries function across borders, the amount of data generated every day
increases exponentially. This compels HR teams to monitor their human and intellectual
resources strictly and protect them from security breaches. They must implement
adequate security measures and draft well-thought-out confidentiality agreements for
vendors. 

Conflict management
Organizations now hire employees from diverse cultural and social backgrounds.
Managing a diverse workforce can get challenging due to cultural sensitivity and may
sometimes lead to disputes in the workplace. As an impact of globalization on HR
practices, HR executives must clearly define acceptable workplace behavior and
encourage open communication channels to avoid conflicts during work. 

Managing diverse workforce

The globalization of the workforce has created a mixture of remote and on/off-site
teams across different genders, cultures, locations, and ages. So, it becomes crucial to
cater to the needs of a diverse employee group, which demands a global HR policy. HR
practices must percolate across different company parallels, teaching employees to
respect their co-workers while maintaining workplace boundaries. 

Performance management
Globalization in human resource management means devising innovative
evaluation measures to keep employees focused and motivated. HR teams can create
a constructive feedback system for regular evaluations instead of yearly assessments.
The rise in the enrollment for performance management certification is another example
of how globalization is influencing human resource management.
 
Compensation package
It is a challenge for companies to devise balanced benefits and compensation
packages for all employees across different countries. So, a company’s HR department
must create a definite system by considering the labor laws of the countries where it
operates to avoid penalties and legal complications. 

Globalization in Human Resource Management: Advantages & Disadvantages

Globalization has rapidly changed how organizations operate and run their
business. The impact of globalization on human resource management is mainly
evident in the cross-cultural communications of companies. Different countries have
different cultural sensibilities, time zones, labor laws, legislature, and regulatory
impositions. Hence, HR management must always consider these factors while
designing company HR strategies.

Advantages of Globalization in HR Management

Globalization offers numerous advantages to businesses. For example, a
company can pay significantly lower wages and have lower overheads in comparatively
lesser developed nations. They can also benefit from lower corporate tax rates, reduced
business set-up costs, etc.  

New ideas due to cultural diversity

 A global workforce comprises crews operating across various locations,
functioning across a wide range of work ethics and practices. By taking a unique
approach to HR management, organizations can infuse diverse insights, perspectives,
and ideas into their work culture. 
Larger markets
Globalization has opened up unique possibilities for corporations to sell their
services/products on the international market, increasing sales and profits. Globalization
in human resource management means more qualified employees can handle sales
and marketing remotely.  

Ability to tap into a wider talent pool

A positive impact of globalization on human resource management is that
companies need not restrict themselves to specific locations while hiring. Thanks to
robust internet facilities, online meeting platforms, and rising work-from-home
opportunities, companies can hire the best candidates worldwide. 

Disadvantages of Globalization in HR Management

One of the major challenges of globalization in human resource management is
the necessity to learn the varying cultural differences of a diverse employee pool. 
HR departments must continuously stay updated with the labor laws of different nations,
devise communication strategies, integrate diverse value systems, and coordinate the
activities of all employees to achieve company goals. They must have a deep
understanding of foreign labor issues, international labor relations laws, and
employment regulations to devise suitable employee packages. This can be pretty time-
consuming, overwhelming, and complicated. 

How The HR Function Changes as A Firm Goes Global

Global human resources managers are responsible for recruitment of new
employees, training, professional development, benefits and legal compliance just
like any other HR team, but they do so on a global scale.

Impact of Globalization on Human Resource Management

In the era of globalization, HR management is slowly shifting from its previously
assigned traditional tasks, such as administration, transactional, and personnel roles.
But as modern businesses face several complex hurdles, their HR departments must
also make a few adjustments to adapt. 
This transformation directly stems from globalization and competition trends in
human resource management. Today, businesses want their HR Management to add
value to the strategic utilization of employee programs. 
In the face of global competition, the decision-making system in organizations has
become complicated. They need advanced HR systems that can interpret the data to
deliver business insights, anticipate future requirements, and devise strategies to cater
to pressing needs. The challenge becomes further aggravated as there’s a significant
shortage in the global talent supply compared to its long-term demand. Hence, the next-
generation of organizations will likely suffer from the lack of highly skilled workers as the
skill gap will deepen over time. 
 Considering the impact of globalization on HR practices, companies will need to
prioritize investment in human capital over financial capital. After all, effective HR
management is the foremost determinant of whether or not a company can become a
global leader. 
Major Areas of Impact of Globalization on Human Resource Development
Due to globalization in human resource management, modern HR managers
must conceive strategies catering to both local and remote employees. For instance, a
Germany-based business hiring people in Europe and Asia must ensure that its HR
strategy adheres to local and international standards while being culturally appropriate. 
Hence, the impact of globalization on human resource management pushes HR
management to rethink their core strategies. 

