Globalization= is a process through which different economies get inter-woven by way of

international trade and investment. They become an integral part of the world economy.
Globalization is a move towards open economic policies lifting up the restriction imposed on the
international economic flows that in turn leads to a sharp increase in the quantum of such flows.
GLOBALIZATION DRIVERS
Technological drivers: Technology shaped and set the foundation for modern globalization.
Innovations in the transportation technology revolutionized the industry. The most important
developments among these are the commercial jet aircraft and the concept of containerization in the
late 1970s and 1980s. Inventions in the area of microprocessors and telecommunications enabled
highly effective computing and communication at a low-cost level. Finally, the rapid growth of the
Internet is the latest technological driver that created global e business and e-commerce.

Political drivers: Liberalized trading rules and deregulated markets lead to lowered tariffs and
allowed foreign direct investments in almost all over the world. The institution of GAT (General
Agreement on Tariffs and Trade) 1947 and the WTO (World Trade Organization) 1995 as well as the
ongoing opening and privatization in Eastern Europe are only some examples of latest
developments.

Market drivers: As domestic markets become more and more saturated, the opportunities for
growth are limited and global expanding is a way most organizations choose to overcome this
situation. Common customer needs and the opportunity to use global marketing channels and
transfer marketing to some extents are also incentives to choose internationalization.

Cost drivers: Sourcing efficiency and costs vary from country to country and global fi rms can take
advantage of this fact. Other cost drivers to globalization are the opportunity to build global scale
economies and the high product development costs nowadays.

