GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY, NEW DELHI

MASTER OF BUSINESS ADMINISTRATION (MBA)

Management of International Business

Course Code: MS 203 L - 3, Credits – 3

Objective: This course aims to introduce students to various facets of international

business. Students should understand the theories of international business and
environmental factors affecting international activities and apply the learning to manage
functional operations in a global context.

Course Outcomes:
CO1: Develop an understanding of the global business environment in terms of economic,
socio-cultural, political, technological and legal aspects.
CO2: Absorb insights of the international aspects of strategic management, global talent
management, finance, marketing, e-commerce, organization and design of multinational
corporations
CO3: Learn the knowledge and skills necessary to function successfully in the diverse
international business environment, with the ability to contribute to the innovation processes.
CO4: Apply the knowledge of cross-cultural issues for effectively managing international
business negotiations
CO5: Appreciate the underlying global public issues of ethical, sustainable and socially
responsible conduct of business in the business operations of MNCs for effective decision
making

Course Content
Unit I
Introduction to International Business: Driving Forces of Globalization, Reasons for
Going International, E.P.R.G. Framework, The Environment of International Business,
Cross-Cultural Management: Hofstede Study, Edward T Hall Study, Analyzing International
Entry Modes, Entry Barriers, International Trade Theories, Regional Economic Integration.
(11 hours)
Unit II
Formulating & Implementing Global Strategy: Organization Design & Structures,
International Competitive Advantage, International Strategic Alliances, Global Mergers and
Acquisition, Managing innovations and Intellectual Property Rights. (10 Hours)
Unit III
Managing Globally: Global Marketing Management, Outsourcing and Logistics, Global
Operations Management & Supply Chain Management, Global Talent Management, Aspects
of Global Financial Management. (10 Hours)

Unit IV
Broad Issues in Globalization: E-Commerce, Ethics, Corporate Social Responsibility and
Sustainability dimensions of International Business, The Social Responsibility of the Global
Firm, International Negotiations and Cross-Cultural Communication, Future of International
Business and other emerging concepts. (11 hours)
Suggested Readings: (Latest Editions)
1. Daniels John, Radebaugh Lee, Sullivan Daniel, Salwan P. Click R.W., International
Business Environments and Operations, Pearson Education.
2. Charles, W.L.Hill International Business: Competing in the Global Marketplace,
McGraw-Hill/Irwin
3. Luthans Fred & Doh Jonathan, International Management: Culture, Strategy, and
Behavior, Mc McGraw-Hill Education.
4. Mike W. Peng, Deepak K. Srivastava, Global Business Cengage India
5. Michael R. Czinkota, Ilkka A. Ronkainen, Suraksha Gupta, International Business,
Cambridge University Press
6. Cavusgil, S. T., Knight, G., Riesenberger, J. R., International Business: The New
Realities. Pearson Education

CO-PO MAPPING

PO1 PO2 PO3 PO4 PO5 PO6 PO7 PO8 PO9

C01 2 3 1 2 1
C02 3 3 3 2 2 2 1
C03 2 2 2 2 3
C04 3 3 2
C05 1 2 3 3

Unit I
1. Introduction to International Business:
1.1 Driving Forces of Globalization,
1.2 Reasons for Going International,
1.3 E.P.R.G. Framework,
1.4 The Environment of International Business,
1.5 Cross-Cultural Management:
1.5.1 Hofstede Study,
1.5.2 Edward T Hall Study,
1.6 Analysing International Entry Modes,
1.7 Entry Barriers,
1.8 International Trade Theories,
1.9 Regional Economic Integration.
1. Introduction to International Business

1.1 Driving Forces of Globalization

Globalization is driven by various new development and gradual changes in the world
economy.
Generally, organizations go global for expanding their markets and increasing their sales and
profits. One of the major forces of globalization is the expansion of communication systems.
In the present era, it has become easy to distribute information to any part of the world
through the Internet.

Some of the important forces behind globalization are shown in Figure:

The different forces (as shown in Figure) are explained as follows:

(a) Advancement of Technologies:

Refers to one of the crucial factors of globalization. Since 1990s, enhancement in

telecommunications and Information Technology (IT) has marked remarkable improvements
in access of information and increase in economic activities. This advancement in
technologies has led to the growth of various sectors of economies throughout the world.

Apart from this, the advancement in technology and improved communication network has
facilitated the exchange of goods and services, resources, and ideas, irrespective of
geographical location. In this way, advanced technologies have led to economic
globalization.

(b) Reduction in Cross-trade Barriers:

Refer to one of the critical forces of globalization. Every- country restricts the movement of
goods and services across its border. It imposes tariffs and quotas on the goods and services
imported in its country. In addition, the random changes in the regulations create a chaos in
global business environment.

Such practices impose limits on international business activities. However, gradual relief in
the cross-border trade restrictions by most governments induces free trade, which, in turn,
increases the growth rate of an economy.

(c) Increase in Consumer Demand:

Acts as a main driver to facilitate globalization. Over the years, with increase in the level of
income and standard of living, the demand of consumers for various products has also
increased. Apart from this, nowadays, consumers are well aware about products and services
available in other countries, which impel many organizations to work in association with
foreign players for catering to the needs of the domestic market.

(d) High Competition:

Constitutes an important driver for bringing about globalization. An organization generally

strives hard to grain competitive edge in the market. The frequent increase in competition in
the domestic market compels organizations to go global. Thus, various organizations enter
other countries (for selling goods and services) to expand their market share.

They export goods in foreign markets where the price of goods and services are relatively
high. Many organizations have achieved larger global market shares through mergers and
acquisitions, strategic alliances, and joint ventures. So, these are the major factors that have
contributed a lot in globalization and the growth of global economy.

(e) Cultural exchange

Cultural exchange has been one of the biggest drivers of globalisation. People travel to
different countries and share their cultural beliefs and practices with each other. Through this
process, a cultural understanding takes place which drives globalisation. Today, the same
smart phones whether they are iPhone, Samsung, HTC, or Sonny Xperia, are liked and used
by people around the world. No wonder why Indian/Bengali curries, and Chinese takeaways
are so popular in the UK! Likewise, now wonder why people around the globe are crazy for
American burgers, softwares, movies, and many more!
(f) Improved transportation

Among the factors that have contributed to globalisation, improved transportation system is a
key one. The world is called a ‘global village’. People can move around it fairly quickly due
to improved transportation systems. Airlines, ships, large vehicles, and others have improved
the delivery time of products to and from abroad. A business man from London can go to
Paris to do his ‘business’ and come back to London on the same day. Likewise, goods can be
transported beyond the national borders on the same day. This happens in many parts of the
world on a daily basis.

(g) Low barriers to trade and investment

This also drives globalisation significantly. Many of the world trades are currently done
through free trade, bilateral, and multilateral agreements. Interestingly, countries which were
very hostile or unfriendly to foreign investment few years ago, are inviting other countries for
inward foreign direct investment (FDI). China is a very good example in this regard.

The EU, the USA, and the UK have free trade agreements with many countries. The UK has
come out of the European Union; however, has conducted consultations on potential future
trade agreements with other countries. It has indeed completed some of the agreements so far.
This shows that the importance of free movement of goods is well recognised by countries
around the world.

(h) Technological changes

Technology is one of the key driving forces behind globalisation. Advanced E-commerce
system has made the emergence of companies such as Amazon.com, Alibaba.com, ebay.com,
and many others possible and immensely successful. This technological revolution enables
traders from remote parts of the world to sell their products/services to customers around the
world on virtual platforms.

(i) Natural Resources

The global GDP in 2020 was around 84.54 trillion U.S. dollars (O’Neil, 2021). A massive
number/ amount of natural resources such as minerals, coal, oil, gas, water, etc. are required
to keep the level of GDP this high or above. However, these resources are not concentrated in
one place, rather scattered around the world. Therefore, the drive to have access to the
resources encourage companies to go around the world, and in the process contributes to the
development of globalisation.

(j) Labour availability

In order to save costs, companies look for the countries that offer cheap labour costs. Often
people ask a question: Where do Primark, Gap, Next and many others produce their
products? The answer is: China, India, Bangladesh, Pakistan, and some other developing
nations.

In a nutshell, there are a number of factors that have contributed to globalisation. Many
companies are now multinational corporations with subsidiaries around the world. This gives
managers more opportunities for growth and development.

1.2 Reasons for Going International

Successful small businesses are figuring out how to master the transition from being a local
company to global. Many businesses are jumping on the global bandwagon – to capitalize on
the potential of tremendous growth. Here are few reasons to do so.
i. Increase sales and profitability.

Going global can provide new sources of revenue, yield greater returns on investments and
secure long-term success for a business. The Internet makes it even easier to reach out to the
world for business.

ii. Enter new markets.

Have you saturated your local, core market? Then look beyond your region and consider a
market overseas. Be sure to pick one that offers opportunity. You want a market where it’s
easy to enter, whose buyers desire your product or service. For example, is there a market for
your products or services in Ireland? If so, get a jump on your competitors and get there
before they do. This is called first-mover advantage.

iii. Create jobs.

As you grow your business globally, you must support the additional workload. Hiring
people is the solution and we know that the strength of our country lies in its ability to create
jobs that help people live and prosper.

iv. Offset slow growth in your home market.

Are you selling kale in your home market and only so many customers will buy it? Or are
you selling specialized software and there’s been a sudden decrease in demand for it? A way
to overcome low growth in your home market is to look at overseas markets. Protect your
company by exporting, using the Internet, licensing or franchising your products.

V. Outmaneuver competitors.

Taking one step to enter a new overseas market that your competitor hasn’t entered might
outmaneuver that domestic-only rival with stronger company performance.

vi. Enlarge the customer base.

If the company currently has 1,000 customers, why not increase the base to 2,000 by entering
a foreign market via e-commerce or a collabourative sales partnership? You’ll need support
to get the work done so consider adding people to get the processes in place.

vii. Create economies of scale in production.

Your company is ramping up and producing 20,000 hammers at once because an outfit in
Ireland, Japan or Australia wants to buy them and won’t buy a single case. The more you
produce, the greater the chances of lowering the per-unit manufacturing costs.

viii. Explore untapped markets with the power of the Internet.

With an ecommerce site, customers worldwide might eventually find you, provided you’ve
made it easy for them to do so. Move into the markets that generate a heavy concentration of
inquiries on your website. You may not have anticipated a particular geographic area would
be a ripe market, but the people there are telling you it is.

ix. Make use of excess capacity off-season.

To insulate the business from seasonal sales fluctuations, find foreign markets to
counterbalance dips in demand. For instance, some firms gear up for the holiday season, only
to see sales nosedive in January. Sell to other nations with peak-buying seasons early in the
new year to avoid a winter sales slowdown.

x. Travel to new countries.

Then there's the fun factor in taking a business global. Not only will you connect with people
from all over the world, but you'll also have an excuse to meet with them in person to grow
the relationship and the business. Treat it as an exciting learning adventure.

1.3 E.P.R.G. Framework

Different attitudes towards company’s involvement in international marketing process are

called international marketing orientations. EPRG framework was introduced by Wind,
Douglas and Perlmutter. This framework addresses the way strategic decisions are made and
how the relationship between headquarters and its subsidiaries is shaped.

Perlmutter’s EPRG framework consists of four stages in the international operations

evolution. These stages are discussed below.

Ethnocentric Orientation

The practices and policies of headquarters and of the operating company in the home country
become the default standard to which all subsidiaries need to comply. Such companies do not
adapt their products to the needs and wants of other countries where they have operations.
There are no changes in product specification, price and promotion measures between native
market and overseas markets.

The general attitude of a company's senior management team is that nationals from the
company's native country are more capable to drive international activities forward as
compared to non-native employees working at its subsidiaries. The exercises, activities and
policies of the functioning company in the native country becomes the default standard to
which all subsidiaries need to abide by.
The benefit of this mind set is that it overcomes the shortage of qualified managers in the
anchoring nations by migrating them from home countries. This develops an affiliated
corporate culture and aids transfer core competences more easily. The major drawback of this
mind set is that it results in cultural short-sightedness and does not promote the best and
brightest in a firm.

Regiocentric Orientation

In this approach a company finds economic, cultural or political similarities among regions in
order to satisfy the similar needs of potential consumers. For example, countries like
Pakistan, India and Bangladesh are very similar. They possess a strong regional identity.

Geocentric Orientation

Geocentric approach encourages global marketing. This does not equate superiority with
nationality. Irrespective of the nationality, the company tries to seek the best men and the
problems are solved globally within the legal and political limits. Thus, ensuring efficient use
of human resources by building strong culture and informal management channels.

The main disadvantages are that national immigration policies may put limits to its
implementation and it ends up expensive compared to polycentrism. Finally, it tries to
balance both global integration and local responsiveness.
Polycentric Orientation

In this approach, a company gives equal importance to every country’s domestic market.
Every participating country is treated solely and individual strategies are carried out. This
approach is especially suitable for countries with certain financial, political and cultural
constraints.

This perception mitigates the chance of cultural myopia and is often less expensive to execute
when compared to ethnocentricity. This is because it does not need to send skilled managers
out to maintain centralized policies. The major disadvantage of this nature is it can restrict
career mobility for both local as well as foreign nationals, neglect headquarters of foreign
subsidiaries and it can also bring down the chances of achieving synergy.

EPRG stand for Ethnocentric, Polycentric, Regiocentric, and Geocentric. It is a framework

created by Howard V Perlmuter and Wind and Douglas in 1969.
It is designed to be used in an internationalization process of businesses and mainly addresses
how companies view international management orientations. According to the EPRG
Framework (or the EPRG Model), there are four management approaches that an
organization can take to get more involved in international business substantially.

The EPRG Framework suggests that companies must decide which approach is most suitable
for achieving successful results in countries abroad.

For this reason, the EPRG Framework can be a useful tool to utilize if a company does not
know yet how to manage business activities between companies in the local country and a
host country. The EPRG Framework is additionally useful for making strategic decisions.

In the following section, the four approaches of the EPRG Framework (Ethnocentric,
Polycentric, Regiocentric, and Geocentric) are described more in detail.
EPRG Framework approaches

Ethnocentric

In this approach of the EPRG Framework, the company in a local country that wants to do
business overseas does not put in much effort to do research abroad about the host country’s
market. Instead, most of the market research is executed in the headquarters in the local
country.
With this approach, the company seeks for markets abroad that share the same characteristics
as the local market so that the marketing strategy does not have to be adapted. More
specifically, the ethnocentric approach uses the same marketing strategies that are created by
local personnel and further utilized multiple countries.

It is many times possible that companies that utilize this approach believe that local products
should not be adapted to the local need of countries abroad because the products are already
of high quality. Another reason could be that a specific product is sold in large volume in the
local market, and for this reason, it is believed it will do the same in other markets abroad.
The ethnocentric approach of the EPRG Framework has benefits but also downsides. At first,
the company saves a lot of operational costs that can be invested elsewhere. But the downside
is that the company does not build up new knowledge about the market abroad, which could
substantially increase sales volume if products and strategies would be adopted to the needs
of the host country.

Polycentric

In the polycentric approach of the EPRG Framework is the opposite of the ethnocentric
approach. A company that utilizes this approach carefully consider different markets abroad
to identify host countries that could potentially offer the most benefits.

It means that if a company has a local headquarter and a separate office overseas in a host
country that manages the operations in that or more countries, the marketing strategies are
locally created and implemented based on the local needs.

Businesses that utilize the polycentric approach of the EPRG Framework strongly believe
that every market has its differences. For this reason, these types of companies implement
different marketing strategies for each market.

In the polycentric approach, it is therefore easier to make strategic decisions based on

current cultural differences and political differences. Companies that use this approach can
also more easily adapt to changes in the market because of their decentralized decision-
making authorities.
The downside is that the local headquarter has less control over its operations abroad. As long
as the business operations in the host country demonstrate to be successful, this might not be
a problem. But if the business operations overseas show to be not too profitable and result in
losses, it is more difficult for the local company to minimize those losses.

However, companies that use this approach learn by doing. For this reason, a learning effect
occurs, and new knowledge is an intellectual asset of the company.

If a company is the first to enter a market or offer an unfamiliar product, the local company
has first-mover advantages. It could have the best location in a host country to operate the
business, and this could additionally substantially increase profit margins.
Regiocentric

In a regiocentric approach of the EPRG Framework, businesses create and implement

internationalization strategies for specific regions. Companies that utilize this type of
approach use this for the area in which the local business is operated.

It can also be that an organization utilizes two kinds of approaches. An organization can use a
regiocentric approach for the business in the region in which it operates. And the same
organization can use a polycentric or ethnocentric approach to do business in countries
outside the region.

Businesses that use a regiocentric approach of the EPRG Framework many times believe that
the markets in the region share the same characteristics of the market in the home country.

It is still challenging to determine countries in one region that share the same characteristics.
Consider, for example; some companies use this approach for NAFTA countries, which
include the United States, Canada, and Mexico.
All countries are in the same region but still have some different characteristics. The same
implies for the Benelux, which include Belgium, Netherlands, and Luxembourg. The
countries are in the same region, but Belgium has different market characteristic than the
Netherlands and Luxembourg.

The reason why companies use this approach to group countries into for example NAFTA
and Benelux. is depending on the type of industry and product or service. Every organization
has its way of internationalization.

Geocentric

A geocentric approach of the EPRG Framework means that a business strongly believes that
it is possible to utilize one type of strategy for all countries, regardless of the cultural
differences.

However, companies that use this approach attempt to create products or offer services in a
way that best suit national and international customers. This means that instead of believing
that their product or service is excellent and that it will sell in other markets, like in the
ethnocentric approach, these organization proactively adapt their products and services that
best meet the global needs.

Companies sometimes prefer this type of strategy of the EPRG Framework because it does
not involve many adoptions, which minimizes operational costs. These companies use one
strategy to sell a product or service, and could for this reason, achieve economies of scale.

Organizations that have a geocentric approach are many times considered as key international
businesses because these companies utilize a combination of the polycentric and ethnocentric
approaches.

It means that organizations with a geocentric approach of the EPRG Framework can identify
similar cultural characteristic, and they can convert the different cultural characteristics into
mutual characteristics.

EPRG Framework conclusions

Determining which approach to utilize is dependent on the type of business and in which
industry it operates. Due to globalization, many companies operate abroad or are willing to
do business overseas. However, doing business abroad really depends on the size of the
company and the experience they have.
Even if a business does not know yet what type of approach of the EPRG Framework / EPRG
Model is most suitable to the current position of the company, it is always good to research
potential markets in term of what size, characteristic, and similar available products in the
market.

There is a lot to learn from competitors. This knowledge is free, and it could help to identify
what opportunities are available, and thus, which approach of the EPRG Framework is best
for an internationalization process.

1.4 The Environment of International Business

The (IBE) International Business Environment is multidimensional as it involves various

things like the political risks, cultural differences, exchange risks, legal & taxation issues.
Therefore (IBE) International Business Environment is crucial for a country’s economy. It
plays a pivotal role in the growth and development of the country.
An international business environment refers to the surrounding in which international
companies run their businesses. Therefore, it is mandatory for the people at the managerial
level to work on the factors that comprise of International Business Environment.

The Difference between Business Environment and International Business

International business is an exchange of goods and services that conducts its operations
across national borders, between two or more countries. International business is also
known as Globalization whereas, a Business Environment is the surrounding in which the
international companies operate.

Forms of Business Environment

 Cross border trading- Import & Export

 Licensing
 Franchising
 Joint venture
 Foreign Direct Investment

Advantages of International Business Environment

The advantages are discussed below:

 Helps in expanding the business,

 Exposure to more customers
 Helps in the proper management of the product life cycle and
 Helps in mutual growth.

Types of International Business Environment

The various types of international business environment:

Political Environment in International Business

The political environment refers to the type of the government, the government relationship
with a business, & the political risk in the country. Doing business internationally, therefore,
implies dealing with a different type of government, relationships, & levels of risk.