Labor laws
Globalization's impact on HR management is directly related to a country’s labor
laws. For example, the minimum wage in Canada will vary from that in the US. In the
same way, Australia and China's rules on employee benefits and compensation differ.
The minimum working hours in Malaysia, India, Britain, and Hong Kong will depend on
the country-specific labor laws. 
So, global organizations must keep such factors in mind while drafting their HR
strategies. Their HR management must possess a thorough knowledge of the domestic
and international labor laws of the relevant countries. Violation of labor laws can lead to
severe legal issues. 

Recruitment
Employers recruiting foreign employees can vouch for the rapid change in the
hiring dynamics. Different countries have varying names and follow unique evaluating
criteria for educational qualifications and certificates. For example, you want to hire a
candidate for a position with a minimum educational requirement of an MBA degree.
The evaluation method for the MBA degree will vary from country to country, ranging
from the degree name to the grades or credits offered in the course. 
Thus, HR departments must be aware of the country’s evaluation criteria for
educational qualifications from where they are hiring and judge candidates accordingly. 

Training
Companies usually offer extensive training to new recruits, detailing their job
responsibilities and the company policies. However, the impact of globalization on HR
practices demands distinct training modules for a global workforce. For example, if an
employer transfers a local employee overseas, they must train them per offshore work
expectations and culture.

Expatriation
Thanks to globalization, companies must train their employees to function in
different countries with their regional offices. In fact, globalization in human resource
management demands HR departments to develop exclusive  strategies for recruiting,
training, retaining, and motivating expats. 
Communication
Communication procedures are a prime example of how globalization is
influencing human resource management. The varying time zones pose a severe
problem for multinational companies operating in different countries. For instance, while
the regional head office in one country wraps up work, an office in another country
might just start its workday. 
Consequently, the HR department must design specific communication
strategies to establish synchronized coordination among the different regional head
offices, keeping in mind remote employees as well.

Major Challenges of Globalization in Human Resource Management

Since globalization brings numerous global tenets together, modern businesses
face multiple challenges. HR departments must tackle these issues efficiently to help
businesses flourish and stay competitive. 

Some of the major challenges of globalization in human resource management

include: 
Attracting and retaining talent
With ample entrepreneurship opportunities and employment prospects available today,
employees choose organizations having an excellent work culture and pro-employee
stance. Hence, the best way to attract talent in this era of globalization in human
resource management is to comprehend their workplace expectations during the
interview. To retain employees, HR teams must create effective engagement plans,
provide them with ample scope for growth, and help them strike a work-life balance. 

Privacy and Security

A company’s employees and data are the responsibility of the HR department. As
countries function across borders, the amount of data generated every day increases
exponentially. This compels HR teams to monitor their human and intellectual resources
strictly and protect them from security breaches. They must implement adequate
security measures and draft well-thought-out confidentiality agreements for vendors. 

Conflict management
Organizations now hire employees from diverse cultural and social backgrounds.
Managing a diverse workforce can get challenging due to cultural sensitivity and may
sometimes lead to disputes in the workplace. As an impact of globalization on HR
practices, HR executives must clearly define acceptable workplace behavior and
encourage open communication channels to avoid conflicts during work. 

Managing diverse workforce

The globalization of the workforce has created a mixture of remote and on/off-site teams
across different genders, cultures, locations, and ages. So, it becomes crucial to cater
to the needs of a diverse employee group, which demands a global HR policy. HR
practices must percolate across different company parallels, teaching employees to
respect their co-workers while maintaining workplace boundaries. 
Performance management
Globalization in human resource management means devising innovative evaluation
measures to keep employees focused and motivated. HR teams can create a
constructive feedback system for regular evaluations instead of yearly assessments.
The rise in the enrollment for performance management certification is another example
of how globalization is influencing human resource management. 