Competitive drivers: With the global market, global inter-fi rm competition increases and
organizations are forced to ‘” play” international. Strong interdependences among countries and
high two-way trades and FDI actions also support this driver.
Globalization is a move towards open economic policies lifting up the restriction imposed on
the international economic flows that in turn leads to a sharp increase in the quantum of such
flows. The different economies, driven by international trade and investment and aided by
information technology, turn this way closely inter-woven and
become an indispensable part of the world economy. However, the literature on the subject
interprets globalization in three different ways. First of all, the hyper-globalist school feels that
globalization leads to a single global economy transcending and integrating the different economic
regions. Supported by technological sophistications and market
integration, globalization leads to denationalization of strategic economic activities. In the sequel,
the flow of global fi nance exercises a decisive influence on the location and distribution of economic
power and wealth. The economy turns borderless. A particular economy has no option rather than
to accommodate global market forces.
Secondly, the skeptical view, on the contrary, does not interpret globalization in terms of
emerging and unified international economic activity. It believes in inter-nationalization were the
increasing flow of economic resources takes place among well-defined national economies. In this
case, national economic policies remain effective to influence the flow of economic
resources.
Thirdly, there are transformationalists who interpret globalization in terms of a process or a
set of processes rather than an end-state. The process embodies a shift in the spatial organization
of social relations from national to transcontinental pattern of human organization. The economic
activities stretch out across frontiers, regions and continents. There is growing interconnectedness
among different regions through flow of trade and investment. The flow of trade and investment is
so intensive and extensive that the impact of local developments spills over to remotest corners of
the globe. In other words, the boundary between the domestic and global affairs turns blurred. The
international
organizations support and regulate such activities. The transformationalists go on arguing that the
very scale of human social organization extends the reach of power nations across the world’s major
regions.
Whatever might be the interpretation, the process of globalization has many dimensions. It
has multiple causes and multiple results. There are benefits of globalization. But it is also true that
this process leads sometimes to lack of homogenization across countries because global economic
transactions are influenced by disparity in the economic and political conditions in different
countries. However, the divergence is corrected through the process of globalization
depending on the nature of this process.
DETERMINANTS OF ENTRY MODE
A firm adopts various modes for its entry into business transaction across borders. Which
particular mode a fi rm should adopt depends, at least, upon four factors. They are:
1. Subservience of the corporate objective = When the objective of a firm spreading
internationally is simply to earn profits and not necessarily to maintain control over the entire
operation, only trading activities will serve its purpose. But if control is the primary objective, the
investment mode, and especially investment in a wholly owned foreign subsidiary, will be the best
course of action. Thus, a particular mode is selected in tune with the very objective of the firm
behind international business.
2. Corporate capability= The corporate objective shaping the entry mode must be supported by
the company’s capability to select the particular entry mode. For example, if the company’ financial
position is not strong enough to make large investment abroad, it will be difficult for the company to
make such investment even if it is desirable on the grounds of fulfilling corporate objectives. Thus,
the choice of the entry mode depends, to a considerable extent, on the capability of the company
going international.
3. Host country environment =The host country environment too influences the entry mode. It
includes many aspects, such as the regulatory environment; cultural environment; political and
legal environment; economic environment, especially the size of the market and the production; the
shipping cost, and so on (Root, 1987). When the managers of a firm are not well acquainted with
the values, beliefs, customs, language, religion, and other aspects of the target market, the fi rm
does not prefer to invest there. Rather, it limits its business only to trading activities in such cases.
The company starts operation in the host country only when the managers are acquainted with the
cultural environment in the host countries. Again, if the political conditions are not congenial in the
target market or if the legal formalities are lengthy, large investment is often avoided. Sometimes,
when the host government bans certain types of investment, foreign investors cannot make such
investments even if they wish to make them. In India, in 1973, the government had fixed a ceiling
on foreign equity participation. Foreign companies that did not favor the ceiling dismantled their
operations in India (Sharan, 1992). Yet again, it is the size of the market in the host country that
influences the entry mode of foreign fi rms. When the market is large and ever expanding, foreign fi
rms prefer to enlarge their involvement through investment. But if the size of the market remains
small, trade is the only suitable option. Last but not least, if the cost of production in the host
economy is lower than in the home country, the host country attracts foreign investment. In fact,
this is one of the important reasons that companies from the developed world have moved to
developing countries. If the shipping cost is also low, it is possible that the fi rm may shift the entire
production process to the low-cost host country and may ship the output back to the home country
for meeting the domestic demand. If, on the other hand, the host country does not represent cost
effectiveness, trading remains the only way out.
4. Perceived risk = Perceived Risk refers to the set of uncertainties that a consumer feels after
buying goods or services. Perceived Risk is generally associated with products having higher prices
like luxury cars, bags, laptops, etc. Consumers generally do deep research before buying expensive
goods by asking friends and experts, to avoid any kind of issues after buying the product. Perceived
Risk is very common in consumers while buying products in the markets, but Perceived Risk makes
it difficult for new brands to enter the market. Manufacturers and marketers make every effort to
lessen these risks in the consumer’s mind by offering guarantees and assurances, securing the
support of reputable organizations, and enlisting well-known and reputable celebrities to serve as
brand ambassadors for the brand. Perceived Risk is affected by a variety of elements such as
individual ideas, experiences, and emotions. The degree of control an individual has over the
circumstance, the potential negative effects, and the likelihood that the risk will occur also have a
major impact on how consumers perceive risk. External influences including media or social
standards, also affect how risk is perceived. This risk is generally associated with a product, like a
teenager perceiving a high social risk when deciding whether to wear a certain outfit to school due
to the fear of being judged by their peers. Perceived risk is also associated with services like a
person experiencing a high physical risk when deciding whether to participate in extreme sports like
bungee jumping or skydiving.
TRADE MODE
Direct and Indirect Export
The trade mode presents the first step in international business. It includes export and import.
Export may be either direct or indirect. In case of direct export, a company takes full responsibility
for making its goods available in the target market by selling directly to the end users, normally
through its own agents. Direct export is feasible when the exporter desires to involve itself greatly in
international business; and at the same time possesses the capacity to do so. There
are also some commodities where direct export is more convenient. They are, for example, air crafts
and similar industrial products.
When the exporting company does not possess the necessary infrastructure to involve itself
in direct exporting, indirect export takes place. It takes place when the exporting company sells its
products to intermediaries, who in turn sell the same products to the end-users in the target
market.
It is a fact that the nature of intermediary differs in direct export or import from that in an
indirect export and import. However, when one talks about intermediaries, export management
companies (EMCs) and trading companies cannot be ignored. When an EMC functions as a
distributor, it takes title to goods, sells them on its own account, and assumes the trading risk.
Alternatively, when it acts as an agent, it charges a commission. Sometimes it acts as an agent
for one client and as a distributor for the other. Trading companies, on the other hand, provide
services to exporters, in addition to exporting activities, such as storage facilities, financing services,
and so on. These companies originated in Europe but are now common in Japan and South Korea.
Apart from the intermediaries, there are trade facilitators. They are independent entities
supplying information and knowledge to the exporter but definitely not participating in the
transactions. They exist both in the public and private sectors. Various commodity boards and
export promotion councils can be grouped as trade facilitators. There are also government
organizations working under the Ministry of Commerce, such as trade development authority,
that act as trade facilitator.
Counter-trade
Counter-trade is a sort of bilateral trade where one set of goods is exchanged for another set of
goods. In this type of external trade, a seller provides a buyer with deliveries and contractually
agrees to purchase goods from the buyer equal to the agreed percentage of the original sale contract
value. Counter-trade is classified broadly as:
1. Commercial counter-trade such as classical barter, counter-purchase and pre-compensation.
2. Industrial counter-trade such as buy-back agreements, develop for import arrangements, and
framework agreements.