There are many different types of political systems, for example, multi-party democracies,
one-party states, constitutional monarchies, dictatorships (military & non-military).
Therefore, in analyzing the political-legal environment, an organization may broadly consider
the following aspects:

 The Political system of the business;

 Approaches to the Government towards business i.e. Restrictive or facilitating;
 Facilities & incentives offered by the Government;
 Legal restrictions for instance licensing requirement, reservation to a specific sector
like the public sector, private or small-scale sector;
 The Restrictions on importing technical know-how, capital goods & raw materials;
 The Restrictions on exporting products & services;
 Restrictions on pricing & distribution of goods;
 Procedural formalities required in setting the business

Economic Environment in International Business

The economic environment relates to all the factors that contribute to a country’s
attractiveness for foreign businesses. The economic environment can be very different from
one nation to another. Countries are often divided into three main categories: the more
developed or industrialized, the less developed or third world, & the newly industrializing or
emerging economies.

Within each category, there are major variations, but overall, the more developed countries
are the rich countries, the less developed the poor ones, & the newly industrializing (those
moving from poorer to richer). These distinctions are generally made on the basis of the gross
domestic product per capita (GDP/capita). Better education, infrastructure, & technology,
healthcare, & so on are also often associated with higher levels of economic development.
Clearly, the level of economic activity combined with education, infrastructure, & so on, as
well as the degree of government control of the economy, affect virtually all facets of doing
business, & a firm needs to recognize this environment if it is to operate successfully
internationally. While analyzing the economic environment, the organization intending to
enter a particular business sector may consider the following aspects:

 An Economic system to enter the business sector.

 Stage of economic growth & the pace of growth.
 Level of national & per capita income.
 Incidents of taxes, both direct & indirect tax
 Infrastructure facilities available & the difficulties thereof.
 Availability of raw materials & components & the cost thereof.
 Sources of financial resources & their costs.
 Availability of manpower-managerial, technical & workers available & their salary &
wage structures.

Technological Environment in International Business

The technological environment comprises factors related to the materials & machines used in
manufacturing goods & services. Receptivity of organizations to new technology & adoption
of new technology by consumers influence decisions made in an organization.

As firms do not have any control over the external environment, their success depends on
how well they adapt to the external environment. An important aspect of the international
business environment is the level, & acceptance, of technological innovation in different
countries.

The last decades of the twentieth century saw major advances in technology, & this is
continuing in the twenty-first century. Technology often is seen as giving firms a competitive
advantage; hence, firms compete for access to the newest in technology, & international firms
transfer technology to be globally competitive.

It is easier than ever for even small business plan to have a global presence thanks to the
internet, which greatly grows their exposure, their market, & their potential customer base.
For the economic, political, & cultural reasons, some countries are more accepting of
technological innovations, others less accepting. In analyzing the technological environment,
the organization may consider the following aspects:

 Level of technological development in the country as a whole & specific business

sector.
 The pace of technological changes & technological obsolescence.
 Sources of technology.
 Restrictions & facilities for technology transfer & time taken for the absorption of
technology.

Cultural Environment in International Business

The cultural environment is one of the critical components of the international business
environment & one of the most difficult to understand. This is because the cultural
environment is essentially unseen; it has been described as a shared, commonly held body of
general beliefs & values that determine what is right for one group, according to Kluckhohn
& Strodtbeck.

National culture is described as the body of general beliefs & the values that are shared by the
nation. Beliefs & the values are generally seen as formed by factors such as the history,
language, religion, geographic location, government, & education; thus, firms begin a cultural
analysis by seeking to understand these factors. The most well-known is that developed by
Hofstede in1980.

His model proposes four dimensions of cultural values including individualism, uncertainty
avoidance, power distance & masculinity. Let’s look at each of these.

 Individualism is the degree to which a nation values & encourages individual action
& decision making.
 Uncertainty avoidance is the degree to which a nation is willing to accept & deal with
uncertainty.
 Power distance is the degree to which a national accepts & sanctions differences in
power.
This model of cultural values has been used extensively because it provides data for a wide
array of countries. Many academics & the managers found that this model helpful in
exploring management approaches that would be appropriate in different cultures.

For example, in a nation that is high on individualism one expects individual goals,
individual tasks, & individual reward systems to be effective, whereas the reverse would be
the case in a nation that is low on individualism.

 While analyzing social & cultural factors, the organization may consider the
following aspects:
 Approaches to society towards business in general & in specific areas;
 Influence of social, cultural & religious factors on the acceptability of the product;
 The lifestyle of people & the products used for them;
 Level of acceptance of, or resistance to change;
 Values attached to a particular product i.e., the possessive value or the functional
value of the product;
 Demand for the specific products for specific occasions;
 The propensity to consume & to save.

Competitive Environment

The competitive environment also changes from country to country. This is partly because of
the economic, political, & cultural environments; these environmental factors help determine
the type & degree of competition that exists in a given country. Competition can come from a
variety of sources. It can be a public or a private sector, come from the large or the small
organizations, be domestic or global, & stem from traditional or new competitors, GST
registration. For a domestic firm, the most likely sources of competition might be well
understood. The same isn’t the case when a person moves to compete in the new environment

So, to summarize, the multinational corporations should get involved in information

collection on all environment dimensions and to adapt to the international business
environment and identify vulnerable areas. It should look forward to a better environment and
execution of best practices.

1.5 Cross-Cultural Management

https://www.youtube.com/watch?v=rJ4IbhXrqnc

Cross Culture Management is about managing culture. Basically, human races came with
different cultural background. The way of doing things in one culture may not be the way in
other culture. What is good in one culture may be bad in other culture. Sometimes the
activities are all the same in two different cultures, but two different meanings, two different
interpretations.

Cross Culture Management explains the behaviour of people in organizations around the
world and shows people how to work in organizations with employee and client populations
from many different cultures. Cross-Culture management describes organizational behaviour
within countries and cultures; compares organizational behaviour across countries and
countries.

According to Mead and Andrews___ “Cross-cultural management is the development and

application of knowledge about cultures in the practice of international management, when
the people involved have different cultural identities.”

Thus, Cross cultural communication thus refers to the communication between people who
have differences in any one of the following: styles of working, age, nationality, ethnicity,
race, gender, sexual orientation, etc. Cross cultural communication can also refer to the
attempts that are made to exchange, negotiate and mediate cultural differences by means of
language, gestures and body language. It is how people belonging to different cultures
communicate with each other.

Importance of Cross-Cultural Management

1. Communicate effectively with customers, suppliers, business associates, and partners

in other countries and with foreign employees.

2. Conduct negotiations and understand the nuances of the beginning postures of the
other parties into a negotiation.

3. Predict trends in social behaviour likely to affect the firm’s foreign operations.

4. Understand ethical standards and concepts of social responsibility in various

countries.
 5. Predict how cultural difference will affect consumer reactions to advertisements and
other promotions.

6. Foster relationships between union confederations and employee associations

requiring cultural empathy.

7. Understand local government policies and influence it for business promotion.

8. Understand how people interpret market research and other information.

Problems of Cross-Cultural Communication

1. Managers: Problems in cross-cultural management exist due to the following:

i. Insufficient Awareness of Existence of Differences.

ii. Insufficient understanding.

iii. Insufficient Willingness.

iv. Insufficient level of abilities and skills.

Factors Affecting Cross-Cultural Communication

i. Language.

ii. Environment and technology.

iii. Social organization and history.

iv. Conceptions of authority and,

v. Non-verbal communication behaviour.

1.5.1 Hofstede Study

Hofstede’s Cultural Dimensions Theory, developed by Geert Hofstede, is a framework used

to understand the differences in culture across countries and to discern the ways that business
is done across different cultures. In other words, the framework is used to distinguish
between different national cultures, the dimensions of culture, and assess their impact on a
business setting.
Hofstede’s Cultural Dimensions Theory was created in 1980 by Dutch management
researcher Geert Hofstede. The aim of the study was to determine the dimensions in which
cultures vary.

Hofstede’s Cultural Dimensions Theory

Hofstede identified six categories that define culture:

1. Power Distance Index

2. Collectivism vs. Individualism
3. Uncertainty Avoidance Index
4. Femininity vs. Masculinity
5. Short-Term vs. Long-Term Orientation
6. Restraint vs. Indulgence

1. Power Distance Index

The power distance index considers the extent to which inequality and power are tolerated. In
this dimension, inequality and power are viewed from the viewpoint of the followers – the
lower level.

 A high-power distance index indicates that a culture accepts inequity and power
differences, encourages bureaucracy, and shows high respect for rank and authority.
 A low power distance index indicates that a culture encourages flat organizational
structures that feature decentralized decision-making responsibility, participative
management style, and emphasis on power distribution.

2. Individualism vs. Collectivism

The individualism vs. collectivism dimension considers the degree to which societies are
integrated into groups and their perceived obligations and dependence on groups.

 Individualism indicates that there is a greater importance placed on attaining personal

goals. A person’s self-image in this category is defined as “I.”
  Collectivism indicates that there is a greater importance placed on the goals and well-
being of the group. A person’s self-image in this category is defined as “We.”

3. Uncertainty Avoidance Index

The uncertainty avoidance index considers the extent to which uncertainty and ambiguity are
tolerated. This dimension considers how unknown situations and unexpected events are dealt
with.

 A high uncertainty avoidance index indicates a low tolerance for uncertainty,

ambiguity, and risk-taking. The unknown is minimized through strict rules,
regulations, etc.
 A low uncertainty avoidance index indicates a high tolerance for uncertainty,
ambiguity, and risk-taking. The unknown is more openly accepted, and there are lax
rules, regulations, etc.

4. Masculinity vs. Femininity

The masculinity vs. femininity dimension is also referred to as “tough vs. tender” and
considers the preference of society for achievement, attitude toward sexuality equality,
behavior, etc.

 Masculinity comes with the following characteristics: distinct gender roles, assertive,
and concentrated on material achievements and wealth-building.
 Femininity comes with the following characteristics: fluid gender roles, modest,
nurturing, and concerned with the quality of life.

5. Long-Term Orientation vs. Short-Term Orientation

The long-term orientation vs. short-term orientation dimension considers the extent to which
society views its time horizon.
  Long-term orientation shows focus on the future and involves delaying short-term
success or gratification in order to achieve long-term success. Long-term orientation
emphasizes persistence, perseverance, and long-term growth.
 Short-term orientation shows focus on the near future, involves delivering short-term
success or gratification, and places a stronger emphasis on the present than the future.
Short-term orientation emphasizes quick results and respect for tradition.

6. Indulgence vs. Restraint

The indulgence vs. restraint dimension considers the extent and tendency for a society to
fulfil its desires. In other words, this dimension revolves around how societies can control
their impulses and desires.

 Indulgence indicates that society allows relatively free gratification related to

enjoying life and having fun.
 Restraint indicates that society suppresses gratification of needs and regulates it
through social norms.

Country Comparisons: Hofstede Insights

Hofstede Insights is an excellent resource for understanding the impact of culture on work
and life. It can be accessed here to understand how the different dimensions differ among
countries under the Hofstede’s Cultural Dimensions Theory.

1.5.2 Edward T Hall Study

Edward T. Hall was an anthropologist who made early discoveries of key cultural factors.
In particular he is known for his high and low context cultural factors.

Context
High context

In a high-context culture, there are many contextual elements that help people to
understand the rules. As a result, much is taken for granted.

This can be very confusing for person who does not understand the 'unwritten rules' of the
culture.

Low context

In a low-context culture, very little is taken for granted. Whilst this means that more
explanation is needed, it also means there is less chance of misunderstanding particularly
when visitors are present.

Contrasting the two

French contracts tend to be short (in physical length, not time duration) as much of the
information is available within the high-context French culture. American content, on the
other hand, is low-context and so contracts tend to be longer in order to explain the detail.

Highly mobile environments where people come and go need lower-context culture. With a
stable population, however, a higher context culture may develop.

Note the similarity with Trompenaars' Universalism (low context) and Particularism (high
context).

High-context culture Low-context culture

Factor

Many covert and implicit Many overt and explicit

Overtness of messages, with use of metaphor messages that are simple
messages and reading between the lines. and clear.

Locus of control Inner locus of control and Outer locus of control

and attribution for personal acceptance for and blame of others for
failure failure failure

Much nonverbal More focus on verbal

Use of non-verbal
communication communication than
communication
body language
 Expression of Reserved, inward reactions Visible, external,
reaction outward reaction

Strong diistinction between Flexible and open

Cohesion and
ingroup and outgroup. Strong grouping patterns,
separation of groups
sense of family. changing as needed

Strong people bonds with Fragile bonds between

People bonds affiliation to family and people with little sense
community of loyalty.

High commitment to long-term Low commitment to

Level of
relationships. relationship. Task more
commitment to
Relationship more important important than
relationships
than task. relationships.

Time is highly
Flexibility of time Time is open and flexible.
organized.
Process is more important than
Product is more
product
important than process

Time
i. Monochronic time

M-Time, as he called it, means doing one thing at a time. It assumes careful planning and
scheduling and is a familiar Western approach that appears in disciplines such as 'time
management'.

Monochronic people tend also to be low context.

ii. Polychronic time

In Polychronic cultures, human interaction is valued over time and material things, leading
to a lesser concern for 'getting things done' -- they do get done, but more in their own time.

Aboriginal and Native Americans have typical polychronic cultures, where 'talking stick'
meetings can go on for as long as somebody has something to say.
Polychronic people tend also to be high context.

iii. Contrasting the two

Western cultures vary in their focus on monochronic or polychronic time. Americans are
strongly monochronic whilst the French have a much greater polychronic tendency -- thus
a French person may turn up to a meeting late and think nothing of it (much to the
annoyance of a German or American co-worker).

Note the similarity with Trompenaars' time as sequence (monochronic) and time as
synchronization (polychronic).

Factor Monochronic action Polychronic action

Actions do one thing at a time do many things at once

Focus Concentrate on the job at hand Are easily distracted

Think about when things must Think about what will be

Attention to time
be achieved achieved

Priority Put the job first Put relationships first

Respect for Borrow and lend things often

Seldom borrow or lend things
property and easily

base promptness relationship

Timeliness Emphasize promptness
factors

Space

Hall was concerned about space and our relationships within it. He called the study of such
space Proxemics.

We have concerns about space in many situations, from personal body space to space in the
office, parking space, space at home.

The need for space

Some people need more space in all areas. People who encroach into that space are seen as
a threat.

Personal space is an example of a mobile form of territory and people need less or greater
distances between them and others. A Japanese person who needs less space thus will stand
closer to an American, inadvertently making the American uncomfortable.

Some people need bigger homes, bigger cars, bigger offices and so on. This may be driven
by cultural factors, for example the space in America needs to greater use of space, whilst
Japanese need less space (partly as a result of limited useful space in Japan).

High territoriality

Some people are more territorial than others with greater concern for ownership. They seek
to mark out the areas which are theirs and perhaps having boundary wars with neighbours.

This happens right down to desk-level, where co-workers may do battle over a piece of
paper which overlaps from one person's area to another. At national level, many wars have
been fought over boundaries.

Territoriality also extends to anything that is 'mine' and ownership concerns extend to
material things. Security thus becomes a subject of great concern for people with a high
need for ownership.

People high territoriality tend also to be low context.

Low territoriality

People with lower territoriality have less ownership of space and boundaries are less
important to them. They will share territory and ownership with little thought.

They also have less concern for material ownership and their sense of 'stealing' is less
developed (this is more important for highly territorial people).

People with low territoriality tend also to be high context.

Contrasting

Australian Aboriginal people will say that they belong to the land rather than the other way
around. Before we scotch this, we should remember that they have thrived in harsh
conditions for thousands of years. Western society, on the other hand has shown much
barbarity over ownership of land.
So, when working across cultures, pay attention to high and low cultures through the
actions of others. For example, if people are late for meetings, it may be because they are
polychronic, not because they are disrespectful or lazy.

When you understand the personal, national or organizational culture, then you can seek to
align with them and hence gain greater influence.

1.6 Analysing International Entry Modes

Types of Entry Modes in International Business

Below are the different modes of international business -

1. Exporting
The traditional mode of entering into international business is
Exporting. Exporting is the simplest way to get started in foreign business.
As a result, most businesses begin their global expansion in this manner.
The act of selling goods and services produced domestically in other
countries is known as exporting. Exports are classified into two types:
Direct exports are transactions in which a company sells its products
directly to a buyer in another country. At this company, you will gain
firsthand market knowledge.

Indirect exports include hiring a third party's skills to facilitate the

transaction. The fee is the amount charged by the intermediary for its
services.

2. Licensing
In this mode of entry, a manufacturer from the home country rents the
right to their intellectual properties, such as technology, copyrights, brand
names, and so on, to a manufacturer from a foreign country. To obtain the
license, you must pay a set fee. Licensees are manufacturers from the
country that receives the license. Essentially, the licensee is purchasing
another company's assets (know-how or R&D). The licensor may grant
these rights non-exclusively to a single licensee or exclusively to one or
more licensees.

3. Franchising
A separate company known as the franchisee operates under the brand of
a different organisation known as the franchisor in this model.
Because of franchising, a franchisee can use a name, procedure, method,
or trademark. Furthermore, the franchisor company provides raw
materials, assists the franchisee with business operations, or does both.

4. Management Contracts
A company essentially rents out its knowledge or know-how to a
government or business in the form of individuals who enter the foreign
setting and manage the business under management contracts and do
contract manufacturing.
This strategy of entering international markets is frequently used with a
new facility after a company has been seized by the national government
or when a business is experiencing difficulties.

5. Foreign Direct Investment

A corporation can enter a foreign market through foreign direct
investment by investing significantly there. Foreign direct investment can
be used to enter the global market through mergers and acquisitions,
joint ventures, and greenfield investments. This strategy is appropriate
when there is sufficient demand, market size, or market growth potential
to justify the investment.
Greenfield and brownfield investments are two types of foreign direct

investment. With greenfield investing, a company will build its own, brand-

new facilities from the ground up. Brownfield investment happens when a

company purchases or leases an existing facility.

6. Joint Endeavours
A joint venture is one of the preferred ways to enter the global market for
companies that don't mind sharing their brand, knowledge, and expertise.

Companies that want to expand into international markets can form joint
ventures with local companies in those markets, in which both joint
venture partners share the benefits and risks of the business.

The investment, costs, profits, and losses are allocated to the two
corporate units in accordance with a predetermined ratio.

This method of entering the global market is suitable for countries where
the government prohibits 100 percent foreign ownership in certain
industries.

Case Study - Different Modes of Entering International

Business
Starbucks Corporation is an American multinational chain of coffeehouses and
roastery reserves headquartered in Seattle, Washington.

Starbucks is owned by its shareholders, as it is a publicly-traded company. The

company has more than 1,500 institutional shareholders, according to the proxy
statement that Starbucks filed with the SEC on January 7, 2022. This figure
clearly shows how well-diversified the ownership of the company is. Vanguard
Group, Inc., is the largest shareholder of the company, having 9.19% shares.
Individual shareholders like Howard Schultz also own a significant percentage
of the company.

In 1994, the corporation began offering free coffee to visitors in several Beijing
hotels to promote the Starbucks brand. This campaign demonstrated that their
goods had a sizable market in China, particularly among foreigners. People in
the area who attempted to emulate Western culture expressed a desire to drink
coffee. Western brands and goods enticed the younger generation as well. These
factors prompted Starbucks executives to investigate and comprehend the Asian
country's economic environment.

Even though Starbucks encountered numerous challenges when attempting to

enter the Chinese market, by 2012, they had successfully expanded their
business into over 20 large or medium-sized Chinese cities, with over 560 stores
opened. The incredible achievement is due to meticulous marketing analysis
and various marketing methods used at various times. These strategies typically
refer to joint ventures and license agreements as two distinct methods of
entering international markets.

Tata Starbucks Private Limited, formerly known as Tata Starbucks Limited, is a

50:50 joint venture coffee company, owned by Tata Consumer Products and
Starbucks Corporation, that owns and operates Starbucks outlets in India. India.