Compensation package
It is a challenge for companies to devise balanced benefits and compensation packages
for all employees across different countries. So, a company’s HR department must
create a definite system by considering the labor laws of the countries where it operates
to avoid penalties and legal complications. 

Globalization in Human Resource Management: Advantages & Disadvantages

Globalization has rapidly changed how organizations operate and run their business.
The impact of globalization on human resource management is mainly evident in the
cross-cultural communications of companies. Different countries have different cultural
sensibilities, time zones, labor laws, legislature, and regulatory impositions. Hence, HR
management must always consider these factors while designing company HR
strategies.

Advantages of Globalization in HR Management

Globalization offers numerous advantages to businesses. For example, a company can
pay significantly lower wages and have lower overheads in comparatively lesser
developed nations. They can also benefit from lower corporate tax rates, reduced
business set-up costs, etc.  

New ideas due to cultural diversity

A global workforce comprises crews operating across various locations, functioning
across a wide range of work ethics and practices. By taking a unique approach to HR
management, organizations can infuse diverse insights, perspectives, and ideas into
their work culture. 

Larger markets
Globalization has opened up unique possibilities for corporations to sell their
services/products on the international market, increasing sales and profits. Globalization
in human resource management means more qualified employees can handle sales
and marketing remotely.  

Ability to tap into a wider talent pool

A positive impact of globalization on human resource management is that companies
need not restrict themselves to specific locations while hiring. Thanks to robust internet
facilities, online meeting platforms, and rising work-from-home opportunities, companies
can hire the best candidates worldwide. 

Disadvantages of Globalization in HR Management

One of the major challenges of globalization in human resource management is the
necessity to learn the varying cultural differences of a diverse employee pool. 
HR departments must continuously stay updated with the labor laws of different nations,
devise communication strategies, integrate diverse value systems, and coordinate the
activities of all employees to achieve company goals. They must have a deep
understanding of foreign labor issues, international labor relations laws, and
employment regulations to devise suitable employee packages. This can be pretty time-
consuming, overwhelming, and complicated. 

Top 12 Functions of an Human Resource Management (HRM)

HRM ensures the smooth functioning of an organization. The process starts with
formulating the right policies for the job requirements and ends with ensuring a
successful business growth of the company. Therefore, HRM is an invisible agent that
binds all the aspects of the organization to ensure smooth progress.

Features of HRM
1. A Part of Management Discipline
HRM is a crucial aspect of administration. Even though it is not considered a profession
in itself, it is unquestionably a subject of study. Because HRM is part of the
management process category, it largely relies on management concepts, methods and
procedures when managing the human resources of almost any business segment.

2. Universal Existence
HRM is universal and is applicable everywhere, irrespective of the size, nature and
variety of scopes.

3. Concerned with People

HRM is concerned with the management of human resources or human characteristics
in a business segment. It oversees a variety of individuals, including workers/laborers,
bosses, managers and other associated senior managers. As a result, HRM is
described as the management of “people resources and their dedication to their jobs.

4. Action-oriented
Instead of record-keeping, written processes or regulations, the focus of Human
Resource Management is “activity.” Employee issues are resolved by sensible policies.

5. Directed towards the achievement of objectives

HRM is focused on working to attain organizational goals. It also gives tools and
procedures for properly managing the firm’s human resources.

6. Integrating mechanism
Among the most essential purposes of HRM is to identify the best way to achieve
shared goals. It also helps to establish friendly relationships among employees at all
levels of a business.

7. Development-oriented
HRM strives to optimize or maximize the usage of employees’ talents or potential. For
all of this, it tailors the compensation structure to the demands of the personnel. It also
influences staff training in order to improve their abilities. It makes every effort to fully
use the capabilities of its people to serve the organizational goals.
8. Continuous processes
HRM is an ongoing process, it operates from the day an organization is created until it is
disbanded. It primarily focuses on managing the firm’s human capital, which is a
continuous process rather than a one-time event or a bad transaction.

9. Comprehensive function
HRM can never be an isolated process since it involves all employees. No one is
exempt from the periphery of HRM, regardless of his or her status, remuneration or kind
of job.