Commercial Counter-trade: Classical barter is one of the oldest modes of commercial counter-
trade. It involves a once-only exchange of goods on the terms agreed upon between the buyer and
the seller. The quantum, quality, and value of goods to be exchanged are well defined. Naturally, the
trade flows in one direction are fully compensated by those in the reverse direction. There is no
need for bridging fi nance. Negotiating parties are often governments. The exchange of Iranian oil for
New Zealand’s lamb or the exchange of Argentine wheat for Peruvian iron pillets are examples of
classical barter. In case of counter-purchase, which is also known as parallel barter, the contracts
are often separate for import and export. The type and price of goods traded are generally not
specified at the time of signing of the contract. The exporter of goods agrees to accept, in return, a
wide range of goods from the importer. Balancing of the value of export and import is done every
three to five years. If the two sides are not equal, the balance is paid in cash. In case of pre-
compensation, the value of exports is entered into an evidence account and imports are made on
that basis. This means that payments for imports are not made
immediately.
Industrial Counter-trade: Being a form of industrial counter-trade, buy-back agreements normally
involve a larger amount corresponding to the sale of industrial equipment or turnkey plants in
exchange for the products manufactured by these industrial plants. Naturally, the contract period
is longer, varying from 10 to 20 years. The United Nations Economic Commission for Europe
mentions the case of Austria selling pipeline equipment and related material to the then Soviet
Union so that the latter could develop certain gas fi elds and could pipe a part of the output back to
Austria. In case of developing countries, such agreements are common as they suffer from the
technology gap on a large scale.

Develop-for-import arrangements are also a variant of the buy-back agreement were the
exporter of the plant and machinery participates in the capital of the importing fi rm and, thereby,
takes a share in the profits thereof. This means the involvement of the exporting fi rm is deeper
than in a general buy-back arrangement. Japanese investment in an Australian fi rm developing
gunpowder copper mine is an opposite example. Framework agreements are the long-term protocol
or bilateral clearing agreement normally concluded between governments. Trade is balanced after a
long period as mentioned in the agreement. If the trade is not equal in value, the debtor sells the
agreed upon commodity in the
international market and the creditor is paid off. For example, Mexico sold cocoa to the United
States of America to pay for its excess import from Malaysia.

Growth of Counter-trade: Barter trade was the mode of international trade in the eighteenth
century when there was no sufficient monetization. During the twentieth century, especially during
the inter-War years, the West German government had resorted to bartering for strategic raw
material. In the post-War period, counter-trade was initiated on a large scale by East European
countries while trading with western countries and developing countries because
they did not relish multilateral trade. In the wake of the oil crisis of 1970s, oil was exchanged for
Soviet arms. The share of counter-trade in the world trade rose from around two per cent in 1964 to
20–30 per cent by the late 1980s, although accurate estimates cannot be made on account of
unavailability of figures. There is also region-wise difference as far as the volume of counter-trade is
concerned.

Contractual Entry Modes

Contractual entry modes are found in case of intangible products such as technology,
patents, and so on. When a company develops a particular technology through its own research and
development programme, it likes to recover the cost of research and development. To this end, it
sells the technology either to a domestic fi rm or to a foreign fi rm. But in this case, the secrecy of
technology is not maintained and the fi rm’s ownership advantage is always at stake. Thus, in order
to maintain the ownership advantage, a fi rm passes on the technology only to its own subsidiary
located abroad. But if the host government does not permit any foreign investment, the subsidiary
of the fi rm in that host country cannot exist. Transfer of technology through contractual deals are
the only way out. The contractual entry mode, often known as technical collaboration or technical
joint-venture, is very common. It is preferred in many cases where:

1. The licensor does not possess enough capital for investment, nor does it possess the requisite
knowledge of the foreign market for the purpose of export.
2. The licensor wishes to exploit its technology in the foreign market.
3. The licensor finds the host country market too small to make any investment for reaping
economies of scale.
4. Nationalization is feared in the host country.
5. Foreign investment in the host country is restricted.
Technical collaboration normally takes four forms. They are:
1. Licensing
2. Franchising
3. Management Contracts
4. Turnkey Projects
Licensing
Nature and Forms: Licensing is an arrangement by which a fi rm transfers its intangible property
such as expertise, know-how, blueprints, technology, and manufacturing design to its own unit, or
to a fi rm, located abroad. It is also known as technical collaboration. The fi rm transferring
technology, and so on is known as the licensor. The fi rm receiving technology, at the other end,
and so on is known as the licensee. The arrangement is meant for a specific
period. The licensor gets technical service fee from the licensee. The licensee, on the other end, does
not have to make a huge investment on research and development. Thus both the parties reap the
benefits of licensing.
A license can be exclusive, non-exclusive, or cross. In an exclusive license, the arrangement
provides exclusive rights to produce and market an intangible property in a specific geographic
region. On the contrary, a non-exclusive license does not grant a fi rm sole access to the market.
The licensor can grant even more companies the right to use the property in the same region. Cross
licensing is reciprocal where intangible property is transferred between two fi rms, both of them
being the licensor and the licensee at the same time. In the early 1990s there was cross licensing
between Fujitsu of Japan and Texas Instruments of the USA. Both the companies used each other’s
technology for a given period.

Franchising
In this form of technical collaboration, the franchiser is the entrant and the franchisee is the
host country entity. The franchisee makes use of intellectual property rights, like trademarks,
copyrights, business know-how, managerial assistance, geographic exclusivity, or of specific set of
procedures of the franchiser for creating the product in question. In the literature available on this
subject, a few experts have established similarities between licensing and franchising.
Oman suggests that “franchising may be regarded as a particular type of licensing”. Root too feels
that franchising is a form of licensing in which the franchiser licenses a business system and other
property rights to a franchisee. On the contrary, there are views to suggest that these two are
different. Perkins is of the view that while franchising encompasses transfer of the total business
function, licensing concerns just one part of business, including transfer of right to manufacture or
distribute a single product or process. Again, franchising differs from licensing in that the former
gives a company greater control over the sale of the product in the target market. When the
franchisee fails to abide by the set of procedures, the franchiser takes back the franchise. Yet again,
licensing is common in manufacturing industries, whereas franchising is more common in-service
industries where the brand name is more important. Franchising may take different forms. In direct
franchising, the franchiser frames policy and monitors and directs the activities in each host
country from its home-country base. But in case of indirect franchising, there are sub-franchisers
between the original franchiser and the host country units. The sub-franchiser possesses the
exclusive right to exploit the original franchiser’s business package within a defined geographic
area.

Management Contracts
In a management contract, one company supplies the other with managerial expertise. Such
agreements are normally signed in case of turnkey projects where the host country fi rm is not able
to manage day to day affairs of the project, or in other cases where the desired managerial
capabilities are not available in the host country. The transfer includes both technical expertise and
managerial expertise.

Turnkey Projects
In a turnkey project agreement, a fi rm agrees to construct an entire plant in a foreign
country and make it fully operational. It is known as turnkey because the licensor starts the
operation and hands over the key of the operating plant to the licensee. Agreements for turnkey
projects normally take place where the initial construction part of the plant is more complex than
the operational part. Such projects are either self-engineered or made to specifications. In case of
the former, it is the licensor who decides the design of the project. In the latter, it is the licensee
who takes such decision. In both cases, the contract involves either a fixed price or a cost-plus
price. In a fixed-price contract, the risk of cost over-runs lies with the licensor.

Foreign Investment
Foreign Portfolio Investment and Foreign Direct Investment
Foreign investment takes two forms. One is foreign portfolio investment, which does not
involve the production and distribution of goods and services. It is not concerned with the control of
the host country enterprise. It simply gives the investor, a non-controlling interest in the company.
Investment in securities on the stock exchanges of a foreign country or under the global depository
receipt mechanism is an example of foreign portfolio investment. On the other
hand, foreign direct investment (FDI) is very much concerned with the operation and ownership of
the host country fi rm. It is often said that even in case of FDI, if a company acquires around 10 per
cent of the equity in a foreign fi rm, it should be treated as foreign portfolio investment as the
investing or the acquiring fi rm does not have a say in the affairs of the target company. FDI is
found in form of either green-fi eld investment (GI) or mergers and acquisitions or brown-fi eld
investment. Green-fi eld investment takes place either through opening of branches in a foreign
country or through foreign financial collaborations—meaning investment in the equity capital of a
foreign company, in the majority of cases a newly established one. If the fi rm buys the entire equity
shares in a foreign company, the latter is known as the wholly-owned subsidiary of the buying fi
rm. In case of purchase of more than 50 per cent shares, the latter is known as a subsidiary of the
buying fi rm. In case of less than 50 per cent purchase, it is known simply as an equity alliance.
Sometimes an equity alliance is reciprocal, meaning that both companies invest in the equity capital
of each other.