So, before entering the global market, the company must make a critical
decision regarding its operational business plan. The best international
business model should be selected based on the company's expansion and
diversification requirements. The company's ability and willingness to devote
resources, the desired level of control, the level of risk the company is willing to
accept, the level of competition, the calibre of the infrastructure, and other
factors must all be considered.
A person cannot meet all of his requirements using only his available
resources. He needs to trade goods and services with other people. In a similar
way, a nation may meet all of its needs using its own resources. But, there are
some circumstances where it must depend on other nations. This dependence
on a single country for any given good is entirely due to the natural resources
of that country. The items created in this manner are first consumed
domestically in a country and the excess is exported to other countries. In
exchange for this sale, the country makes purchases of goods that are not
widely available in that country. Hence, supply and demand are in balance.
This trade between the two countries is known as international business. In
simple terms, international business refers to those business activities that take
place beyond the geographical limits of a country. It includes not just
international trade in products and services, but also capital, labour,
technology, and intellectual property such as patents, trademarks, and
copyrights.

Modes of Entry into International Business

A corporation can enter into international trade in a variety of ways listed below:
1. Exporting and Importing
Selling goods and services to a company in a foreign country is referred to
as Exporting. For instance, Gulab sold sweets to a store in Canada. Purchasing
goods from a foreign company is known as Importing. For instance, the purchase
of dolls from a Chinese company by an Indian dolls dealer. Exports and imports are
the typical way through which businesses begin their activities overseas before
moving on to other kinds of international trade.
Important Ways to Export and Import
i) Direct Importing/ Exporting: The company handles all of the necessary
paperwork for the shipment and financing of goods and services and deals directly
with foreign suppliers or purchasers.
ii) Indirect Importing/ Exporting: The company uses a middleman to handle all
the paperwork and negotiate with foreign suppliers or customers. The firm’s
involvement is limited.
2. Contract Manufacturing
According to this, every well-known company in a nation accepts responsibility for
promoting the goods and services created by a business in another nation. Here, the
company is specialised in the manufacturing process but lacks marketing skills,
whereas the other company, due to its established reputation, is capable of selling
those items and services. Offering these items and services is not the primary
business of these organisations, but they do it for the benefit of their name and
reputation, as well as to provide high-quality products at a low cost to their
customers.
Contract manufacturing is a type of international business, in which a firm enters
into a contract with another firm in a foreign country to manufacture certain
components or goods as per its specifications.
Multinational firms, like Maybelline, Loreal, Levis, and others use contract
manufacturing to have their products or component parts produced in developing
nations. Contract manufacturing is also known as international outsourcing.
3. Licensing
When a corporation from one country (the Licensor) grants a license to a company
from another country (the Licensee) to use its brand, patent, trademark, technology,
copyright, marketing skills; etc., to assist the other firm sell its products, this
contractual agreement is referred to as Licensing. The licensor corporation receives
returns in proportion to sales. Returns may take the form of royalties or fees. In other
nations, the government determines how the returns are fixed. This cannot exceed
5% of revenues in several developing nations.
For instance, Pepsi and Fanta are made and distributed globally by local bottlers in
other nations under the licensing system.
The company that provides such authorisation is known as the Licensor while the
other company in a different country that receives these rights is known as
the Licensee. The mutual sharing of knowledge, technology, and/or patents between
the companies is called Cross-licensing.
4. Franchising
The franchise is the unique right or freedom that a producer grants to a certain
person or group of people to establish the same business at a specific location. The
producers use this contemporary business model to market their products in far-off
locations. In general, producers who have a good reputation use this system.
Individuals are motivated by their goodwill and try this mode of business in order to
earn profit.
Franchising is a contractual agreement that involves the grant of rights by one
party to another for use of technology, trademark, and patents in return for the
agreed payment for a certain period of time.
The business that gives the rights (i.e., the parent company) is referred to as
the Franchisor, and the business that purchases the rights is referred to as
the Franchisee.
5. Joint Ventures
A joint venture is formed when two or more businesses decide to work together for
a common goal and mutual benefit. These two commercial entities could be private,
public, or foreign-owned. Joint ventures are those types of businesses that are
established in international trade where both domestic and foreign entrepreneurs are
partners in ownership and management. The trade is carried out in collaboration with
the importing nation’s firm. For instance, the Joint venture of the Indian company
Maruti with the Japanese Company Suzuki.
6. Wholly Owned Subsidiary
When a foreign company establishes a business unit or acquires a full stake in any
domestic company, then they are called a Wholly-owned Subsidiary. Wholly
owned subsidiaries are set by a foreign company to enjoy full control over their
overseas operations. A wholly-owned subsidiary in a foreign country may be
established in two ways:
 Setting up of wholly-owned new firm in the foreign land, also
called Green Field Venture.
 Acquiring an established firm in a foreign country and using that firm to
do business in a foreign country.

Some of the modes of entry into international business you can opt for include direct export,
licensing, international agents and distributors, joint ventures, strategic alliance, and
foreign direct investment.
Each of these entry strategies for international markets are different in terms of the costs
involved, level of risk, level of ease of execution, and the level of reward. Arranging these 5
modes of entry into international business on a graph suggests what are the trade-offs in
each of these entry strategies for international markets.
1. Direct Exporting

Direct exporting involves you directly exporting your goods and products to another
overseas market. For some businesses, it is the fastest mode of entry into the international
business.
Direct exporting, in this case, could also be understood as Direct Sales. This means you as a
product owner in India go out, to say, the middle east with your own sales force to reach out
to the customers.
In case you foresee a potential demand for your goods and products in an overseas
market, you can opt to supply your goods to an importer instead of establishing your own
retail presence in the overseas market.
Then you can market your brand and products directly or indirectly through your sales
representatives or importing distributors.

And if you are in an online product-based company, there is no importer in your value chain.

Advantages of Direct Exporting

 You can select your foreign representatives in the overseas market.

 You can utilize the direct exporting strategy to test your products in international
markets before making a bigger investment in the overseas market.
  This strategy helps you to protect your patents, goodwill, trademarks and other
intangible assets.
Disadvantages of Direct Exporting

 For offline products, this strategy will turn out to be a really high-cost strategy.
Everything has to be setup by your company from scratch.
 While for online products this is probably the fastest expansion strategy, in the
case of offline products, there is a good amount of lead time that goes into the
market research, scoping and hiring of the representatives in that country.

2. Licensing and Franchising

Companies which want to establish a retail presence in an overseas market with minimal risk,
the licensing and franchising strategy allows another person or business assume the risk
on behalf of the company.
In Licensing agreement and franchise, an overseas-based business will pay you a royalty or
commission to use your brand name, manufacturing process, products, trademarks and other
intellectual properties.

While the licensee or the franchisee assumes the risks and bears all losses, it shares a
proportion of their revenues and profits you.
This strategy works best in the case where one of the established companies of the other
country already had a loyal audience with them.

Advantages of Licensing and Franchising

 Low cost of entry into an international market
 Licensing or Franchising partner has knowledge about the local market
 Offers you a passive source of income
 Reduces political risk as in most cases, the licensing or franchising partner is a
local business entity
 Allows expansion in multiple regions with minimal investment
Disadvantages of Licensing and Franchising
 In some cases, you might not be able to exercise complete control on its licensing
and franchising partners in the overseas market
  Licensees and franchisees can leverage the acquired knowledge and pose as future
competition for your business
 Your business risks tarnishing its brand image and reputation in the overseas and
other markets due to the incompetence of their licensing and franchising partners
3. Joint Ventures
A joint venture is one of the preferred modes of entry into international business for
businesses who do not mind sharing their brand, knowledge, and expertise.
Companies wishing to expand into overseas markets can form joint ventures with local
businesses in the overseas location, wherein both joint venture partners share the rewards and
risks associated with the business.

Both business entities share the investment, costs, profits and losses at the
predetermined proportion.
This mode of entry into international business is suitable in countries wherein the
governments do not allow one hundred per cent foreign ownership in certain industries.
For instance, foreign companies cannot have a 100 hundred per cent stake in broadcast
content services, print media, multi-brand retailing, insurance, power exchange sectors and
require to opt for a joint-venture route to enter the Indian market.

Here is what’s the difference between a Licensing/Franchisee kind of a setup and a Joint
Venture.
The subtle nuance that I came across while recently creating a strategy was that a franchise
setup would work well when you as a franchiser are a bigger brand in that particular product.

You could be big in your own country and not necessarily in the franchisee’s country.

In case of a Joint Venture, both the brands have a similar level of brand strength for that
particular product. And therefore, they wish to explore that product in that international
market together.

Advantages of Joint Venture

 Both partners can leverage their respective expertise to grow and expand within a
chosen market
  The political risks involved in joint-venture is lower due to the presence of the
local partner, having knowledge of the local market and its business environment
 Enables transfer of technology, intellectual properties and assets, knowledge of the
overseas market etc. between the partnering firms
Disadvantages of Joint Venture
 Joint ventures can face the possibility of cultural clashes within the organisation
due to the difference in organisation culture in both partnering firms
 In the event of a dispute, dissolution of a joint venture is subject to lengthy and
complicated legal process.

4. Strategic Acquisitions
Strategic acquisition implies that your company acquires a controlling interest in an
existing company in the overseas market.
This acquired company can be directly or indirectly involved in offering similar products or
services in the overseas market.

You can retain the existing management of the newly acquired company to benefit from
their expertise, knowledge and experience while having your team members positioned in the
board of the company as well.
Advantages of Strategic Acquisitions
 Your business does not need to start from scratch as you can use the existing
infrastructure, manufacturing facilities, distribution channels and an existing
market share and a consumer base
 Your business can benefit from the expertise, knowledge and experience of the
existing management and key personnel by retaining them
 It is one of the fastest modes of entry into an international business on a large scale
Disadvantages of Strategic Acquisitions
 Just like Joint Ventures, in Acquisitions as well, there is a possibility of cultural
clashes within the organisation due to the difference in organisation culture
 Apart from that there mostly are problems with seamless integration of systems
and process. Technological process differences is one of the most common issues
in strategic acquisitions.

5. Foreign Direct Investment
Foreign Direct Investment involves a company entering an overseas market by making a
substantial investment in the country. Some of the modes of entry into international business
using the foreign direct investment strategy includes mergers and acquisitions, joint ventures
and greenfield investments.
This strategy is viable when the demand or the size of the market, or the growth potential of
the market in the substantially large to justify the investment.

Some of the reasons because of which companies opt for foreign direct
investment strategy as the mode of entry into international business can include:
 Restriction or import limits on certain goods and products.
 Manufacturing locally can avoid import duties.
 Companies can take advantage of low-cost labour, cheaper material.

Advantages of Foreign Direct Investment

 You can retain your control over the operations and other aspects of your business
 Leverage low-cost labour, cheaper material etc. to reduce manufacturing cost
towards obtaining a competitive advantage over competitors
 Many foreign companies can avail for subsidies, tax breaks and other concessions
from the local governments for making an investment in their country
Disadvantages of Foreign Direct Investment
 The business is exposed to high levels of political risk, especially in case the
government decides to adopt protectionist policies to protect and support local
business against foreign companies
 This strategy involves substantial investment to be made for entering an
international market
So, while every business dreams of global domination within its industry, you need to plan its
internationalization strategy based upon your finances, existing capabilities, the growth
potential of the overseas market etc. before opting for different modes of entry into the
international business.

1.7 Entry Barriers

When starting a new business, or bringing a new product to market, there's no
shortage or factors that affect the odds of potential success. By understanding
barriers to entry and how they impact the competitive landscape, new firms can
put themselves in a stronger position to compete with existing firms in a given
industry.

New entrants in a market will always have an uphill battle to climb especially in
the case of high start-up costs. Fortunately, for many ecommerce businesses, the
natural barriers that often keep new entrants from seeing growth compared to
their competition is not a major factor.

Barrier to entry is the high cost or other type of barrier that prevents a business
startup from entering a market and competing with other businesses. Barriers to
entry are frequently discussed in the context of economics and general market
research.

Barriers to entry can include government regulations, the need for licenses, and
having to compete with a large corporation as a small business startup.

While there is no universally accepted list of barriers to entry, generally barriers

to entry fall under three categories.
Artificial barriers to entry; Artificial barriers to entry refers to barriers that
are the direct result of existing firms’ actions. Frequently this involves barriers
centred around pricing, brand, switching costs, and customer loyalty.

Natural barriers to entry; This includes barriers such as network effects,

economics of scale, and other natural barriers that are the direct results of a new
entrant’s new position in the market place.

Government barriers to entry; Barriers to entry related to the government

refer specifically to challenges for new firms face as a result of government
regulations and restrictions. Governments around the world frequently create
favourable conditions for particular incumbent firms that can make it
challenging for new entrants.

Depending on the market, barriers to entry can include barriers in a mix of these
three category buckets.

Example of Barriers to Entry

For example, a large established company is able to produce a large number of

products efficiently (low fixed costs) and more cost-effectively than a company
with fewer resources. They have lower costs because they are able to purchase
materials in bulk, and they have lower overhead because they are able to
produce more under one roof. The smaller company would simply have a hard
time keeping up with that, which can result in them avoiding entering the
market altogether.

Another example of barrier to entry would be education and licensing

requirements decided by the government. If you were to create an alternative
school for example, you would need to spend significant amount of capital on
the various certifications etc which can add for new firms who may not have
large amounts of cashflow.

Other firms who have already developed market share of a certain industry are
almost always at a significant advantage compared to new firms. New entrants
face high startup costs in addition to the challenges of growing their business.
Existing firms on the other hand, enjoy cost advantages and have already
established market share.

Barriers to entry can have a negative effect on prices since the playing field is
not level and competition is restricted. It’s not really an ideal situation for
anyone except the large company that holds the monopoly.

However, barriers to entry are not always completely prohibitive. In fact, many
business startups encounter some sort of barrier to entry that they must
overcome, whether that’s initial investments, acquiring licenses, or obtaining
a patent – it’s just part of doing business.

Sources of Barriers to Entry

Generally speaking, entry barriers come from seven sources:

1) Economies of scale: the decline in the cost of operations due to higher

production volume which helps keeps fixed costs low. More established
existing firms have a significant cost advantage compared to new comers.
2) Product differentiation: the brand strength of the product as a result of
effective communication of its benefits to the target market. It can be
difficult for new entrants to "break through the noise" in their market.
3) Capital requirements: One of the major economic barriers, capital
requirement refers to financial resources required for operating the
 business. Starting a car wash business for example is more capital
extensive than creating an e-commerce store.
4) Switching costs: This refers to one-time costs the buyer must incur for
making the switch to a different product. Your product may technically be
the better solution, but if the cost to switch is too high, customers will often
remain with the solutions existing firms provide.
5) Access to distribution channels: does one business control all of them, or
are they open? Shipping, logistics and more are a powerful barrier to entry,
incumbent firms use to their advantage.
6) Cost disadvantages independent of scale: when a company has
advantages that cannot be replicated by the competition, such as
proprietary technology.
7) Government policy: controls the government has placed on the market,
such as licensing requirements and other required documentation needed to
start and grow a business.

Overcoming Barriers to Entry

While barriers to entry make it difficult for new entrants to establish market
share, many existing firms view barriers to entry as a competitive advantage.

Some businesses want there to be high barriers to entry in their market because
they want to limit competition or hold on to their place at the top. Therefore,
they will try to maintain their competitive advantage any way they can, which
can make entry even more difficult for new businesses.

Existing firms might do something like spend an excessive amount of money on

advertising (in other words, on product differentiation), because they have it and
they can, and any new entrant would not be able to do that, giving them a
significant disadvantage.
When starting a business, evaluating all potential barriers to entry is a crucial
step in deciding whether or not to enter a chosen market. By understanding the
barriers to entry in a particular industry, new entrants can make strategic
choices on how to best compete with other firms.

High start-up costs, government regulations, and even predatory pricing are all
challenges new entrants will likely face over the course of growing their
business. But despite the disadvantages new companies may have, there's no
shortage of stories of incumbent firms finally being dethroned. —a classic tale
of "David vs Goliath" in the world of business. What are the business lessons of
David and Goliath?

Everyone thought the only way to defeat the giant would be to match his
strength, size and skill, but David took an entirely different approach, using his
unique strengths against the giant. Approach your big business competitors the
same way – don't match them, come at them from a different, unexpected angle.

Resonating the classic story of David Vs. Goliath with Current

Global Business Scenario

The classic story of David battling Goliath resonates with any successful
entrepreneur. At some point, small companies must confront large, entrenched
rivals. Those big companies possess clear advantages: brand recognition,
economies of scale, financial leverage and many others. Customers need a
compelling reason to switch providers.

How do would-be Davids compete? They need to develop their own

modernized slingshot. Technology provides virtually endless possibilities for
competitive advantage. Like David, though, you need to size up your opponent
and adopt the right strategy before choosing your weapon.
In the United Kingdom, a company called Ocado did just that in the exotic,
sophisticated market of…grocery stores.

In the UK, the role of Goliath in this story is played by a company called Tesco.
Tesco is a 100-year-old retailer, tracing its roots to a tea stand in post-World
War I Britain. Today, it’s a roughly $60 billion global company with most of its
business still in the UK. It employs 300,000 people in the British Isles working
in 3,400 stores across the region. They credibly claim to account for millions of
shopping trips each week.

Ocado was founded in 2000. It had no venerable history or brand recognition. In

fact, it had no physical stores. It was created from the start as an online grocery
that delivers its goods to consumers rather than serving them in a brick-and-
mortar location.

Online groceries were a niche market in the early 2000s, so Ocado grew in
relative safety for a time, proving its methods and building a brand. Of course,
the consuming public changed its behaviour as the 21 st century unfolded. Online
grocery ordering and delivery became a much bigger part of the total grocery
market.

Goliath noticed David then and aimed at absorbing this growing online delivery
segment (of course, Tesco wasn’t the only one competing for that business,
others such as the UK’s Asda Group and our own Amazon saw the same
opportunities). In this online segment, switching costs for customers were
negligible so all the brand recognition Tesco brought with them was a threat to
Ocado. Ocado managers knew they already offered a great customer experience,
from the ease of ordering to the breadth of choice in fresh foods. Underlying all
that success was the efficiency of their operations, a necessity in the low-margin
grocery business. They made the strategic choice to focus on what might be
called radical efficiency.
To say it a little differently, this David’s slingshot was an army of robots.

Ocado completely redesigned their Customer Fulfilment Centres (CFC), the

warehouses where they picked and packed groceries to customer orders.
Groceries are sorted into bins by categories—apples here, ground meats there,
etc. Above that array of bins is an elaborate crosshatch grid of rails. The
company calls this configuration “the hive,” calling to mind the honeycombed
composition of a bee hive. A bee hive is buzzing with the activity of worker
drones and the Ocado hive has that too.

Ocado engineers (yes, it’s a grocery store employing “engineers”) designed

hundreds of robots, about the size of a small shopping cart. Those robots wheel
about on the rails connecting the grid layout. They stop above an individual bin,
pull the groceries they need and move on to the next bin. When they’ve
completed their circuits, they go to a packing station and unload their contents,
pick up their new programming and zoom off to go back to work.

Humans then confirm orders, perform quality assurance on the merchandise and
do the final packing of orders. From there, the orders head to delivery vans. The
latest iterations of the CFC can fulfill 65,000 orders a week and Ocado has them
stationed all around the UK. They are so efficient Ocado was able to reduce the
number of delivery vehicles they need in their fleet because of the ripple effects
of this incredible productivity throughout the business.

The story isn’t finished yet. Seattle business people will likely note that I’ve
talked about the hardware–robots, rails, bins–but not the software in this
solution. The robots provide the brawn in the CFC, but the brain is a
sophisticated software platform that provides the overall process control.

https://www.youtube.com/watch?v=4DKrcpa8Z_E
In this video, you can see them whizzing past each other in what might look like
haphazard patterns, however they are anything but random. Robots are routed
for maximum efficiency based on the items in their orders. They stay out of
each other’s way through this sophisticated air traffic control system.

Ocado built this software platform to compete with the giants moving into its
space. It’s proving so successful that the company launched a separate business
selling the platform to other retailers. In the US, Kroger signed a deal to use the
system for its own battle with Amazon Prime, Wal-Mart and others.