Objectives of HRM:
Some of the key objectives of HRM are:
 HR managers strive to reduce expenses in areas, such as retaining employees.
HR specialists are taught to conduct effective negotiations with potential and
current workers, as well as to be knowledgeable about employee perks that are
likely to attract excellent applicants and keep current employees.
 HR managers play an important role in developing employer-employee
relationships since they contribute considerably to training and development
programs. This leads to staff development inside the organization, hence,
increasing employee happiness and productivity.
 Human resource managers are in charge of organizing activities, events and
celebrations inside the organization, which provide possibilities for team
development. Furthermore, it increases employee engagement and fosters a
sense of confidence and regard among colleagues.

Functions of HRM:
1. Job design and job analysis
2. Employee hiring and selection
3. Employee training & development
4. Compensation and Benefits
5. Employee performance management
6. Managerial relations
7. Labour relations
8. Employee engagement & communication
9. Health and safety regulations
10. Personal support for employees
11. Succession Planning
12. Industrial Relations

1. Job design and job analysis

One of the foremost functions of HRM is job design and job analysis. Job design
involves the process of describing duties, responsibilities and operations of the job. To
hire the right employees based on rationality and research, it is imperative to identify the
traits of an ideal candidate who would be suitable for the job. This can be accomplished
by describing the skills and character traits of your top-performing employee. Doing so
will help you determine the kind of candidate you want for the job. You will be able to
identify your key minimum requirements in the candidate to qualify for the job.
Job analysis involves describing the job requirements, such as skills, qualification and
work experience. The vital day-to-day functions need to be identified and described in
detail, as they will decide the future course of action while recruiting.

2. Employee hiring and selection

Recruitment is one of the primary functions of human resource management. HRM aims
to obtain and retain qualified and efficient employees to achieve the goals and
objectives of the company. All this starts with hiring the right employees out of the list
of applicants and favorable candidates.
An HRM helps to source and identify the ideal candidates for interview and
selection. The candidates are then subjected to a comprehensive screening
process to filter out the most suitable candidates from the pool of applicants. The
screened candidates are then taken through different interview rounds to test and
analyze their skills, knowledge and work experience required for the job position.
Once the primary functions of HRM in recruitment are completed, and the
candidate gets selected after rounds of interviews, they are then provided with the job
offer in the respective job positions. This process is important because these selected
employees will, after all, help the company realize its goals and objectives.

3. Employee training & development

Imparting proper training and ensuring the right development of the selected candidates
is a crucial function of HR. After all, the success of the organization depends on how
well the employees are trained for the job and what are their growth and development
opportunities within the organization.
The role of HR should be to ensure that the new employees acquire the
company-specific knowledge and skills to perform their task efficiently. It boosts the
overall efficiency and productivity of the workforce, which ultimately results in better
business for the company.
HRM plays a very crucial role in preparing employees for bigger tasks and
responsibilities, which leads to the holistic development of employees at work. And an
organization which provides ample growth and development opportunities to its
employees is considered to be a healthy organization.

4. Compensation and Benefits

Benefits and compensation form the major crux of the total cost expenditure of an
organization. It is a must to plug the expenses, and at the same time, it is also
necessary to pay the employees well. Therefore, the role of human resource
management is to formulate attractive yet efficient benefits and compensation packages
to attract more employees into the workplace without disturbing the finances of the
company.
The primary objective of the benefits and compensation is to establish equitable and fair
remuneration for everyone. Plus, HR can use benefits and compensation as a leverage
to boost employee productivity as well as establish a good public image of the
business.
Therefore, one of the core HR department functions is to lay down clear policies
and guidelines about employee compensation and their available benefits. One of the
functions of HR manager is to ensure the effective implementation of these policies and
guidelines. This creates equality and builds transparency among the employees and the
management within the organization. After all, the level of employee satisfaction at work
is directly proportional to the compensation and benefits they receive.

5. Employee performance management

The next activity on HR functions list is effective employee performance management.
Effective performance management ensures that the output of the employees meets the
goals and objective of the organization. Performance management doesn’t just focus on
the performance of the employee. It also focuses on the performance of the team, the
department, and the organization as a whole.