The Amazon angle here is an interesting wrinkle in the Ocado story. Amazon
started in books and now sells pretty much everything online. They built out
data centre capacity to fuel their growth and that capability eventually turned
into Amazon Web Services, Amazon’s commercial cloud computing arm. So,
ironically, Ocado followed a similar path to empowering others to compete with
Amazon.

Every fast-growing company is a David that may one day come up against a
Goliath. The moral of the modern version of this story is that you first need to
take aim with a strategy to create competitive advantage. Then build your
slingshot.

1.8 International Trade Theories

As quoted by Wasserman and Haltman, international trade can be connoted as

transactions among the inhabitants of different countries. International trade acts
as a major contributing factor in global economic activity and a catalyst of
economic growth in developing as well as developed countries. Differences in
various conditions, like resource availability, natural climatic conditions, cost of
production, etc., act as the motive behind trade between the countries.
International trade has made it all possible and has provided a large number of
employment opportunities as well as several goods and services for the
consumer. It has been a major reason for the rising living standards of
people all over the globe.

With time, economists have established theories that explain global trade. These
theories explain the mechanism of international trade which is how
countries exchange goods and services with each other. International trade
theories help countries in deciding what should be imported and what should be
exported, in what quantity, and with whom trade should be done internationally.
Initially, economists developed international trade theories on the basis of the
country which were termed - Classical Theories. However, these theories, later
on, shifted from country-based to firm or company based by the mid-twentieth
century which were termed - Modern Theories.

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. The Theory is focused on the
motto that, on a priority basis, a country must look after its own welfare and
therefore, expand exports and discourage imports. 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.

In the 17th-18th Century, the wealth of the nation only consisted of gold or
other kinds of precious metals so the theorists suggested that the countries
should start accumulating gold and other kinds of metals more and more. The
European Nations started doing so. Mercantilists, during this period, stated that
all these precious stones denoted the wealth of a nation, they believed that a
country will strengthen only if the nation imports less and exported
more. They said that this is a favourable balance of trade and that this will help
a nation to progress more.

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 Imperialist 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 21st 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. Import restrictions lead to higher prices of goods and
services. Free-trade benefits everyone, whereas, mercantilism's protectionist
policies select only profit industries.
Limitations

 Under this theory, the accumulation of wealth takes place at the cost of
another trading partner. Therefore, international trade is treated as a win-
lose game resulting virtually in no contribution to global wealth.
Thus, international trade becomes a zero-sum game.

 A favourable balance of trade is possible only in the short run and would
automatically be eliminated in the long run, according to David Hume’s
Price-Specie- Flow doctrine. An influx of gold by way of more exports
than imports by a country raises the domestic prices, leading to an
increase in export prices. In turn, the county would lose its competitive
edge in terms of price. On the other hand, the loss of gold by the
importing countries would lead to a decrease in their domestic price
levels, which would boost their exports.

 Presently, gold represents only a minor proportion of national foreign

exchange reserves. Governments use these reserves to intervene in
foreign exchange markets and to influence exchange rates.

 The mercantilist theory overlooks other factors in a country’s wealth,

such as its natural resources, manpower, and its skill levels, capital, etc.

 If all countries follow restrictive policies that promote exports and restrict
imports and create several trade barriers in the process, it would
ultimately result in a highly restrictive environment for international
trade.

 Mercantilist policies were used by colonial powers as a means of

exploitation, whereby they charged higher prices from their colonial
markets for their finished industrial goods and bought raw materials at
much lower costs from their colonies. Colonial powers restricted
 developmental activities in their colonies to a minimum infrastructure
base that would support international trade for their own interests. Thus,
the colonies remained poor.

 A number of national governments still seem to cling to the mercantilist

theory, and exports rather than imports are actively promoted. This also
explains the reason behind the ‘import substitution strategy’ adopted by a
large number of countries prior to economic liberalization.

2) Absolute Advantage

In 1776, the economist Adam Smith criticised 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 labour.
Specialisation ensures higher productivity, thereby increasing the standard
of living of the people of the country. He proposed that the division of labour
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 specialisation 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. He stated that trade should flow naturally according to market forces.
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.
The idea of absolute advantage rests on a number of assumptions on the part of
Adam Smith. While influential and insightful, the theory of absolute advantage
is not always entirely accurate because many of these fundamental assumptions
are in fact not true in practice. Here are the most significant of these
assumptions:

1. Lack of Mobility for Factors of Production

Adam Smith assumes that factors of production cannot move between countries.
This assumption also implies that the Production Possibility Frontier of each
country will not change after the trade.

2. Trade Barriers

There are no barriers to trade for the exchange of goods. Governments

implement trade barriers to restrict or discourage the importation or exportation
of a particular good.
 3. Trade Balance

Smith assumes that exports must be equal to imports. This assumption means
that we cannot have trade imbalances, trade deficits, or surpluses. A trade
imbalance occurs when exports are higher than imports or vice versa.

4. Constant Returns to Scale

Adam Smith assumes that we will get constant returns as production scales,
meaning there are no economies of scale. For example, if it takes 2 hours to
make one loaf of bread in country A, then it should take 4 hours to produce two
loaves of bread. Consequently, it would take 8 hours to produce four loaves of
bread.

However, if there were economies of scale, then it would become cheaper for
countries to keep producing the same good as it produced more of the same
good.

Absolute Advantage Example

In our absolute advantage example, we assume that there are two countries,
which are represented by a blue and red line. They are called Blue Country and
Red Country respectively.
To keep things simple, we also assume that only two goods are produced. They
are Good A and Good B. From the table below, we can determine how many
hours it takes to create one product.

Consider this table, which gives hours required to produce one unit of Good A
and Good B by Blue and Red country:

The Blue country has an Absolute Advantage in the production of Good A (2

hours). Blue county has an absolute advantage because it takes fewer hours to
produce a unit of Good A than Red country, which takes 10 hours.
Red Country takes fewer hours to produce Good B (4 hours). Therefore, Red
Country has an Absolute Advantage in the production of Good B.

As a result, Blue Country will be better off if it specializes in the production of

Good A.

Red Country will be better off if it specializes in Good B.

As we can see from our example, it makes sense for businesses and countries to
trade with one another. All countries engaged in open trade benefit from lower
costs of production.

3) Comparative Advantage

The theory of comparative advantage flourished in the 19th century and was
propounded by David Ricardo in his book ‘Principles of Political Economy
and Taxation’ in 1817. 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.

Assumptions of Comparative Advantage

The following are the assumptions of the Ricardian doctrine of comparative

advantage:

 There are only two countries, assume A and B.

 Both of them produce the same two commodities, X and Y.

 Labour is the only factor of production.

 The supply of labour is unchanged.

 All labour units are homogeneous.

 Tastes are similar in both countries.

 The labour cost determines the price of the two commodities

 The production of commodities is done under the law of constant costs or

returns.

 The two countries trade on the barter system.

 Technological knowledge is unchanged.

 Factors of production are perfectly mobile within each country. However,

they are immobile between the two countries.
  Free trade is undertaken between the two countries. Trade barriers and
restrictions in the movement of commodities are absent.

 Transport costs are not incurred in carrying trade between the two
countries.

 Factors of production are fully employed in both the countries.

 The exchange ratio for the two commodities is the same.

Criticisms of Comparative Advantage

The following are the criticisms of the Ricardian doctrine of comparative

advantage:

 The theory only considers labour costs and neglects all non-labour costs
involved in the production of the commodities.
 The theory considers all labour to be homogenous. However, in reality,
labour is heterogeneous due to different grades and kinds.

 The theory assumes similar tastes for all. However, the tastes differ with
the growth of economies and income brackets.

 The theory assumes that a fixed proportion of labour is used in the

production of all commodities. However, in reality, the utilization of the
proportion of labour depends on the type of commodity being produced.

 The theory has an unrealistic assumption of constant costs. However,

large-scale productions lead to cost reduction and thereby increase the
comparative advantage.

 Transport costs play an essential role in determining the pattern of trade.

But the Ricardo theory neglects this independent factor of production.

 The assumption of the factors of production being mobile internally is

unrealistic. The factors do not move freely from one region to another or
one industry to another. The greater the degree of specializations in an
industry, the more immobile the factor will be.

 The assumption of the theory of having only two countries and two
commodities is unrealistic as international trade takes place among
countries trading numerous commodities.

 Every country implements restrictions on the movement of goods to and

from the countries. Thus, tariffs and trade restrictions play a role in world
imports and exports. However, the theory assumes free and perfect world
trade.

 The theory assumes full employment. However, every economy has an

existence of underemployment.
  A country may or may not want to trade a commodity due to military,
strategic, or development considerations. Therefore, self-interest stands in
the operation of the comparative advantage theory.

 The Ricardian theory considers only the supply side of world trade and
neglects the demand side.

 The theory only explains how two countries gain from international trade.
But the theory fails to explain how the gains from the trade are distributed
between the two countries.

So, in conclusion, despite weaknesses, the Ricardian theory of comparative

advantage has remained significant over the years. The basic structure of the
theory still exists with a few refinements. It is believed that a nation that
neglects this theory may have to pay a heavy price in terms of the potential rate
of growth and living standards.

4) 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, labour, 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 labourers, so foreign countries

establish industries that are labour-intensive in India. Examples of such
industries are the garment and textile industries.

The core premises of the Heckscher-Ohlin model are:

 The model explains how resources are imbalanced throughout the world.

 Naturally, resources are not evenly distributed across the world, some
parts of the world have certain resources in abundance while some have
other resources in abundance.

 Since each country has its own unique natural resources and specialized
area of production, mathematically, a country will export resources it has
in abundance.

 The Heckscher-Ohlin model is not limited to natural resources or

commodities, it also accounts for factors of production such as labour,
land and capital and how they affect exportation.

 The Heckscher-Ohlin model helps to find a trade balance between the

two countries involved in international trade.

Real World Example of the Heckscher-Ohlin Model

The Heckscher-Ohlin Model can be studied extensively in the real-world trade
between different countries. For example, while some countries are the largest
exporters of oil and petroleum products, some have coal in abundance, some
cotton, some precious metals, while others have agricultural products in
abundance. The Heckscher-Ohlin model explains the imbalance of natural
resources throughout the world and gives an explanation of why countries
export the resource they have at most. For example, OPEC countries are the
largest exporters of oil, this does not mean they do not have other natural
resources such as coal, metal, and others, but they have oil reserves in
abundance, wherein lies their strength. The Heckscher-Ohlin model also
amplifies the benefits of international and how exporting resources that are
naturally abundant in some countries help other countries.

Modern or Firm-Based Theory

The emergence of modern or firm-based theories is marked after 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:

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.

2) 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 assumed
that production of the new product will occur completely in the home country of
its innovation. In the 1960s this was a useful theory to explain the
manufacturing success of the United States. US manufacturing was the globally
dominant producer in many industries after World War II.

It has also been used to describe how the personal computer (PC) went through
its product cycle. The PC was a new product in the 1970s and developed into a
mature product during the 1980s and 1990s. Today, the PC is in the
standardized product stage, and the majority of manufacturing and production
process is done in low-cost countries in Asia and Mexico.

The product life cycle theory has been less able to explain current trade patterns
where innovation and manufacturing occur around the world. For example,
global companies even conduct research and development in developing
markets where highly skilled labour and facilities are usually cheaper. Even
though research and development is typically associated with the first or new
product stage and therefore completed in the home country, these developing or
emerging-market countries, such as India and China, offer both highly skilled
labour and new research facilities at a substantial cost advantage for global
firms. 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.

3) 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 optimise are

 Mainly research and development,

 The ownership of intellectual property rights,

 Economies of scale,

 Unique business processes or methods,

 Extensive experience in the industry, and

 The control of resources or favourable access to raw materials.

 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.

4) Porter’s National Competitive Advantage Theory

In the continuing evolution of international trade theories, Michael Porter of

Harvard Business School developed a new model to explain national
competitive advantage in 1990. Porter’s theory stated that a nation’s
competitiveness in an industry depends on the capacity of the industry to
innovate and upgrade. His theory focused on explaining why some nations are
more competitive in certain industries. To explain his theory, Porter identified
four determinants that he linked together.

The four determinants are

(1) local market resources and capabilities,

(2) local market demand conditions,

(3) local suppliers and complementary industries, and

(4) local firm characteristics.

1. Local market resources and capabilities (factor conditions). Porter
recognized the value of the factor proportions theory, which considers a
nation’s resources (e.g., natural resources and available labour) as key
factors in determining what products a country will import or export.
Porter added to these basic factors a new list of advanced factors, which
he defined as skilled labour, investments in education, technology, and
infrastructure. He perceived these advanced factors as providing a
country with a sustainable competitive advantage.

2. Local market demand conditions. Porter believed that a sophisticated

home market is critical to ensuring ongoing innovation, thereby creating a
sustainable competitive advantage. Companies whose domestic markets
are sophisticated, trendsetting, and demanding forces continuous
 innovation and the development of new products and technologies. Many
sources credit the demanding US consumer with forcing US software
companies to continuously innovate, thus creating a sustainable
competitive advantage in software products and services.

3. Local suppliers and complementary industries. To remain competitive,

large global firms benefit from having strong, efficient supporting and
related industries to provide the inputs required by the industry. Certain
industries cluster geographically, which provides efficiencies and
productivity.

4. Local firm characteristics. Local firm characteristics include firm

strategy, industry structure, and industry rivalry. Local strategy affects a
firm’s competitiveness. A healthy level of rivalry between local firms
will spur innovation and competitiveness.

In addition to the four determinants of the diamond, Porter also noted that
government and chance play a part in the national competitiveness of industries.
Governments can, by their actions and policies, increase the competitiveness of
firms and occasionally entire industries.

Porter’s theory, along with other modern, firm-based theories, offers an

interesting interpretation of international trade trends. Nevertheless, they remain
relatively new and minimally tested theories.

Conclusion

For years, theories concerning international trade have been the subject of
intense research and debate. Growing international trade has its own pros and
cons. The analysis of the system of international trade by way of various
theories has enabled a systematic framework for better understanding.
International trade contributes to the economic growth of a country, thereby
increasing the standard of living of its people, creating employment
opportunities, a greater variety of choices for consumers, etc. The development
of trade theories has seen a major shift from the view of restricting free trade as
stated in the theory of mercantilism to the various modern theories providing a
better understanding to facilitate smooth international trade with increasing
benefits.

1.9 Regional Economic Integration

Regional economic integration refers to a way where neighbouring nations work

to merge their thrifts by falling barriers to trade, investment, and mobility of
labour and capital within the region. The goal is for the region to become more
useful and roaring through alliance and mutual support. Regional economic
integration begins with free trade areas that remove tariffs and quotas on
member nations' trade. The next stage is a typical market that allows for the free
move of labour, capital, and goods within the region. One of
the UNCTAD projects is harnessing the power of bees to enhance their
livelihoods while creating fair options in rural wards in the southern African
country.

Regional Economic Integration

Regional economic integration means that nations within the same geographic
region work jointly to reduce barriers to trade, asset, and labour mobility
between them. The goal is for the region to become more fruitful and thriving
through integration and alliance.

Types of Regional Economic Integration

The levels of regional economic integration have been defined below.

 o Free Trade Area
o Common Market
o Customs Union
o Economic Union
o Monetary Union
o Political Union

Objectives of Regional Economic Integration

The goals of regional economic integration have been stated below.

o Promote trade - The main goal is to raise trade of goods and services
between member countries by reducing or eliminating tariffs and non-
tariff barriers. Regional integration aims to make it easier and cheaper for
nations to trade with each other.
o Create larger markets - By merging their thrifts, member nations gain
access to a larger regional market with more likely clients and suppliers.
This allows firms to reach thrifts of scale and be more competitive
globally.
o Specialize in what you do best - Member nations can specialize in
creating and shipping the types of goods and services they are best at and
have a close edge in. This leads to more efficient production.
o Attract more investment - A larger integrated regional market is more
alluring to investors. Regional integration aims to increase foreign direct
investment in the region.
o Foster economic growth - The gain in trade, investment and efficiencies
from specialization are intended to enable faster economic growth for
member nations.
 o Improve living standards - The economic growth benefits of regional
integration can help improve norms of living and lower poverty for locals
of member nations.
o Enhance stability - Deeper economic ties and interdependence between
member countries are meant to promote peace, stability and reduce the
likelihood of conflict.

Effects of Regional Economic Integration

The effects of regional economic integration have been stated below.

o Increased trade and investment within the region- By easing tariffs and
other trade barriers, regional integration leads to more trade and asset
between member nations.
o Specialization and comparative advantage- Member nations can
specialize in making and exporting goods they are relatively efficient at,
taking advantage of regional comparative advantage.
o Economies of scale- A larger integrated regional market allows firms to
produce at higher volumes and achieve lower costs through economies of
scale.
o Competition and innovation- Firms face more competition from regional
rivals, pushing them to innovate and become more efficient.
o Growth and development- Increased trade, investment, and specialization
from integration boost economic growth and growth within the region.
o Reduced poverty- Integration's positive impact on growth helps reduce
poverty and income contrasts across the member nations.
o Political stability- Economic integration fosters interdependence that
spills over into closer political ties and alliance, contributing to regional
stability.
 o Global competitiveness- A larger integrated regional economy evolves
more competitive globally, supporting the region's position globally.
o Job creation- Integration may lead to job creation in export sectors, while
some import-competing sectors face under stress. The net impact relies
on specific country contexts.
o Access to larger markets- Firms gain access to a larger integrated regional
market that makes the region more attractive for foreign investors.

Advantages and Disadvantages of Regional Economic Integration

The edges and drawbacks of regional economic integration have been stated
below.

Advantages of Regional Economic Integration

The advantages of regional economic integration have been stated below.

o Grown trade- By reducing trade barriers, regional integration boosts the

flow of goods, services, and investment within the bloc. This allows
members to benefit more from international trade.
o Economies of scale- An integrated regional market provides access to a
larger customer base, allowing firms to produce at larger scales and
reduce costs through efficiency gains.
o Specialization and efficiency- Members can specialize in making and
exporting goods they have a comparative advantage while importing
others from the larger regional market. This enhances overall productivity
and efficiency.
o Increased investment- A larger integrated market makes the region a
more attractive destination for foreign direct investment that benefits all
member economies.
 o Technology transfer- Greater trade and investment flows within the bloc
facilitate the transfer of technology, knowledge, and skills among
members. This boosts creation and productivity.
o Political stability- Economic interdependence fosters alliance, stability,
and security among member states. Regional integration becomes multi-
dimensional.
o Reduced poverty- By increasing growth potential, regional integration
aims to reduce poverty and raise income levels across the merged region.
A rising tide lifts all boats.
o Global competitiveness- Regional integration allows fellows to jointly
address regional and global issues, giving the bloc more weight and voice
on the world stage.

Disadvantages of Regional Economic Integration

The drawbacks of regional economic integration have been stated below.

o Loss of sovereignty- Member states may lose some control over their
trade policies and regulations.
o Increased competition- Domestic industries may face more competition
from other member nations. This can lead to job losses and eviction of
workers.
o Increased economic contrasts. The benefits of integration may not be
evenly distributed across nations. More grown members may benefit
more, raising the economic gap.
o Risk of conflicts- There could be conflicts over the allocation of benefits
and costs among member nations. This can strain the integration.
o Cost of coordination- Costs are associated with blending policies, rules,
and governance forms across nations. This can be weak.
 o Trade diversion- Members may trade more with each other at the cost of
lower-cost non-members. This can be weak.
o Raised barriers to non-members- Integration may raise barriers to trade
with non-members, disabling them.
o Policy imposition- There is a risk of larger members imposing their
policies on smaller members. This can exacerbate tensions.
o Slower decision-making- Decision-making may become more complex
with multiple members, slowing down the process.
o Spread of economic issues- Issues like financial crises, downturns, and
inflation may spread more easily within the integrated region.

Reasons for Regional Economic Integration

The reasons for regional economic integration have been stated below.

o Increased trade- Integration expands trade between members by lowering

barriers to trade and investment.
o Economic growth- Deeper economic integration can boost growth
through raised trade, investment, and match.
o Gain from trade- Members can gain by specializing in goods and services
they can produce more efficiently.
o Peace and security- Closer ties between neighbours can strengthen
political and security relationships.
o Counterbalance- Integration helps members counterbalance the influence
of larger economies.
o Attract FDI- An integrated market is more appealing to foreign investors.
Members can attract more FDI.
o Grown influence- An economic bloc has more power to shape global
rules of trade and politics.
 o Spread development- Wealthier members can spread growth to poorer
members through investments and aid.
o Learning effect- Nations can learn from each other by assuming best
practices.
o Joint policies- Members can coordinate policies like infrastructure,
environment, and research for mutual benefit.
o Economies of scale- A larger market enables firms to achieve greater
economies of scale and efficiency.
o Increased contest- Integration spurs contest, enabling creation, greater
efficiency, and lower prices.
o Improved infrastructure- Members build better infrastructure links for a
smooth flow of goods, services, and capital.
o Reduced costs- Harmonization of rules, regulations, and standards helps
lower costs of exchange and doing business.
o Factor mobility- There is greater labour, capital, and technology mobility
between member nations.
o Cultural exchange- Closer ties promote a greater exchange of cultural,
educational, and social ideas between populations.

Regional Economic Integration in Africa

The regional economic integration in Africa has been stated below.

o African nations have formed several regional economic wards to promote

economic integration and growth.
o The objectives of regional integration include: promoting trade,
investment, and financial flows, harmonizing trade policies, and setting
common markets and economic unions.
 o Benefits of regional integration include larger markets, grown trade and
investments, domain and economies of scale, and alliances on
infrastructure and energy projects.
o Challenges include limited internal trade within regions, non-tariff
barriers, differences in economic development, and political flux in some
nations.

Regional Economic Integration NAFTA

The regional economic integration NAFTA has been stated below.

o NAFTA is the North American Free Trade Agreement formed in 1994

between the United States, Canada, and Mexico.
o The objectives of NAFTA were to promote economic integration and
increase trade, and buy flows within North America.
o NAFTA stopped most tariffs on goods traded between the US, Canada,
and Mexico. It aimed to slowly reduce and finally stop non-tariff barriers
like import quotas.
o NAFTA also opened sectors like services, investment, agriculture, and
government procurement to contest between the three nations.
o NAFTA resulted in a large increase in trade and foreign direct investment
within North America. Trade between the member nations more than
tripled from 1993 to 2018.

Arguments for Regional Economic Integration Trade Creation

The arguments for regional economic integration have been stated below.

o Larger markets- By integrating economies, member nations gain access to

a larger regional market which can lead to more trade and investments.
 o Domain and efficiency- Member nations can specialize in paying goods
and services where they have a relative edge, resulting in more efficient
production.
o Infrastructure and investment projects- Regional integration can help
larger infrastructure and asset projects that unique nations could not
achieve alone.
o Political stability- Closer economic ties can help foster peace and political
stability between member nations.

Diversion Effects of Regional Economic Integration

The pursuit effects of regional economic integration have been stated below.

Trade Creation

Trade creation has been stated below.

o When member nations shift show towards goods they can create more
efficiently due to regional trade choices, this is known as trade creation.
o Regional integration leads fellow nations to specialize and trade
according to their close benefits, creating more efficient exhibit and
consumption.
o Overall, trade creation rises economic welfare for member nations.

Trade Diversion

The trade diversion has been stated below.

o When member nations shift trade towards less producers within the
region due to trade picks, this is known as trade diversion.
o Member nations may import goods from higher-cost producers within the
region instead of lower-cost suppliers outside the region.
 o Trade diversion results in a loss of economic efficiency and reduces
overall welfare for member nations.

So regional integration can lead to positive trade result and potentially hostile
trade diversion effects.

Hope this summary helps! Let me know if you have any other queries.

Regional Economic Integration of ASEAN

ASEAN stands for Association of South-East Asian Nations. It is a regional

group of 10 Southeast Asian nations.

Objectives of ASEAN for ASEAN have been stated below.

The goals of ASEAN economic integration are stated below.

o Foster economic growth and development

o Improve the social well-being of ASEAN people
o Create a single market and production base
o Narrow the development gap between fellow nations

ASEAN Measures

ASEAN has enforced various efforts to achieve integration

o Stopped tariffs on many goods traded between member states

o Gradually reducing non-tariff barriers like quotas and import licensing
o Liberalized trade in services
o Promoted asset flows within the region
o Blended trade policies and rules
o Set the ASEAN Free Trade Area (AFTA)
Benefits of ASEAN

The benefits of ASEAN integration include the following

o Increased trade and buy flows

o Access to a larger regional market of over 600 million people
o Field by member states in drives where they have a comparative
advantage
o More foreign direct asset into the region

Challenges of ASEAN

Challenges include the following

o Different levels of economic growth - ASEAN members are at varying

stages of economic growth. Some nations like Singapore and Brunei are
created, while others like Cambodia, Laos, and Myanmar are less grown.
This creates challenges for merging thrifts.
o Infrastructure gaps - There are important infrastructure gaps within
ASEAN, mainly in transport, energy, and telecommunications.
Underdeveloped infrastructure hinders economic integration and cross-
border trade and asset.
o Non-tariff barriers - While tariffs have been eased within ASEAN, non-
tariff barriers like quotas, import licensing, standards, and laws still exist
for some goods and services. This hampers the free flow of trade within
the region.
o Limited internal trade - Intra-ASEAN trade as a share of total trade
remains relatively low. Member nations still trade more with nations
outside ASEAN than within the group. This means the integration gain
has been slow.
 o Movement of labour -ASEAN has been slow to liberalize the labour
move between member states. Rules on skilled and unskilled labour
mobility hinder economic integration.

These topics helps in understanding the Indian ASEAN relations better.

Impact of Regional Economic Integration

The impact of regional economic integration has been stated below.

Positive Impacts

The positive impacts have been stated below.

o Boosted trade and investment

o Field and efficiency
o Economic growth
o Larger markets
o Technology transfer
o Poverty reduction

Potential Negative Impacts

The negative impacts have been stated below.

o Job disruption
o Grown inequality
o Loss of tariff revenue
o Environmental impacts
o Political tensions

Limitations of Regional Economic Integration

The limitations of regional economic integration have been stated below.

o Uneven development - Member nations are often at various stages of

economic growth, which can limit the benefits of integration.
o Political disputes - Recorded and ongoing political tensions or disputes
between fellows pose challenges to economic alliance.
o Performance issues - Weak implementation and enforcement of regional
agreements can damage useful integration.
o Non-tariff barriers - Despite efforts, non-tariff barriers like quotas,
regulations, and administrative hurdles still persist within many
integration blocs.
o Limited trade creation - Much of the boost in trade that occurs may even
come from trade pursuit rather than the efficient trade creation expected.
o Restrictions on labour movement - Most integration arrangements still
place rules on the free stir of skilled and unskilled labour between
member states.
o Winner/loser imbalances - Not all member nations or economic sectors
benefit equally from integration, creating political tensions.
o Environmental impacts - Integration and raised economic activity can
worsen environmental sustainability challenges.

Importance of Regional Economic Integration

The importance of regional economic integration has been stated below.

o Promotes financial growth - Integration raises trade, investment, and

field, which drives higher growth for member nations.
o Creates larger markets - Members gain access to a regional market much
larger than their unique domestic needs.
 o Improves competitiveness - By merging and specializing, members can
become more competitive globally in certain drives.
o Attracts investment - Regional integration deals make a bloc more
attractive for foreign direct investment.
o Transfers technology - Integration enables the transfer of technology and
wisdom between more set and less developed fellows.
o Reduces poverty - The economic growth benefits of integration can help
reduce poverty levels within member states.
o Promotes stability - Deeper economic ties between members can promote
political stability and reduce the likelihood of conflict.

Regional Economic Integration in Europe

The regional economic integration in Europe has been stated below.

o The European Union is the most integrated region in the world, with the
free movement of goods, services, capital, and people.
o The EU has a common market with harmonized trade policies, common
trade tariffs for non-members, and uniform product regulations.
o EU members also have a customs union with a common external tariff
and visa-free travel for EU citizens.
o The EU has a single currency (euro) adopted by 19 member states. Other
EU policies are also coordinated.
o Regional integration in Europe began with the European Coal and Steel
Community in 1951 and gradually expanded from there.
o The EU now consists of 27 member states with over 450 million citizens.

Arguments for Regionalism

The arguments for regionalism have been stated below.

 o Economies of scale - Large regional markets allow firms to achieve
economies of scale and produce more efficiently.
o Comparative advantage - Regional integration allows nations to
specialize and trade based on their comparative advantages, boosting
productivity.
o Investment attraction - A large regional market makes a region more
attractive for foreign direct investment, bringing in capital and jobs.
o Infrastructure alliance - Nations can cooperate on major regional
infrastructure projects that individual nations cannot undertake alone.
o Political stability - Deeper economic interdependence can foster peace
and help resolve conflicts between neighbouring nations.
o Collective bargaining power - A unified region has more global influence
and bargaining power in international trade negotiations.
o Policy coordination - Coordinated regional policies in areas like contest,
climate, and R&D can maximize benefits for members.
o Cultural and historical ties - Nations with existing cultural and historical
links may find regionalism adorable.

Conclusion

The objective of regional economic integration is to raise alliance and

integration between neighbouring nations by reducing trade barriers and helping
economic policy coordination. The ultimate goals are to achieve higher growth,
growth, and political stability through larger common markets, customs unions,
and sometimes full economic unions. Yet, challenges remain due to uneven
growth among fellows, non-tariff barriers, performance issues, and rules on
labour mobility. Examples of economic integration include the European Union,
NAFTA/USMCA, ASEAN, Mercosur, and the African Economic Community.
Unit II

Formulating & Implementing Global Strategy:

2.1 Organization Design & Structures,

2.2 International Competitive Advantage,
2.3 International Strategic Alliances,
2.4 Global Mergers and Acquisition,
2.5 Managing innovations and Intellectual Property Rights.

2.1 International Organizational Structures (With Diagram)

In these days of globalized business, organizations are faced with international

competitors in their domestic markets, as well as competitive forces when
operating abroad.

Being able to handle country-specific market differences, cultures and staff is

going to be critical if a company’s international operations are to be effective.

When we use the term ‘international organization’ we are referring to

a company operating across multiple national borders, as distinct from an
‘international institution’.

Confusingly, the latter can also be known as an international organization, but is

better described as an 'intergovernmental organization'. These are set up to
establish a common set of rules between countries. Examples include the United
Nations, the World Health Organization, OECD, INTERPOL and NATO.

So, we are not talking about the UN or the WHO here, we are talking about
companies that have broad international operations, selling products and
services across multiple countries.
The way a company organizes itself can have dramatic effects on its overall
performance, and getting this piece right when going international is critically
important.

Sadly, it is not usually done well. In a recent McKinsey survey of more than
300 executives, only 44% said they felt their organizational structure created
clear accountabilities.

“Global companies find structure difficult because there are no simple

solutions,” said the McKinsey report, “Most global structural options create
challenges as well as benefits.”

For example, many international organizations have strong, set rules laid down
for how their products and services should be branded, sold and distributed
across the world.

A McDonald’s Big Mac is the same Big Mac wherever it is bought, the world
over. However, some global companies are finding problems with this
approach, with the standardization producing limitations on certain markets,
reducing the ability to respond to local customer needs.

Despite being a global franchise brand, McDonald’s has not gone down well in
the Caribbean. Despite opening 11 outlets in Jamaica in the mid-1990's, the last
store closed in 2005.

Reasons included a sluggish economy and the relative high cost price of the
franchise and its training requirements. Fundamentally though, it was the
product itself. The locals felt the burgers and meals were not big enough to
quench the appetite, and tasted bland. Even an attempt to introduce a local
Jamaican 'jerk chicken burger' with spicy sauce fell flat.
In Barbados, the Golden Arches only lasted one year; and they pulled out of
Trinidad and Tobago altogether in 2003.

International Organizational Structures: Type # 1.

Expo-documents against Acceptancert Department:
Exports are often looked after by a company’s marketing or sales department in
the initial stages when the volume of exports sales is low. However, with
increase in exports turnover, an independent exports department is often setup
and separated from domestic marketing.

Exports activities are controlled by a company’s home-based office through a

designated head of export department, i.e. Vice President, Director, or Manager
(Exports). The role of the HR department is primarily confined to planning and
recruiting staff for exports, training and development, and compensation.

Sometimes, some HR activities, such as recruiting foreign sales or agency

personnel are carried out by the exports or marketing department with or
without consultation with the HR department.

International Organizational Structures: Type # 2.

International division structure:
As the foreign operations of a company grow, businesses often realize the
overseas growth opportunities and an independent international division is
created which handles all of a company’s international operations. The head of
international division, who directly reports to the chief executive officer,
coordinates and monitors all foreign activities.

The in-charge of subsidiaries reports to the head of the international division.

Some parallel but less formal reporting also takes place directly to various
functional heads at the corporate headquarters.

The corporate human resource department coordinates and implements staffing,

expatriate management, and training and development at the corporate level for
international assignments. Further, it also interacts with the HR divisions of
individual subsidiaries.

The international structure ensures the attention of the top management towards
developing a holistic and unified approach to international operations. Such a
structure facilitates cross-product and cross-geographic co-ordination, and
reduces resource duplication.

Although an international structure provides much greater autonomy in

decision-making, it is often used during the early stages of internationalization
with relatively low ratio of foreign to domestic sales, and limited foreign
product and geographic diversity.

International Organizational Structures: Type # 3.

Global Organizational Structures:

Rise in a company’s overseas operations necessitates integration of its activities
across the world and building up a worldwide organizational structure.

While conceptualizing organizational structure, the internationalizing firm

often has to resolve the following conflicting issues:
i. Extent or type of control exerted by the parent company headquarters over
subsidiaries

ii. Extent of autonomy in making key decisions to be provided by the parent

company headquarters to subsidiaries (centralization vs. decentralization)

It leads to re-organization and amalgamation of hitherto fragmented

organizational interests into a globally integrated organizational structure which
may either be based on functional, geographic, or product divisions. Depending
upon the firm strategy and demands of the external business environment, it
may further be graduated to a global matrix or trans-national network structure.

Global functional division structure:

It aims to focus the attention of key functions of a firm, as shown in Fig. 17.4,
wherein each functional department or division is responsible for its activities
around the world. For instance, the operations department controls and monitors
all production and operational activities; similarly, marketing, finance, and
human resource divisions co-ordinate and control their respective activities
across the world.
Such an organizational structure takes advantage of the expertise of each
functional division and facilitates centralized control. MNEs with narrow and
integrated product lines, such as Caterpillar, usually adopt the functional
organizational structure.

Such organizational structures were also adopted by automobile MNEs but have
now been replaced by geographic and product structures during recent years due
to their global expansion.

The major advantages of global functional division structure include:

i. Greater emphasis on functional expertise

ii. Relatively lean managerial staff

iii. High level of centralized control

iv. Higher international orientation of all functional managers

The disadvantages of such divisional structure include:

i. Difficulty in cross-functional coordination

ii. Challenge in managing multiple product lines due to separation of operations
and marketing in different departments

iii. Since only the chief executive officer is responsible for profits, such a
structure is favoured only when centralized coordination and control of various
activities is required.

Global product structure:

Under global product structure, the corporate product division, as depicted in
Fig. 17.5, is given worldwide responsibility for the product growth.

The heads of product divisions do receive internal functional support associated

with the product from all other divisions, such as operations, finance,
marketing, and human resources. They also enjoy considerable autonomy with
authority to take important decisions and operate as profit centres.

The global product structure is effective in managing diversified product lines.

Such a structure is extremely effective in carrying out product modifications so

as to meet rapidly changing customer needs in diverse markets. It enables close
coordination between the technological and marketing aspects of various
markets in view of the differences in product life cycles in these markets, for
instance, in case of consumer electronics, such as TV, music players, etc.

However, creating exclusive product divisions tends to replicate various

functional activities and multiplicity of staff. Besides, little attention is paid to
worldwide market demand and strategy. Lack of cooperation among various
product lines may also result into sales loss. Product managers often pursue
currently attractive markets neglecting those with better long-term potential.

Global geographic structure:

Under the global geographic structure, a firm’s global operations are organized
on the basis of geographic regions, as depicted in Fig. 17.6. It is generally used
by companies with mature businesses and narrow product lines. It allows the
independent heads of various geographical subsidiaries to focus on the local
market requirements, monitor environmental changes, and respond quickly and
effectively.

The corporate headquarter is responsible for transferring excess resources from

one country to another, as and when required. The corporate human resource
division also coordinates and provides synergy to achieve company’s overall
strategic goals between various subsidiaries based in different countries.

Such structure is effective when the product lines are not too diverse and
resources can be shared. Under such organizational structure, subsidiaries in
each country are deeply embedded with nationalistic biases that prohibit them
from cooperating among each other.

Global matrix structure:

It is an integrated organizational structure, which super-imposes on each other
more than one dimension. The global matrix structure might consist of product
divisions intersecting with various geographical areas or functional divisions.
Unlike functional, geographical, or product division structures, the matrix
structure shares joint control over firm’s various functional activities.
Such an integrated organizational structure facilitates greater interaction and
flow of information throughout the organization. Since the matrix structure has
an in-built concept of interaction between intersecting perspectives, it tends to
balance the MNE’s prospective, taking cross-functional aspects into
consideration.

It facilitates ease of technology transfer to foreign operations and of new

products to different markets leading to higher economies of scale and better
foreign sales performance. Matrix structure is used successfully by a large
number of MNEs, such as Royal Dutch/Shell, Dow Chemical, etc.

In an effort to bring together divergent perspectives within the organization, the

matrix structure may also lead to conflicting situations. It inhibits a firm’s
ability to respond quickly to environmental changes in case an effective conflict
resolution mechanism is not in place.

Since the structure requires most managers to report to two or multiple bosses,
Fayol’s basic principle of unity of command is violated and conflicting
directives from multiple authorities may compel employees to compromise with
sub-optimal alternatives so as to avoid conflict which may not be the most
appropriate strategy for an organization as a whole.

Transnational network structure:

Such a globally integrated structure represents the ultimate form of an earth-
spanning organization, which eliminates the meaning of two or three matrix
dimensions. It encompasses elements of function, product, and geographic
designs while relying upon a network arrangement to link worldwide
subsidiaries (Fig. 17.8).
This form of organization is not defined by its formal structure but by how its
processes are linked with each other, which may be characterized by an overall
integrated system of various inter-related sub-systems.

The trans-national network structure is designed around ‘nodes’, which are the
units responsible for coordinating with product, functional and geographic
aspects of an MNE. Thus, trans-national network structures build-up multi-
dimensional organizations which are fully networked.

The conceptual framework of a trans-national network structure primarily

consists of three components:
Disperse sub-units:
These are subsidiaries located anywhere in the world where they can benefit the
organization either to take advantage of low-factor costs or provide information
on new technologies or market trends
Specialized operations:

These are the activities carried out by sub-units focusing upon particular
product lines, research areas, and marketing areas design to tap specialized
expertise or other resources in the company’s worldwide subsidiaries.

Inter-dependent relationships:
It is used to share information and resources throughout the dispersed and
specialized subsidiaries.

Organizational structure of N.V. Philips which operates in more than 50

countries with diverse range of product lines provides a good illustration of a
trans-national network structure.

International Organizational Structures: Type # 4.

Evolution of Global Organizational Structures:
Organizational structures often exhibit evolutionary patterns, as shown in Fig.
17.9, depending upon their strategic globalization. The historical evolution of
organizational patterns indicates that in the early phase of internationalization,
most firms separate their exports departments from domestic marketing or have
separate international divisions.
Companies with emphasis on global business strategies move towards global
product structures whereas those with emphasis on location base strategies
move towards global geographic structures.

Subsequently, a large number of companies graduate to a matrix or trans-

national network structure due to dual demands of local adaptations pressures
and globalization. In practice, most companies hardly adopt either pure matrix
or trans-national structures; rather they opt for hybrid structures incorporating
both.