The list of HR functions for performance management includes:

 Developing a proper job description
 Initiating an appropriate selection process to hire the right candidates for the job
positions
 Providing the right training and education needed to enhance the performance of
the employees
 Enabling real-time feedback and coaching employees to boost efficiency among
them
 Conducting performance reviews monthly or quarterly to discuss the positives
and the improvement areas of employees
 Formulating a proper exit interview process to understand why experienced
employees choose to leave the company
 Designing a proper appraisal and compensation system that recognizes and
rewards the workforce for their effort and hard work

6. Managerial relations
Relationships in employment are normally divided into two parts — managerial relations
and labor relations. While labor relations is mainly about the relationship between the
workforce and the company, managerial relations deals with the relationship between
the various processes in an organization.
Managerial relations determine the amount of work that needs to be done in a
given day and how to mobilize the workforce to accomplish the objective. It is about
giving the appropriate project to the right group of employees to ensure efficient
completion of the project. At the same time, it also entails managing the work schedules
of employees to ensure continued productivity. It is essential that HR handles such
relations effectively to maintain the efficiency and productivity of the company.

7. Labor relations
 Cordial labor relations are essential to maintain harmonious relationships
between employees at the workplace. At the workplace, many employees work together
towards a single objective. However, individually, everyone is different from the other in
characteristics. Hence, it is natural to observe a communication gap between two
employees. If left unattended, such behaviors can spoil labor relations in the company.
Therefore, it is crucial for an HR to provide proper rules, regulations and policies about
labor relations. This way, the employees have a proper framework within which they
need to operate. Therefore, every employee will be aware of the policies which will
create a cordial and harmonious work environment.
Such a structured and calm work atmosphere also helps with improving performance
and aching higher targets.

8. Employee engagement and communication

Employee engagement is a crucial part of every organization. Higher levels of
engagement guarantee better productivity and greater employee satisfaction. Efficiently
managing employee engagement activities will help in improving the employee retention
rates too. HRM is the right agent who can manage the employee engagement
seamlessly. Proper communication and engagement will do wonders for the employees
as well as the organization. The more engaged the employees are, more committed and
motivated they will be.
Human resource teams know the ‘humans’ of the organization better than
anyone else. This gives them an upper hand in planning engagement activities.
Although such activities might not fall under the direct functions of HRM, they are
indeed required for the organizational welfare and employer branding.

9. Health and safety regulations

Every employer should mandatorily follow the health and safety regulations laid
out by the authorities. Our labor laws insist every employer to provide whatever training,
supplies, PPE, and essential information to ensure the safety and health of the
employees. Integrating the health and safety regulations with company procedures or
culture is the right way to ensure the safety of the employees. Making these safety
regulations part of the company activities is one of the important functions of HRM.

10. Personal support for employees

HRM assists employees when they run into personal problems which may
interfere with the workflow. Along with discharging administrative responsibilities, HR
departments also help employees in need. Since the pandemic, the need for employee
support and assistance has substantially increased. For example, many employees
needed extra time off and medical assistance during the peak period of the pandemic.
For those who reached out for help, whether it may be in the form of  insurance
assistance or extra leaves, companies provided help through HR teams.

11. Succession Planning

Succession planning is a core function of HRMs. It aims at planning, monitoring,
and managing the growth path of the employees from within the organizations.
What usually happens is that promising and bright employees within the organization
who have excelled in their roles are handpicked by their supervisors and HRs, and their
growth paths are developed.
This, of course, becomes quintessential as those employees who recognize the
fact that the company is investing in their growth and development, and therefore, will
stay loyal in the long run. However, while developing such employees towards a higher
role, companies must keep in mind several aspects, such as improving employee
engagement, assigning challenging tasks and activities.
An employee leaving the organization can prove to be disruptive and expensive.
Therefore, succession planning is a savior of some sorts, as it helps identify the next
person who is just right to replace the outgoing individual.

12. Industrial Relations

It’s usually the production lines and manufacturing units where this HR function is
mostly used. You see, Unions exist in factories and manufacturing units. And their
responsibility is towards the goodwill about the workers — in fact, they’re always vocal
and upfront about.
Now, for a company, especially into manufacturing and production, the HRs must
have ongoing Industrial Relations practices. They must also continuously engage with
the Unions in a friendly and positive manner to maintain amicable relations.
The true motive of Industrial Relation touches on a lot of issues within the company. For
instance, Industrial Relations may be in place to meet wage standards, reduce
instances that call for strikes and protests, improve working and safety conditions for
employees, reduce resource wastage and production time and so on.
Industrial Relations is extremely important because, if handled properly, it can
circumvent protests, violence, walkouts, lawsuits, loss of funds and production time. IR
is a sensitive yet critical function of the HR department, naturally, it requires personnel
with vast experience.
HRM plays a major role in the smooth functioning of the organization. The process
starts with formulating the right policies for the job requirements and ends with ensuring
a successful business growth of the company. Therefore, HRM works as an invisible
agent that binds together all the aspects of the organization to ensure smooth progress.

Differences And Similarities of Training Employees In Different Countries

Global Differences and Similarities in HR Practices
Personnel Selection Procedures:
Employers around the world tend to use similar criteria and methods for selecting
employees. As in the United States, employers around the world usually rank personal
interviews. The person’s ability to perform the technical requirements of the job and
proven work experiences in a similar job at or near the top of the criteria or methods
they use. The top rankings were the same or similar in the United States. Australia and
Latin America for instance, cultural differences did have some impact across countries;
however, in Mexico having the right connections was a top consideration for being
hired. Employee tests were one of the three top selection practices the People’s
Republic of China, Indonesia and Korea but not in the United States. And the person’s
ability to get along well with others already working there was one of the three
personnel selection criteria in Japan and Taiwan but not in other countries.

The Purpose of the performance appraisal

There tends to be more variation in how employers in different countries use
performance appraisals.
For example employers in Taiwan, the United States and Canada rank to
determine pay as one of the top three reasons for appraising performance, while that
purpose is of relatively little significance in Korea and Mexico .Employers in the United
States , Taiwan, and Australia emphasize using the appraisal to document the
employee’s performance while in Mexico and the People’s Republic of China this
purpose is far down the list .To recognize the subordinate was the main purpose for
appraisals in Japan and Mexico but nowhere else.

Training and Development Practices

The amount of training that a firm provides varies substantially from country to
country. For example, training expenditures per employee range from a low of $241 per
employee in Asia (outside Japan) to $359 in Japan and $724 in the United States.
Similarly, the total hours of training per eligible employees per year ranges from 26 total
training hours in Asia up to just over 49 total hours of training per year in Europe.
However, when it comes to the purposes of training there are usually more similarities
than differences across countries employers just above everywhere rank to improve
technical abilities is the main reason for providing employees with training.

The use of pay incentives

Findings regarding the use of financial incentives were somewhat
counterintuitive. Given the People’s Republic of China’s communist roots, and the
traditional US emphasis on pay for performance one might have expected US
managers to stress incentives more heavily than their Chinese peers. However, that
was not the case. Based on this survey in terms of their use, incentives play an only
moderate role in US pay packages. In the People’s Republic of China, Japan, and
Taiwan incentives play a relatively important role.
Owners of small businesses are not immune to global differences lie these.

How to implement global HR systems

Given such cross cultural differences in human resource management practices,
one could reasonably ask- Is it realistic for a company to try to institute a standardized
human resource management system in all or most of its facilities around the world? A
study suggests that the answer is yes. In brief the study results show that employers
may have to defer to local managers on some specific human resource management
policy issues. However, in general findings also suggest that big inter-country policy
differences are often not necessary or even advisable. The important thing is that the
employer needs to understand how to install its preferred human resource policies a
practice globally.

What is global HR?

 Global HR is how international employers manage geographic, linguistic and
cultural differences amongst their workforce to achieve maximum productivity and
engagement. Its primary responsibilities include:
 Recruiting suitably skilled employees
 Supporting regulatory compliance
 Standardizing processes and systems
 Analyzing metrics between markets

Challenges of expansion and global HR

Global HR challenges are an inevitable part of expansion and if not properly
managed, can hinder a company’s ability to achieve its international ambitions.
Leaders at outward-looking companies need to equip themselves with capabilities
to address the following difficulties:
 Finding the right employees
Recruiting people with the right vision, skills and adaptability can be
demanding, especially when specific technical skills are required. The supply
of qualified professionals may also be diminished in certain countries with
low unemployment rates.

 Managing scale
As companies increase in size and span a wider range of cultures,
managing an international workforce becomes that much more complex.
Mergers and acquisitions further exacerbate the problem because in addition
to the communication challenges posed by different languages, change
naturally gives rise to uncertainty among employees.