Functional International Organizational Structure

When a company commences international operations, it might start by

exporting to those markets from a home base.

Assuming the company organizes itself in a traditional functional sense, then

these exports may be covered by the sales department, possibly with an
additional department to the domestic market sales:

International Exports Structure

The exports department might be headed up by a VP of International Sales or a
Manager of Exports.

As the foreign operations grow, you might see a change in organizational

structure, with a whole international division being created. A Head of the
International Division may have several country line managers reporting to
them, with each subsidiary country having its own operations, finance,
marketing and sales departments within in:

International Divisional Structure

The final stage of internationalization will be when the organization is operating
across the world, on several continents (America, Europe and Asia, for
example), and moves to a global divisional structure, also by function.

Here, the company may best be described as a Multinational Corporation

(MNC), with the independence of decision-making driven down to the country-
specific level, albeit across the top of an overall organizational mission for the
entire company.

Advantages of Global Functional Organization

 Specialization of functional expertise at country level

 Centralized control at global headquarters

 International focus at top management level

 Plenty of opportunity for progression within company

 Strong breeding ground for future CEOs, from among country Heads
Disadvantages of Global Functional Organization

 Difficulties in managing cross-country coordination of mission

 Complexities of various product lines

 Cultural differences between countries

 Separates domestic and international managers

 Other International Organization Structures

Global Product Organizational Structure

There are many other ways of organizing international organizations: one is the
global product structure. In this organization, the main functions (marketing,
finance, HR…) remain at the global headquarters, with the company separated
into various product departments, spread around the world:

Global Product Structure

Advantages of Global Product Organization

 Specialization of in-country product knowledge

 Effective in carrying out product modifications for different markets

 Close coordination between technology and marketing

 International and domestic management operate at the same level

Disadvantages of Global Product Organization

 Replication of functional tasks for each territory

 Less attention paid to worldwide strategy

 Sales in mature markets have most focus, with less invested in R&D

 Can be a costlier structure to manage, compared to functional.

Other options for global organizations include a geographical structure, or some

combination of more than one dimension such as a matrix structure.

Alphabet, the company formerly known as Google, arranges itself with one
large department working on the core product, Google, with others doing ‘other
bets’ such as Google X, AI or cloud operations. It also blends in a functional
aspect, creating cross-functional teams that allow the company to ‘feel flat’.

At Google, there is more of an emphasis on intelligence than seniority, with

staff working in teams responsible for various products. From the outside
looking in, this looks very much like a matrix structure.

2.2 International Competitive Advantage

Competition has always been central to the agenda of firms. It has become one
of the enduring themes of our times and the rising intensity of competition has
continued until this day thereby spreading to more and more countries. As a
result of globalization, most industries with the topics of international business
and competitive advantage have received much attention from business
executives, public policy makers and scholars in recent years. This; in
conjunction with the rise of global competitors has helped to explain why a
country’s competitive advantage can be determined by the strength of its
business firms. This has resulted in numerous rankings, where industries and
firms are compared on a global scale to see which are the most competitive.
Most firms prefer to compete in the business environment so that it will help
determine the competitive advantage of the country in which they operate. A
firm’s ability to deliver the same benefits as competitors but at a lower cost or
deliver benefits that exceed those of competing products, then such a firm is
said to possess a competitive advantage over its rivals. Today’s development in
communication, information technology and transportation technology have
enabled firms to market their products and services beyond national borders.
This level of involvement has contributed to the concept of firms marketing
their products in international markets.

The Determinants of National Competitive Advantage

Global competitiveness occur at the cross roads between international

economics and strategic management. Michael Porter, in his book ‘’The
Competitive Advantage of Nations’ has introduced a model that helped to
determine a nation’s international competitive advantage. This model of
determining factors of national competitive advantage is known as Porters
Diamond. Porter distinguishes four determinants; Demand Conditions, Factor
Endowments, Related and Supporting Industries and Firm Strategy, Structure
and Rivalry.
Demand conditions describe the size and affluence of the domestic market.
These are important because they play a role home demand plays in upgrading
competitive advantage and serves as the primary source of competition for firms
in a given industry. A similar example can be found in the wireless telephone
equipment industry, where sophisticated and demanding local customers in
Scandinavia helped push Nokia of Finland and Ericsson of Sweden to invest in
cellular phone technology long before demand for cellular phones took off in
other developed nations.

Factor endowments include any factors of production that a firm uses in its
business to maintain economic competitiveness. Thus, the natural resources
which include land, labour, capital and also naturally occurring raw materials.
Other factors of production can include manmade structures that facilitate
commerce, including communication infrastructure, supplicated and skilled
labour, research facilities and technological know-how. An obvious example of
this phenomenon is Japan, a country that lacks arable land and mineral deposits
and yet through investment has built a substantial endowment of advanced
factors.

Related and supporting industries are the third attribute of national competitive
advantage. These are beneficial to MNEs because it provides them with low-
cost inputs and supply them with information regarding industry environmental
changes thereby helping them achieve a strong competitive position
internationally. For example, Swedish strengths in fabricated steel products
have drawn on strengths in Sweden’s specialty steel industry. Similarly,
Switzerland’s success in pharmaceuticals is closely related to its previous
international success in the technologically related dye industry.

Firm strategy, structure and rivalry are also important in ensuring national
competitiveness. Strategy refers to several key strategic factors that characterize
a firm thus, actions firms utilize to achieve both long-range and short-range
goals. This is important because it helps the firm to utilize the best actions with
which to compete and the market it wants to compete in. Structure refers to the
industry composition, thus, the degree to which an industry is concentrated or
dispersed, competitive or monopolistic, global or domestic. Rivalry indicates
both the number of players and the level of competition among firms in an
industry. Greater rivalry in an industry would lead a firm to higher levels of
competitiveness visa vis its rivals. Rivalry is thought to be the most
comprehensive of the three factors, as it often indicates the underlying strategy
and structure of the competitors. This is more evident in Japan, where Japanese
auto-makers have become competitive in the world market and has taken over
major US and European auto producers.

Some of the Challenges faced by MNE’s

A multinational enterprise (MNE) is an enterprise that manages production or

delivers services in more than one country. There are some challenges faced by
MNEs that transact business in international markets which can hinder its
competitiveness hence its controversies and these are as follows;

 Market imperfections: It may seem strange that a corporation has

decided to do business in a different country, where it doesn’t know the
laws, local customs or business practices of such a country is likely to
face some challenges that can reduce the manager’s ability to forecast
business conditions. The additional costs caused by the entrance in
foreign markets are of less interest for the local enterprise. Firms can also
in their own market be isolated from competition by transportation costs
and other tariff and non-tariff barriers which can force them to
competition and will reduce their profits. The firms can maximize their
 joint income by merger or acquisition which will lower the competition in
the shared market. This could also be the case if there are few substitutes
or limited licenses in a foreign market.
 Tax competition: Countries and sometimes subnational regions compete
against one another for the establishment of MNC facilities, subsequent
tax revenue, employment, and economic activity. To compete, countries
and regional political districts must offer incentives to MNCs such as tax
breaks, pledges of governmental assistance or improved infrastructure.
When these incentives fail they are liable to face challenges which limit
their chance of becoming more attractive to foreign investment. However,
some scholars have argued that multinationals are engaged in a ‘race to
the top.’ While multinationals certainly regard a low tax burden or low
labor costs as an element of comparative advantage, there is no evidence
to suggest that MNCs deliberately avail themselves of tax environmental
regulation or poor labour standards.
 Political instability: Many multinational Enterprises face the challenge
of political instability when doing business in international markets. This
kind of problem mostly occurs when there is an absence of a reliable
government authority. When this happens, it adds to business costs,
increase risks of doing business and sometimes reduces manager’s ability
to forecast business trends. Political instability is also associated with
corruption and weak legal frameworks that discourage foreign
investments.
 Market withdrawal: The size of multinationals can have a significant
impact on government policy, primarily through the threat of market
withdrawal. For example, in an effort to reduce health care costs, some
countries have tried to force pharmaceutical companies to license their
patented drugs to local competitors for a very low fee, thereby artificially
lowering the price. When faced with that threat, multinational
 pharmaceutical firms have simply withdrawn from the market, which
often leads to limited availability of advanced drugs. Countries that have
been the most successful in this type of confrontation with multinational
corporations are large countries such as United States and Brazil, which
have viable indigenous market competitors.
 Lobbying: Multinational corporate lobbying is directed at a range of
business concerns, from tariff structures to environmental regulations.
Companies that have invested heavily in pollution control mechanisms
may lobby for very tough environmental standards in an effort to force
non-compliant competitors into a weaker position. Corporations lobby
tariffs to restrict competition of foreign industries. For every tariff
category that one multinational wants to have reduced, there is another
multinational that wants the tariff raised. Even within the U.S. auto
industry, the fraction of a company’s imported components will vary, so
some firms favor tighter import restrictions, while others favor looser
ones. This is very serious and is very hard and takes a lot of work for the
owner.

2.3 International Strategic Alliances

Strategic alliances are one of the less discussed means for companies to
generate growth.

Businesses can become so entrenched in the quest of enhancing their own day-
to-day operations, that they can overlook a pathway to growth that can be low
risk and high return.

A strategic alliance is a legal agreement between two or more companies,

which commit resources to achieve a common set of goals.
These goals are typically access to new markets, shared intellectual property,
infrastructure, technology, or people, or simply combining complementary
products or service lines. Ultimately, a strategic alliance should be a mutually
beneficial partnership that generates value for all sides.

Understanding Strategic Alliances

A strategic alliance is a legal commitment made by two or more companies to

work together to achieve one or more common objectives. There are generally
considered to be three forms of strategic alliance. In order of the level of
commitment of resources, these are:

 Non-equity strategic alliance

‍Where two or more companies commit resources for a new venture (people,
technology, IP, or money) but not equity commitments.

 Equity strategic alliance

‍Essentially the same as a non-equity strategic alliance, but where at least one of
the companies involved in the alliance will acquire equity in the other company
(or companies) involved in the process.
  Joint Venture

‍A joint venture involves the creation of a new entity - a NewCo - using the
resources of those involved in the strategic alliance.

A fourth form of strategic alliance which might be added is a handshake

agreement. This is less formal than any of the above but a handshake is still
considered a legal commitment, even if the terms are more difficult to define if
not written on paper.

Reasons for Creating Strategic Alliances

The reasons for creating strategic alliances depend on whether they’re with
companies in the same countries or foreign entities. We look at the motives for
each in turn below:

Motives for domestic strategic alliances:

 Market share: Two companies joining resources to create synergies that

ultimately lead to higher market share.

 Pooling resources: This could be for any strategic objective, but usually
involves capital resources (R&D is a common area for strategic
alliances).

 Economies of scale: Similar to pooling resources, this enables both

companies to achieve a scale impossible without the alliance - usually in
the form of a JV.

 Gain access to complementary resources: In this case, the idea is to

pool resources (human, upstream and downstream, capital, etc.) to
achieve a common objective.

Motives for international strategic alliances:

 Gain access to new markets: Both companies in the strategic alliance

can benefit from the distribution capabilities of others in new markets.

 Avoiding import barriers: Producing products within a country

(through a strategic alliance) can avoid import barriers, tariffs, and other
import levies.
  International synergies: Firms operating in different countries can often
find synergies with companies that wouldn’t exist with companies in their
home markets.

 Develop core competencies: By working on strategically important areas

(e.g. R&D or new product development) with companies in foreign
countries, companies can avoid giving away trade secrets to others in
their home market.

Strategic Alliance vs. M&A

A strategic alliance is often seen as a first step to a merger or an acquisition, but

they are quite different.

In summary, however, a strategic alliance is a lower commitment means to

working with a company, perhaps getting a feel for its culture and way of
working, in an effort to generate value for both sides. This is particularly true
with cross border strategic alliances, where the information gained through
lower risk strategic alliances can be invaluable.

By contrast, mergers and acquisitions are ‘all in’ approaches, where a company
makes an investment decision that can often make or break them in the
medium-term.

When we think of all the large M&A transactions that went terribly wrong, it is
worth considering how much value would have been saved in each case had the
participants first tried a strategic alliance of some form (more due diligence
would also have helped, of course).
When Should Alliances be Preferred to M&A

Each alliance or M&A transaction is subject to its own idiosyncrasies, but in

general terms, there are certain circumstances under which strategic alliances
should be preferred to M&A. These include the following:

Speed of transaction

‍When a company needs to move fast, a strategic alliance may be preferable to

M&A. Imagine the case of a ‘land grab’ in a new opportunity. In this case, the
speed of tying up strategic alliances can be more beneficial than looking to
acquire a business (which can take a year or more).

Lower commitment

‍When a company wants to ‘hedge its bets’ a little in a new market, unsure of
whether to make a mid-term commitment to it with an acquisition, a strategic
alliance is an ideal solution. Working with a local player gives it knowledge into
the market, without the capital outlay required by an M&A transaction.

Inability to raise capital

‍Many companies would be content to make more M&A transactions if their

financial position would allow it. While an acquisition could cost millions (or
billions) of dollars, a strategic alliance tends to cost a fraction of it, often
bringing several of the benefits of the latter.

Example of a Strategic Alliance

The example of well-known fashion brands outsourcing the production of their
watches to famous watchmakers is a good example of a strategic alliance. While
the fashion houses gain access to technology that their fashion designers have
no knowledge of, the watchmakers are, in turn able to bring on a new revenue
stream, as well as gain extra notoriety for their in-house watch brands: a rare
win-win situation.

An example of one such strategic alliance can be seen with Calvin Klein’s 2019
deal with Movado Group, which began distributing CK-branded watches in
January 2022. Previously, Calvin Klein watches had been produced by Swiss
watch maker, Swatch. This also enabled Calvin Klein to distribute its own
watches through selected Swatch retail outlets, of which there are over 3,000
spreads across the globe.

Is your alliance actually strategic?

According to an analysis by Kearney, to maximize returns, it's highly important

to recognize the key characteristics of a strategic alliance compared to other
partnership types.

The following graphic shows characteristics of strategic partnership and the key
differences between other types of agreements.
Pros and Cons of Strategic Alliances

Pros:

 Gain access to extra resources at low cost

 Less risk than other growth methods (e.g. acquisitions)

 Proven method for companies to gain understanding of new markets

 Good way for companies to gain a better understanding of potential

acquisition targets

 Can be limited to a certain timeframe to limit risk exposure

Cons:

 Many of the same risks that exist in M&A exist in strategic alliances in
the short-term

 There is arguably increased risk of bad faith acting in strategic alliances

 The benefits of the strategic alliance may be unequally distributed

  Even a short-term strategic alliance exposes a company to reputational
risk

 Managers often feel that due diligence isn’t necessary (hint: It is)

Strategies in Building an Alliance

When building deals, make sure that you're structuring them in a best way for
the particular asset you're trying to achieve. Post-deal, it's all about managing
risks that could emerge in executing your deal structure. There's usually three
significant areas where risks come from; Human, infrastructure, and legal risk.
Human risk is the biggest threat that you need to manage.

When it comes to managing human risks, communication is key. It's all about
being transparent and breaking down barriers to be able to work together
effectively. The pandemic might have affected this in a way because face-to-
face is still better than virtual calls, but communication regardless is crucial.

One of the best things you can do is to create a team where everyone is
comfortable interacting with their counterparts in the partner company so they
can constantly work together to anticipate risks before they even arise.

"You're most successful when nobody really notices what you're doing. If things
are going wrong, then it becomes very visible to senior management very
quickly."

That is the single most effective way to do that. Really, we do try and look
where the risks are likely to be and anticipate those as far as possible.
To help you get the strategy right, we interviewed Emma Barton on How
AstraZeneca Approaches Alliances. Check out the rest of the interview on
M&A Science, our parent site.

Risk in Strategic Alliances

The biggest risk inherent in strategic alliances is for executives to feel that there
is no risk in closing a strategic alliance.

Other risks in strategic alliances include:

Management

‍If a new entity is formed, it needs to be established quite quickly who is

responsible for the entity, who profits from it, and who is liable for its
downside. This requires much of the same organization as an M&A transaction.

Cultural differences

‍It’s easy to believe that an 18-month strategic alliance is low risk. Cultural
differences won’t wait 18 months - they’ll happen overnight, and will start to
destroy value straight away.

This is another place where an M&A management platform can iron out
wrinkles far faster than waiting for a strategic alliance to expire.

Clear goals

‍‘More growth’,’market expansion’, and ‘shared knowledge’ are admirable

goals, but they’re not enough in themselves. Teams of both companies need to
come together to collaborate on a plan through confidentially sharing
information, pointing out the opportunities to each other, and executing. It
cannot be done on the back of an envelope.

Success Factors in Strategic Alliances

There are essentially three keys to strategic alliances:

Definition

‍Understanding what the goal is, making it measurable, and understanding what
the terms of the strategic alliance should be to achieve that goal.

Due diligence

‍A lack of commitment does not mean lack of due diligence. Both sides should
be fully aware of what they’re getting into. Anyone believing otherwise should
look at the Swatch and Tiffany & Co. failed strategic alliance.

Communication

‍Strategic alliances are different to M&A in that the firms involved don’t have to
be completely culturally aligned. But they do have to be aligned on the terms of
the alliance, making communication extremely important.

Organization

‍Who does what, how, and when is important for every organization. The danger
with a strategic alliance is that responsibilities are left to the counterparty. This
is why organization cannot be put on a long finger.
Strategic Alliance Phases

The phases in a strategic alliance tend to follow the pattern:

1. Defining the business vision and how a strategic alliance should fit that
vision.

2. Evaluate potential partners for the strategic alliance.

3. Develop a plan of action with one or more potential partners for the
alliance.

4. Conduct due diligence of the partners specifically for the strategic

alliance.

5. Formally (legally) define the terms of the strategic alliance.

6. Continued communication and collaboration with the strategic alliance

partner.
Strategic alliances can be successful when operated with an arm’s length
approach. The best way to ensure their success is through due diligence
followed by constant collaboration, communication, sharing of insights, and
operational oversight.

2.4 Global Mergers and Acquisition

The term mergers and acquisitions (M&A) refers to the consolidation of

companies or their major business assets through financial transactions
between companies. A company may purchase and absorb another company
outright, merge with it to create a new company, acquire some or all of its
major assets, make a tender offer for its stock, or stage a hostile takeover. All
are M&A activities.
The term M&A also is used to describe the divisions of financial
institutions that deal in such activity.

 The terms "mergers" and "acquisitions" are often used interchangeably,

but they differ in meaning.
 In an acquisition, one company purchases another outright.
 A merger is the combination of two firms, which subsequently form a
new legal entity under the banner of one corporate name.
 A company can be objectively valued by studying comparable
companies in an industry and using metrics.

Understanding Mergers and Acquisitions

The terms mergers and acquisitions are often used interchangeably,

however, they have slightly different meanings.

When one company takes over another and establishes itself as the new owner,
the purchase is called an acquisition.1

On the other hand, a merger describes two firms, of approximately the same
size, that join forces to move forward as a single new entity, rather than remain
separately owned and operated.1 This action is known as a merger of equals.
Case in point: Both Daimler-Benz and Chrysler ceased to exist when the two
firms merged, and a new company, DaimlerChrysler, was created. Both
companies' stocks were surrendered, and new company stock was issued in its
place.2 In a brand refresh, the company underwent another name and ticker
change as the Mercedes-Benz Group AG (MBG) in February 2022.3

A purchase deal will also be called a merger when both CEOs agree that
joining together is in the best interest of both of their companies.
Unfriendly or hostile takeover deals, in which target companies do not wish to
be purchased, are always regarded as acquisitions. A deal can be classified as a
merger or an acquisition based on whether the acquisition is friendly or hostile
and how it is announced. In other words, the difference lies in how the deal is
communicated to the target company's board of directors, employees,
and shareholders.

M&A deals generate sizable profits for the investment banking industry, but
not all mergers or acquisition deals close.4

Types of Mergers and Acquisitions

The following are some common transactions that fall under the M&A
umbrella.

Mergers
In a merger, the boards of directors for two companies approve the
combination and seek shareholders' approval. For example, in 1998, a merger
deal occurred between the Digital Equipment Corporation and Compaq,
whereby Compaq absorbed the Digital Equipment Corporation.5 Compaq later
merged with Hewlett-Packard in 2002. Compaq's pre-merger ticker symbol was
CPQ. This was combined with Hewlett-Packard's ticker symbol (HWP) to
create the current ticker symbol (HPQ).6

Acquisitions
In a simple acquisition, the acquiring company obtains the majority stake in the
acquired firm, which does not change its name or alter its organizational
structure. An example of this type of transaction is Manulife Financial
Corporation's 2004 acquisition of John Hancock Financial Services, wherein
both companies preserved their names and organizational structures.7
Consolidations
Consolidation creates a new company by combining core businesses and
abandoning the old corporate structures. Stockholders of both companies must
approve the consolidation, and subsequent to the approval, receive
common equity shares in the new firm. For example, in 1998, Citicorp and
Travelers Insurance Group announced a consolidation, which resulted in
Citigroup.8

Tender Offers
In a tender offer, one company offers to purchase the outstanding stock of the
other firm at a specific price rather than the market price. The acquiring
company communicates the offer directly to the other company's shareholders,
bypassing the management and board of directors.9 For example, in 2008,
Johnson & Johnson made a tender offer to acquire Omrix Biopharmaceuticals
for $438 million.10 The company agreed to the tender offer and the deal was
settled by the end of December 2008.11

Acquisition of Assets
In an acquisition of assets, one company directly acquires the assets of another
company. The company whose assets are being acquired must obtain approval
from its shareholders. The purchase of assets is typical
during bankruptcy proceedings, wherein other companies bid for various assets
of the bankrupt company, which is liquidated upon the final transfer of assets to
the acquiring firms.

Management Acquisitions
In a management acquisition, also known as a management-led buyout (MBO),
a company's executives purchase a controlling stake in another company,
taking it private. These former executives often partner with a financier or
former corporate officers in an effort to help fund a transaction. Such M&A
transactions are typically financed disproportionately with debt, and the
majority of shareholders must approve it. For example, in 2013, Dell
Corporation announced that it was acquired by its founder, Michael Dell.12

How Mergers Are Structured

Mergers can be structured in a number of different ways, based on the

relationship between the two companies involved in the deal:

 Horizontal merger: Two companies that are in direct competition and

share the same product lines and markets.
 Vertical merger: A customer and company or a supplier and company.
Think of an ice cream maker merging with a cone supplier.
 Congeneric mergers: Two businesses that serve the same consumer
base in different ways, such as a TV manufacturer and a cable company.
 Market-extension merger: Two companies that sell the same products
in different markets.
 Product-extension merger: Two companies selling different but related
products in the same market.
 Conglomeration: Two companies that have no common business areas.

Mergers may also be distinguished by following two financing methods, each

with its own ramifications for investors.

Purchase Mergers
As the name suggests, this kind of merger occurs when one company purchases
another company. The purchase is made with cash or through the issue of some
kind of debt instrument. The sale is taxable, which attracts the acquiring
companies, who enjoy the tax benefits. Acquired assets can be written up to the
actual purchase price, and the difference between the book value and the
purchase price of the assets can depreciate annually, reducing taxes payable by
the acquiring company.

Consolidation Mergers
With this merger, a brand new company is formed, and both companies are
bought and combined under the new entity. The tax terms are the same as those
of a purchase merger.

How Acquisitions Are Financed

A company can buy another company with cash, stock, assumption of debt, or
a combination of some or all of the three. In smaller deals, it is also common
for one company to acquire all of another company's assets. Company X buys
all of Company Y's assets for cash, which means that Company Y will have
only cash (and debt, if any). Of course, Company Y becomes merely a shell
and will eventually liquidate or enter other areas of business.

Another acquisition deal known as a reverse merger enables a private company

to become publicly listed in a relatively short time period. Reverse mergers
occur when a private company that has strong prospects and is eager to acquire
financing buys a publicly listed shell company with no legitimate business
operations and limited assets. The private company reverses merges into
the public company, and together they become an entirely new public
corporation with tradable shares.

How Mergers and Acquisitions Are Valued

Both companies involved on either side of an M&A deal will value the target
company differently. The seller will obviously value the company at the
highest price possible, while the buyer will attempt to buy it for the lowest
price possible. Fortunately, a company can be objectively valued by studying
comparable companies in an industry, and by relying on the following metrics.

Price-to-Earnings Ratio (P/E Ratio)

With the use of a price-to-earnings ratio (P/E ratio), an acquiring company
makes an offer that is a multiple of the earnings of the target company.
Examining the P/E for all the stocks within the same industry group will give
the acquiring company good guidance for what the target's P/E multiple should
be.

Enterprise-Value-to-Sales Ratio (EV/Sales)

With an enterprise-value-to-sales ratio (EV/sales), the acquiring company
makes an offer as a multiple of the revenues while being aware of the price-to-
sales (P/S ratio) of other companies in the industry.

Discounted Cash Flow (DCF)

A key valuation tool in M&A, a discounted cash flow (DFC) analysis
determines a company's current value, according to its estimated future cash
flows. Forecasted free cash flows (net income + depreciation/amortization
(capital expenditures) change in working capital) are discounted to a present
value using the company's weighted average cost of capital (WACC).
Admittedly, DCF is tricky to get right, but few tools can rival this valuation
method.

Replacement Cost
In a few cases, acquisitions are based on the cost of replacing the target
company. For simplicity's sake, suppose the value of a company is simply the
sum of all its equipment and staffing costs. The acquiring company can literally
order the target to sell at that price, or it will create a competitor for the same
cost.
Naturally, it takes a long time to assemble good management, acquire property,
and purchase the right equipment. This method of establishing a price certainly
wouldn't make much sense in a service industry wherein the key assets (people
and ideas) are hard to value and develop.

Biggest Mergers and Acquisitions Examples List

Reading this list, it can seem that most megadeals are doomed to failure (at least
from the perspective of their shareholders). But thankfully, that just isn’t the
case. Some of the biggest deals of the past 20 years have been outstanding
successes.

Many of these deals have achieved what they set out to do at the outset -
to reshape industries on the strength of a single deal.

With that in mind, let's take a closer look at 11 companies that recorded the
largest mergers and acquisitions in history.

1. Vodafone and Mannesmann (1999) - $202.8B

As of November 2022, the largest acquisitions ever made was the takeover of
Mannesmann by Vodafone occurred in 2000, and was worth ~$203 billion.
Vodafone, a mobile operator based in the United Kingdom, acquired
Mannesmann, a German-owned industrial conglomerate company.

This deal, that resembles a perfect example of an acquisition, made Vodafone

the world’s largest mobile operator and set the scene for dozens of mega deals
in the mobile telecommunications space in the years that followed. This deal
goes down as the biggest acquisition in history.
2. AOL and Time Warner (2000) - $182B

When we mentioned at the outset of this article that ‘big doesn’t always mean
better’, the famous merger of AOL and Time Warner in 2000 is a case in point.
In little over two decades, the deal has become cemented as the textbook
example of how not to conduct mergers and acquisitions.

It featured everything from overpaying to strong cultural differences and even,

with the benefit of hindsight, two large media companies who just weren’t sure
where the media landscape was headed. The merger's valuation came crashing
down after the dot-com bubble burst just two month after the deal was signed.

The deal, which is to be known as the largest merger in history, fell apart in
2009, 9 years later after it was originally signed.

3. Gaz de France and Suez (2007) - $182B

France loves its national champions - the large French companies that compete
on a world stage, waving the tricolor. It was no surprise then, when Nicholas
Sarkozy, President of France in 2007, stepped in to save this merger.

That’s right - a President playing the role of part-time investment banker. These
days, Suez is one of the oil and gas ‘majors’, although the fact that the
company’s share price hovers very close to where it was a decade and a half ago
tells us everything of what investors thought of the deal.

The deal, one of the biggest mergers ever in energy, created the world’s fourth
largest energy company and Europe’s second largest electricity and gas group.
The merged companies created a diversified, flexible energy supply stream with
high-performance electricity production base.

4. Verizon and Vodafone (2013) - $130B

Vodafone has been involved in so many transactions over the past 20 years that
they should be getting quite efficient at the process at this stage.
The $130B deal in 2013 allowed Verizon to pay for its US wireless division.

At the time, the deal was the third largest in history - two of which Vodafone
had partaken in. From Verizon’s perspective, it gave the company full control
over its wireless division, ending an often fraught relationship with Vodafone
that lasted for over a decade, and also allowed it build new mobile networks and
contend with an increasingly competitive landscape at the time.

From Vodafone's point of view, the acquisition cut the company value roughly
in half, to $100 billion. The business acquisition also moved Vodafone from the
second largest phone company in the world down to fourth, behind China
Mobile, AT&T, and Verizon.

5. Dow Chemical and DuPont merger (2015) - $130B

When Dow Chemical and DuPont announced they were merging in 2015,
everyone sat up and took notice; the merger of equals would create the largest
chemicals company by sales in the world, as well as eliminate the competition
between them, making it a picture-perfect example of horizontal merger.

Shortly after the deal was completed, in 2018, the company was already
generating revenue of $86B a year - but it didn’t last long: In 2019,
management announced that the merged company would spin off into three
separate companies, each with a separate focus.
6. United Technologies and Raytheon (2019) - $121B

Another classic merger example, so-called “merger of equals.”

The long-term impact of the United Technologies and Raytheon deal has yet to
be felt, given that the deal closed in the first half of 2020 (not the best of years
to close a transaction in).

Raytheon Technologies, as the merged company is called, claims that the

merger "defines the future of aerospace and defense and creates world’s most
advanced aerospace and defense systems provider".

Now that the deal went through, Raytheon can leverage United Technologies'
expertise in high temperature materials for jet engines; and in directed energy
weapons, United Technologies has relevant power generation and management
technology.

The companies expect to reap $1 billion in annual cost synergies by the fourth
year after the merger is closed, mostly at the corporate level. So far, however,
investors seem less convinced with the company’s share price taking a dip of
around 25% straight after the deal closed.
7. AT&T and Time Warner (2018) - $108B

Not only did the proposed merger of AT&T and Time Warner draw criticism
from antitrust regulators when it was announced, it also brought back memories
of the previous time Time Warner had been involved in a megadeal.

With the best part of two decades to learn from its mistake, and AT&T a much
bigger cash generator than AOL, this deal looks like it has been better thought
through than the deal that preceded it.

8. AB InBev and SABMiller merger (2015) - $107B

If stock price is any indication of whether a deal was successful or not, then the
creation of AmBev through the merger of InBev and SABMiller in 2015
certainly wasn’t.
On paper, the deal looked good - two of the world’s biggest brewers bringing a
host of the world’s favorite beers into one stable.

There was just one problem - they didn’t foresee the rise of craft beers and how
it would disrupt the brewing industry. Several bolt-on acquisitions of craft
brewers later and the new company may finally be on track again.

9. Glaxo Wellcome and SmithKline Beecham merger (2000) - $107B

The merger of the UK’s two largest pharmaceutical firms in 2000 led to what is
currently the 6th largest pharmaceutical firm in the world, and the only British
firm in the top 10.

However, like several deals on this list, it wasn’t received particularly well by
investors and at the time of writing is trading at about 25% less than the time of
the merger.

This, and a range of bolt-on acquisitions in the consumer space over the past
decade, may explain why the company is planning to split into two separate
companies in the coming years.
10. Heinz and Kraft merger (2015) - $100B

The merger of Heinz and Kraft - to create the Kraft Heinz Company - is yet
another megadeal that has a detrimental effect on stock.

The deal has been called a “mega-mess,” with billions knocked off the stock
price since the deal closed. One of the reasons has been allegations made about
accounting practices at the two firms before the merger.

Another reason has been zero-based budgeting (ZBB), a strict cost cutting
regime that came at a time when old brands needed to be refreshed rather than
have their budgets cut back.

11. Bristol-Myers Squibb and Celgene merger (2019) - $95B

Despite the massive size of the transaction, this 2019 megadeal wasn’t a
“merger of equals.” Instead, Celgene became a subsidiary of Bristol-Myers
Squibb. The deal brings together two of the world’s largest cancer drug
manufacturers, so hopefully the deal amounts to something much greater than
the sum of the parts.

And that concludes our list of 11 biggest company mergers and acquisitions
ever made.

Which deals, however, resemble examples of a proper merger or an acquisition

transaction? And what is the difference?

Following are M&A deals that represent company merger transactions, as well
as acquisitions.
Merger Examples

A merger is a transaction of two companies, usually of similar size, in which the

shareholders of each of the two separate companies, jointly own the shares of
the company that arises after the merger.

This is distinct from an acquisition, where one company (the buyer) buys the
outstanding shares of a target company, and the target company’s shareholders
receive the proceeds from selling those shares.
Vertical Merger - eBay acquires PayPal (2002)

An example of a real vertical merger is the 2002 transaction between eBay and
PayPal.

In an attempt to help eBay further purchases made on their online marketplace,

they acquired PayPal to help their online users transfer money more easily.

PayPal provides the ability to transfer payments online from one user to
another, so when eBay and PayPal merged, the simple way to conduct a
transaction helped increase the profits and success of not just eBay, but also
PayPal.

Royal Dutch Petroleum and Shell (2004) - $95B

This merger was a slightly unorthodox one in that both companies had
previously been the same company before splitting (albeit, over a century
before), and each one held stock in a pre-existing company Royal Dutch Shell.

The point is that the merger made sense as it reduced several layers of
management and increased the company’s asset base. Furthermore, it came right
before oil hit its historic highs before the financial crash of 2008. The combined
company is today one of the few European oil and gas majors.

Pfizer and Warner Lambert (1999) - $90B

Pfizer had their eye on Warner-Lambert because of a highly demanded

cholesterol medication Lipitor. “Pfizer had commercial rights to Lipitor, but
Pfizer was splitting profits on it with Warner-Lambert, and in 1999, Warner-
Lambert sued Pfizer to end their licensing pact.”

The acquisition created the second-largest drug company, took three months,
and Pfizer obtained control of Lipitor’s profits, which amounted to over $13
billion.
Acquisition Examples

An acquisition is a transaction whereby companies, organizations, and/or their

assets are acquired for some consideration by another company. The motive for
one company to acquire another is nearly always growth.
Examples:

The acquisition to extend the product line - Coca-Cola and Monster acquisition
(2015)

The Coca-Cola fridge is instantly recognizable worldwide, but its contents have
continued to change over the decades in response to consumer tastes. In 2015,
recognizing a global thirst for energy drinks, the Coca-Cola company went
looking for a popular energy drink to bolster its portfolio.

It acquired a stake in energy drink business Monster - the world’s second largest
selling energy drink after Red bull - for $2.15bn, allowing customers to open
that fridge and take out a cola, a lemonade, an orange, water, juice or an energy
drink, which are all amongst Coca-Cola's product and brand portfolio.

Such is the power of an acquisition that extends a company’s product line.

The acquisition as part of a roll up strategy - Salesforce and Slack acquisition
(2021)

Salesforce is an example of a company that has made acquisitions a central part

of its growth strategy.

Its acquisition of Slack for $27.7 billion in July 2021 was made after the
company realized that the workplace had changed forever as a result of the
Covid-19 pandemic.

The Slack acquisition, however, is just one of many that have allowed the
company to become a leader in the workplace technology space.
The acquisition to acquire technology - Google acquires Android (2005)

Despite closing hundreds of small add-on technology acquisitions, Google (or

Alphabet, as it’s now officially called) made what is widely regarded as its best
acquisition nearly 20 years ago.

The acquisition of Android in 2005 for $50 million, enabling Google to enter
the cellular phone market for the first time.

To say that the acquisition was a success would bean understatement: in 2020,
the Android operating system was the operating system operating in over 70%
of the world’s mobile technology, with this figure reported to increase in the
following years.

Bonus: Newer & Successful Mergers and acquisitions

There are quite a few M&As on the larger side that happened in recent years.
While we do not know the long-term success yet of these M&As, they could
have solid potential and you might want to keep an eye on them. Here is an
interesting statistic, according to a report by a law firm White & Case:
The total value of mergers and acquisitions for 2022 rose to $2.6 trillion.

1. BMO Financial Group and Bank of the West (2021) - $105B

2. Walt Disney and 21st Century Fox (2017) - $84.2B

3. Microsoft and Activision Blizzard (2022) - $68.7B

4. S&P Global and IHS Markit (2020) - $44B

5. Nvidia and Arm Holding (2020) - $40B

6. Altimeter and Grab Holdings (2021) - $40B

7. AstraZeneca and Alexion Pharmaceuticals (2020) - $39B

8. Lionheart Acquisition Corp. and MSP Recovery (2021) - $32.6B

1. Facebook’s and Whatsapp acquisition (2014) - $22B

Take the example of Facebook’s acquisition of Whatsapp in 2014 for $22B.

Although the internet was awash with analysts using the word “overpaid”, time
- and the fact that the platform has 70 million users in the US alone - have
proven them wrong.

The app also provides potential for Facebook to bring more businesses onto its
advertising program, with thousands of businesses coming onto the platform
every day.

2. Charles Schwab and TD Ameritrade merger (2019)

Elsewhere, the merger of Charles Schwab and TD Ameritrade in 2019 looks

like it will be a long-term value generator. That’s already reflected in the stock
price, which is significantly higher than when the deal was announced.
The merger gives the combined company a massive online presence in the
online brokerage industry. And with trading fees falling precipitously, it’s not
hard to see how scale will become increasingly important.

3. Salesforce and Slack acquisition (2021) - $27.7B

Finally, although the deal has just closed, the acquisition of Slack by Salesforce
for a reported fee of $27.7B looks to be a winning combination.

The deal is the second biggest of all time for a software company (the largest
being IBM’s 2019 acquisition of RedHat) but already looks like it has the
potential to generate massive synergies for both companies.

Time will tell, but this one looks like it could be a winner.

However, the top mergers and acquisitions take into account best practices such
as robust communication, focus on the strategic goal/deal thesis, and early
integration planning throughout the deal lifecycle.

Much can be learned from companies that have successfully merged with or
acquired other companies.

The right technology and tools can also work to make deals more successful.
DealRoom’s M&A project management software and tools aims to help teams
manage their complex M&A transactions.

Whether teams need deal management software, due diligence process

assistance, help with their post merger (PMI) process, or just a simple VDR, our
platform provides the necessary technology and features to streamline M&A
processes.
Frequently Asked Questions

How Do Mergers Differ From Acquisitions?

In general, "acquisition" describes a transaction, wherein one firm absorbs

another firm via a takeover. The term "merger" is used when the purchasing
and target companies mutually combine to form a completely new entity.
Because each combination is a unique case with its own peculiarities and
reasons for undertaking the transaction, the use of these terms tends to overlap.

Why Do Companies Keep Acquiring Other Companies Through M&A?

Two of the key drivers of capitalism are competition and growth. When a
company faces competition, it must both cut costs and innovate at the same
time. One solution is to acquire competitors so that they are no longer a threat.
Companies also complete M&A to grow by acquiring new product lines,
intellectual property, human capital, and customer bases. Companies may also
look for synergies. By combining business activities, overall performance
efficiency tends to increase, and across-the-board costs tend to drop as each
company leverages the other company's strengths.

What Is a Hostile Takeover?

Friendly acquisitions are most common and occur when the target firm agrees
to be acquired; its board of directors and shareholders approve of the
acquisition, and these combinations often work for the mutual benefit of the
acquiring and target companies.

Unfriendly acquisitions, commonly known as hostile takeovers, occur when the

target company does not consent to the acquisition.
Hostile acquisitions don't have the same agreement from the target firm, and so
the acquiring firm must actively purchase large stakes of the target company to
gain a controlling interest, which forces the acquisition.

How Does M&A Activity Affect Shareholders?