 Keeping employees engaged
Engagement and employee performance are usually influenced by
improvements in working conditions. Therefore, a company must treat
employees in new divisions just as well as it does in its established markets.
What’s more, countries with market growth opportunities tend to generate
higher engagement scores than those that don’t.

Expansion is hard and while there is no silver bullet to make it easy, the
accumulated knowledge of lessons learned by other companies over time is a good
place to start. Here are some tips used by successful international employers:

 Ensure leaders have the proper background

Companies must appreciate that specific skills and experience are
required for international expansion. Executives who have built their careers
managing domestic operations may not be best equipped to lead global HR.

 Assert the strategic role of HR

HR is not always well represented on boards of directors, but they may
need to raise their voices. The more assertive their recommendations –
whether it’s identifying who is best capable to lead expansion efforts or
 deciding which teams to retain in new divisions – the more important people
become in the growth of an organization.

 Use data insights effectively

Many businesses have successfully applied analytics to drive global
HR operations, including payroll, recruitment and benefits administration.
Data analysis also enables managers to identify and share best practices so
they can improve processes throughout their organization.
 Let technology guide integration
Of all the tactics, integrating HR systems, workflows and data across
geographies can have the most positive impact on global expansion. The key
is to adapt processes to technology and not the other way around.

 Build a culture of diversity

If a company’s culture is built on diversity and inclusion and is focused
on attracting and retaining local talent, it will be better prepared for
international expansion. Balancing the efficiency afforded by centralization
with respect for cultural differences further increases the chances of
success.

What is global human resource management (HRM)?

Managing HR globally means determining how HR capabilities will be
delivered internationally. There are generally two options – scale operations from a
central location or create localized HR systems and processes. Most enterprises try
to find a balance between the two because while centralization has its advantages,
sometimes a local touch is needed for optimal function.

Why is global human resource management important?

The best business opportunities – be they foreign or domestic – can fail if
HR is not managed well. In fact, most companies say that HR-related issues are
among the most challenging barriers to international expansion.

What are the main functions of global HRM?

Managing HR internationally may consist of the following:
 Recruiting employees who have the requisite skillsets
 Maintaining compliance with employment laws and customs
 Understanding cultural differences and their HR implications
 Promoting diversity and inclusion
 Managing employee development
 Integrating disparate HR systems, processes or data
 Addressing communication and language barriers
 Planning pays and benefits policies

What is the role of a global HR manager?

If an organization is preparing to expand internationally, it’s the global HR
manager’s responsibility to ensure that their department is equipped with the
necessary experience and that HR-related matters are addressed in the expansion
strategy.

Common global HR mistakes

During the initial phases of an international expansion, the efficiency and
costs of HR are less than optimal. Employers might accept short-term solutions to
overcome these early challenges of global human resource management, but such
fixes may not be ideal long-term. When making an informed trade-off between two
options, business leaders should revisit their decision and adjust as needed based
on subsequent knowledge.
Another potential pitfall for businesses as they grow their operations globally
is pay parity. Should employees in one region receive the same compensation as
employees in another, despite different financial market conditions? Some
employers try to maintain pay parity across their international division as far as
possible, while others set pay according to the rates for local jobs. As the dialogue
around pay parity develops around the world, expect stakeholders to demand
better visibility and confidence in how this is being managed across borders and
cultures.

Activity 12
1. Discuss the objectives of human resource management in an international firm.
2. Explain how the HR function changes as a firm goes global.
3. Elucidate how the HR function changes as a firm goes global

Prepared by:

DR. NENITA D. TANDINGAN

Professor
1-14-23
Books:
Charles W.L. Hill (2015) Competing in the global marketplace; International
Business Books; International Business: International Business: The
Challenges.

Claude, Jonnard (2019) International business and trade theory, practice, and policy
Deresky, Helen& Stewart R. Miller. (2014) International Management: Managing Across
Borders and Cultures, Text and Cases. 10th Edition.

Erin Meyer (2014) The culture map: breaking through the invisible boundaries of global
business 

Rao, Subba (2016) International business text and cases; 2nd Edition: Geetanjali Press
Nagpur Himalaya Publishing house

Online References
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manufacturing-companies-74890.html https://www.ncbi.nlm.nih.gov/pubmed/21250319
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