Generally speaking, in the days leading up to a merger or acquisition,

shareholders of the acquiring firm will see a temporary drop in share value. At
the same time, shares in the target firm typically experience a rise in value.
This is often due to the fact that the acquiring firm will need to spend capital to
acquire the target firm at a premium to the pre-takeover share prices.

After a merger or acquisition officially takes effect, the stock price usually
exceeds the value of each underlying company during its pre-takeover stage. In
the absence of unfavorable economic conditions, shareholders of the merged
company usually experience favorable long-term performance and dividends.

Note that the shareholders of both companies may experience a dilution of

voting power due to the increased number of shares released during the merger
process. This phenomenon is prominent in stock-for-stock mergers, when the
new company offers its shares in exchange for shares in the target company, at
an agreed-upon conversion rate. Shareholders of the acquiring company
experience a marginal loss of voting power, while shareholders of a smaller
target company may see a significant erosion of their voting powers in the
relatively larger pool of stakeholders.

What Is the Difference Between a Vertical and Horizontal Merger or

Acquisition?

Horizontal integration and vertical integration are competitive strategies that

companies use to consolidate their position among competitors. Horizontal
integration is the acquisition of a related business. A company that opts for
horizontal integration will take over another company that operates at the same
level of the value chain in an industry—for instance when Marriott
International, Inc. acquired Starwood Hotels & Resorts Worldwide, Inc.13

Vertical integration refers to the process of acquiring business operations

within the same production vertical. A company that opts for vertical
integration takes complete control over one or more stages in the production or
distribution of a product. Apple, for example, acquired AuthenTec, which
makes the touch ID fingerprint sensor technology that goes into its iPhones.

2.5 Managing Innovations and Intellectual Property Rights

We now live in a world where the capacity to create, sell, and, most crucially,
appropriate (or capture) the economic advantages of scientific and technical
breakthroughs determine the economic health of nations and the
competitiveness of companies. Patents and copyrights are examples of
Intellectual Property Rights (IPRs) that companies employ to safeguard their
investments in the invention.

Intellectual property (IP) is often regarded as a company’s most valuable asset.

Patents, copyright, trademarks, and registered designs are all examples of
intellectual property rights that may be used to protect innovation. In reality,
several IP rights may apply to a single product or idea. You must acquire one or
more of the four basic forms of intellectual property to protect your concept
from being stolen by others.
Every innovation begins as a trade secret of the innovator. Inventors must first
obtain one or more of the other kinds of intellectual property protection, such as
patents, trademarks, and copyrights, before they may sell their innovations.

Intellectual Property Rights

Intellectual property rights are the rights granted to individuals over the creation
of their minds. For a set length of time, they generally grant the author exclusive
rights over his or her invention. Traditionally, intellectual property rights are
separated into two categories:

1) Copyright and its related rights

Copyright protects the rights of creators of literary and creative works (such as
books and other publications, musical compositions, paintings, sculptures,
computer programmes, and films) for at least 60 years after their death.

The rights of performers (e.g., actors, singers, and musicians), makers of

phonograms (sound recordings), and broadcasting companies are also protected
by copyright and associated (often referred to as “neighbouring”) rights. The
primary societal goal of copyright and associated rights protection is to promote
and reward innovative activity.

The Copyright Act, 1957 governs copyright law in India, and it has been
modified six times, the most recent being in 2012. It is a comprehensive
legislation that protects copyright, moral rights, and adjacent rights. The Act
establishes transferrable, comprehensive economic rights (copyright) in a
variety of works. Moral rights are perpetually vested in the authors and their
legal representatives and are non-transferable and enforceable by the authors
and their legal representatives even after the copyright in the work has been
transferred.
The Copyright Rules, 2013, came into effect on March 14, 2013, and set out the
procedures for relinquishing copyright, obligatory licences, statutory licences,
voluntary licences, registration of copyright societies, membership, and
management of copyright societies and performers’ organisations.

2) Industrial property

Industrial property can usefully be divided into two main areas:

 One area can be defined as the protection of distinguishing indicators,

such as trademarks (which differentiate one company’s goods or
services from those of another) and geographical indications (which
identify a good as originating in a place where a given characteristic of
the good is essentially attributable to its geographical origin).
The goal of trademark protection is to encourage and promote fair competition,
as well as to safeguard customers by allowing them to make educated decisions
about diverse goods and services. If the symbol in question remains unique, the
protection may exist eternally.

 Other forms of industrial property are protected largely to encourage

technological innovation, design, and development. Patented
innovations, industrial designs, and trade secrets all come within this
category.
The societal aim is to safeguard the outcomes of investments in new technology
development, therefore providing an incentive and means to fund research and
development operations.
Types of Intellectual Property Rights

Intellectual Property Rights (IPR) are exclusive rights granted by the Indian
government to safeguard the uniqueness of an inventor’s work. The tangible
product of the human mind is a simple intellectual property right. Patents,
trademarks, trade secrets, industrial design, layout design, and copyright-
oriented rights are all included in intellectual property rights. This intellectual
property right refers to people’s ownership of their creations. For a set length of
time, they generally grant the inventor exclusive rights to exploit his or her
inventions. Since the uniqueness of the work can have varieties in it, therefore,
the Intellectual Property Rights are divided into some types, to ease the
understanding of each type.

Four Basic types of IPR are as follows:

Trade secrets

Trade secrets are unique, confidential knowledge that is valuable to a company

because it offers it a competitive advantage in its market. If a firm acquires a
trade secret, it may cause harm to the original owner.

Others cannot duplicate or steal an idea if a person or company has trade secret
protection. Businesses must be actively conducted in a manner that indicates
their willingness to preserve information in order to establish it as a “trade
secret” and to get the legal protections associated with trade secrets. Trade
secrets are protected even if they are not officially registered; nevertheless, a
trade secret owner whose rights have been violated–for example, if someone
steals their trade secret–can petition a court to take action against that person
and prohibit them from utilising the trade secret.
Trade secrets are defined and protected in the United States under the Economic
Espionage Act of 1996 (outlined in Title 18, Part I, Chapter 90 of the United
States Code) and are also subject to state law. Each state may enact its own
trade secret laws as a result of a 1974 judgement.

In India, there is no particular legislation that protects trade secrets and sensitive
information. Indian courts and tribunals, on the other hand, safeguard trade
secrets, sensitive information, and corporate know-how. Under common law, a
misappropriation action can provide wide protection for trade secrets. Under the
grounds of justice and contractual obligation, Indian courts have supported trade
secret protection. The provision pertaining to restraint of commerce in Section
27 of the Indian Contract Act makes this clear. This clause, which is broad in
scope, deems all trade restraint agreements invalid.

The Paris Convention’s Article 10 (b) and the TRIPS Agreement’s Articles
39(2) and 39(3) established the worldwide standard for trade secret legislation
in 1995. However, no similar regulation exists in India, putting undeclared
proprietary assets in jeopardy.

Patents

A patent is an exclusive right given for an invention, which is a product or a

method that gives a new technological solution to a problem or a new way of
doing something. It gives the patent holder protection for his or her idea. The
protection is only provided for a set amount of time, namely 20 years. Without
the permission of the patent owner, the innovation cannot be commercially
manufactured, utilised, distributed, or sold. When a patent expires, the
protection ceases, and the innovation enters the public domain, which means
that the owner no longer has exclusive rights to the creation, and it can be
commercially exploited by anyone. Patents in India are controlled by the Patent
Act of 1970 and Rules of 1972, which apply across the country.

Copyrights

Although they are sometimes mistaken, copyrights and patents are not the same
things. A copyright is a kind of intellectual property protection that safeguards
original works of authorship, such as literary works, music, and art, among
other things. Because copyright is inherent in work as a result of its production,
registration is not required. However, registering copyright establishes that the
work has copyright and that the creator is the proprietor of the work. In
exchange for remuneration, creators frequently sell the rights of their works to
persons or corporations best suited to promote them. These payments are
typically made contingent on the work’s actual use and are referred to as
royalties.

Trademarks

A trademark is a distinguishing mark that identifies certain goods or services as

those produced or offered by a specific person or business. It might be a single
word, letter, or number, or a combination of them. Drawings, symbols, three-
dimensional signals like the design and packaging of items, auditory signs like
music or voice sounds, scents, or colours utilised as differentiating elements are
all examples. It ensures the owner of the mark has the sole right to use it to
identify products or services or to permit someone else to use it in exchange for
payment.

Patents and copyrights can expire, while trademark rights are derived from the
use of the trademark and can thus be kept eternally. The registration of a
trademark, like that of copyright, is optional, although it can provide extra
benefits.

Trademarks in India are protected by a combination of particular statutes (such

as the Trademarks Act 1999) and auxiliary legislation (such as the Customs Act
1962 and the Companies Act 1956).

The procedure to be followed before the Trademarks Registry is outlined in the

Trademarks Act and related rules. The Code of Civil Procedure 1908 applies to
civil procedures brought before the courts, whereas the Intellectual Property
Rights (Imported Goods) Enforcement Rules 2007 apply to customs
recordables. The Companies Act, as well as the restrictions established under it,
apply when trademarks or names are used in a business name and the Indian
Penal Code of 1860 is used to prosecute criminal offences. Unique laws, such as
the Emblems and Names (Prevention of Improper Use) Act 1950, may be
applicable in specific situations.

Invention v. innovation

Invention is defined as “the first-time production of a thing or the introduction

of a method.” For example, Thomas Edison was a pioneer in the field of
invention. On the other hand, when someone “improves on or adds a substantial
addition” to something that has previously been developed, this is called
innovation. For example, Steve Jobs was an innovator. In its simplest form,
innovation may be defined as a change that adds value to products or services
while also meeting consumer demands. It occurs when a new and effective
product or service is brought to the market that meets the demands of customers
by providing better products and services.
Characteristics required in order to legally protect your innovation

Some of the characteristics which must be fulfilled by any innovation to possess

legal protection are as follows:

 The innovation should be new: It would be unjust to impose the

economic benefits of a patent on something that is already well known,
thus you can’t legally protect anything that is already widely known.

 The innovation should have a subject matter which can be considered

for protection.

 The innovation should be inventive: The ‘obviousness’ of the new

product, technique, or innovation is a prerequisite of an innovative
step. It is not protected if it is ‘obvious’ to a knowledgeable person.

 The innovation should be useful: This criterion has nothing to do with

whether the new product, method, or idea is ‘useful’ in terms of
whether or not it will be purchased. Rather, it concerns whether the
invention can be manufactured in line with the patent’s claims and
details.

 The innovation must not have a prior use.

Ways to protect your innovation

One of your company’s constants is innovation. It is necessary, yet it is pricey

because the expenses frequently outweigh the benefits. Fortunately, your recent
idea has filled a niche in the market. You want to safeguard your Intellectual
Property because commercial success is on the horizon. After all, your rivals are
always keeping an eye on you. But how can you go about effectively
safeguarding your innovation?
Here are some ways in which you can protect your innovation:

Patent

In that scenario, filing for a patent may be the best approach to safeguard your
intellectual property. You will have exclusive rights to your invention for 20
years if you obtain a patent. To be eligible for a patent, your invention must
fulfil the requirements of originality, innovative step, and industrial
applicability. Patent law in India is governed by the Patents Act of 1970, the
Patent Rules of 1972, the Patent Rules of 2003, and the Patent Amendment
Rules of 2016.

Secrecy

In certain instances, it is thus preferable to keep it hidden. Especially when it’s

hard to determine what the innovation entails from the final result. This makes it
more difficult for a rival to duplicate your idea. Processes are sometimes more
difficult to keep hidden than tangible products. However, for a tangible product,
secrecy might be appealing.

The benefit of secrecy is that you are shielded in theory indefinitely and do not
have to reveal anything.

Design protection

An article’s visual characteristics are protected by a registered design. Visual

characteristics must sometimes be protected in order to prevent others from
creating a product that appears the same or similar. If the product’s look is
crucial to its economic success, a registered design should be filed. Buyers
aren’t influenced by product form for some items, such as industrial equipment.
Product form protection, on the other hand, may be crucial for consumer items.
If your innovation’s design is the most distinguishing feature of your product,
you may be eligible for design protection. The Designs Act of 2000 (“the Act”)
is a full code in and of itself, with absolute legislative protection. It safeguards
the aesthetics of non-purely utilitarian items. A design is protected for a period
of ten years. It can be renewed for a charge every five years. ‘Novelty’ is the
most essential criterion for design protection. Furthermore, the design may not
be technically feasible.

So, in conclusion, Intellectual Property Rights are rights provided by the Indian
government. Intellectual property is concerned with intellectual activity in the
domains of industry, science, literature, and the arts. These rights protect
intellectual property creators and other producers by providing them time-
limited rights to regulate their usage. For a set length of time, the inventor is
generally granted exclusive rights to exploit his or her inventions and
innovation.

Although the term “invention” and “innovation” are generally termed the same
there is a difference between them. In the simplest terms, innovation is
something that adds value to the invention. When you want to protect your
invention, you can easily go for Intellectual Property Rights, (Trademarks,
Copyrights, Patents, etc.) but when you want to legally protect your innovation
then, there are certain characteristics for that and the said innovation has to fulfil
all the criteria, otherwise, they said innovation cannot apply for legal
protection.

Unit III: Managing Globally

3.1 Global Marketing Management
3.2 Outsourcing and Logistics
3.3 Global Operations Management & Supply Chain Management
3.4 Global Talent Management
3.5 Aspects of Global Financial Management.

3.1 Global Marketing Management

As global competition increases, multinational companies must change how

they manage and alter their organizational structures accordingly. The ultimate
goal is to enhance their current position to take advantage of opportunities
existing in the global marketplace. Whether your company is already
multinational, or you are domestic company looking into foreign expansion,
there are many strategic decisions involved with planning, implementing and
maintaining appropriate business processes. For instance, will you use a
standardized or adapted marketing approach, expand in a concentrated vs.
dispersed manner, or have integrated vs. independent operations? It makes no
difference what industry you are involved with or the size of your organization.
Marketers must fully understand the nature of competition, planning
requirements and market-entry options from a global perspective.

What does Global Marketing mean today?

Throughout the past few decades, there has been much debate over whether
global homogenization of consumer tastes allows for standardization of the
marketing mix. To refresh, understand that there are differences between global
marketing and international marketing. Global marketing implies that your
organization standardizes its marketing programs, coordinates across markets
and practices global integration.

Today, many companies have trouble deciding whether using a truly global
marketing strategy is right for them. There is a slight trend back toward
localization due to new efficiencies of customization made possible by
technology, the Internet, and new manufacturing processes. “Mass
Customization” has now taken the place of “Mass Production.” In today’s
world, the customer does not always respond to a “one size fits all” approach.

What are the benefits of Global Marketing?

The number of companies that can have a truly global marketing strategy is
limited, however if carried out successfully, global marketing offers the
following benefits:

1. When a large market segment can be identified across major regions,

better economies of scale can be achieved and can create a competitive
advantage for a multinational company
2. The transfer of knowledge and experience across countries results in
improved communication and coordination of marketing activities.
Global diversity in a marketing team can also lead to new approaches that
may not have normally been utilized, creating a stronger local presence
contributing to a more powerful global brand as a whole.
3. Marketing globally can gain access to the toughest customers. Pleasing
customers in product and services categories that are normally hard to
reach means winning business that the competition cannot.
4. Diversifying your markets means more financial stability. Spreading out
your company’s portfolio means that if financial, legal or economic
conditions suffer in one area, they can be balanced out by others.

How do I plan for a Global Market?

If your company chooses to go global, planning is essential and is one area that
business-owners are often not disciplined enough to do. As previously
discussed, international business can be much more complex than doing
business domestically. Planning is a tool that allows you to relate to the future.
It is an attempt to control the effects of the internal, external and customer
environments in such a way that the firm can set and meet goals. When goals
are solidified and a commitment is made to specific resources, growth is more
likely.

There are 3 types of planning related to international business: corporate,

strategic or tactical.

 Corporate planning is long-term, and includes generalized goals for the

whole firm
 Strategic planning is conducted at highest management levels and deals
with products, capital, research and the long and short-term goals of the
company
 Tactical planning, or market planning, are specific actions and the
allocation of resources used to carry out strategic goals in given markets.

Whether you are marketing in many countries or entering a foreign market for
the first time, the International Planning Process is essential. The diagram below
explains the process.

How do I organize internally?

Do not underestimate the importance internal communication and

organizational structure for your MNC (multinational corporation). In order to
go global, organizations must reflect upon a number of company-specific
factors, such as:

 size
 level of policy decisions
 the length of chain of command
 staff support
  sources of natural and personnel resources
 degree of organizational control
 cultural differences in decision-making styles
 centralization
 type or level of marketing involvement

There are three ways companies usually choose to structure themselves:

 Global product divisions are responsible for product sales throughout the
world
 Geographic divisions are responsible for all products and functions
within a defined area
 A matrix organization consists of either of these structures with an
additional centralized sales and marketing run by a functional staff, or a
combination of area operations and global product management

Considerations must also be made involving who makes decisions and for
whom. Management must decide which decisions are made at corporate
headquarters, at international headquarters, at regional levels, national levels
and even local levels.

There are three major types of organizational patterns used by MNC’s.

 Centralized: Most decisions are made by corporate headquarters.

Advantages are that all experts are in one location and can exercise a high
degree of control in planning and implementing. Records and information
are stored accessible in the same place, which can ease communication.
 Regionalized: Very large corporations may use these structures, where
decision-makers are grouped by similar regions. For example, a European
headquarters and North American headquarters may have similar
functions but express control over different areas.
  Decentralized: Is used when there is a belief that hiring competent local
managers and giving them full responsibility of their organizations will
ensure that those with the most direct contact with their market are
making the best business decisions.

Although formally a firm may have a chosen structure, it is important to

remember that informally there may be aspects of different structures affecting
the organization. For example, many companies have a highly centralized
Product/Service structure, but may have decentralized Pricing, Promotion and
Distribution structures. On a global level, marketers must work to have a broad
company view that can optimize the performance of each individual market
segment and location.

3.2 Outsourcing and Logistics

Outsourcing your business has great a benefit since it cost less, and you can get
better quality, plus you can save on infrastructure. Moreover, you no longer
need to invest in recruiting and training expensive resources for your business
because the foreign country will be well established to deliver product.
However, exporting has a dark side, if you merely export to a country, the
distributor or buyer might switch to or at least threaten to switch to a cheaper
supplier to get a better price.

We all probably understand outsourcing better than we think, and in part that is
thanks to the UPS commercials where they boil down logistics to its foundation:
getting things where they need to be, when they need to be there at a cost that is
acceptable to both the seller and buyer. Outsourcing has been a prominent
business practice among businesses worldwide. Business owners that are
looking for practical methods to enhance the efficiency of their processes find
relief in outsourcing. Outsourcing refers to the business practice of contracting
an external organization to handle specific tasks. External companies that deal
with these tasks are commonly known as Business Process Outsourcing (BPO)
providers. Tasks that BPO firms handle are non-core or functions that are
essential but not the most critical part of business operations. (Muñiz, 2018)

Global production, outsourcing, and logistics and benefits

There are many benefits of outsourcing your business processes to destinations

around the world. Some of them are –

1. Cost advantages-The most obvious and visible benefit relates to the cost
savings that outsourcing brings about. You can get your job done at a
lower cost and at better quality as well. Due to the difference in wages
between western countries and Asia, the same kind of work that is done
over there can be done in India at a fraction of the cost. There is a cost
savings of around 60% by outsourcing your work to India. Plus, the
quality of the services provided is high thereby ensuring that low-cost
does not mean low-quality.

2. Increased efficiency -When you outsource, this can bring years of

experience in business practices and expertise in delivering complex
outsourcing projects. Thus, they can do the job better with their
knowledge and understanding of the domain. This leads to an increase in
productivity and efficiency in the process thereby contributing to the
bottom-line of your company.

3. Focus on core areas-Outsourcing your business processes would free

your energies and enable you to focus on building your brand, invest in
research and development and move on to providing higher value-added
services.
 4. Save on infrastructure and technology-Outsourcing eliminates the need
for investment in infrastructure as the outsourcing partner takes the
responsibility of the business processes and hence develops infrastructure
for the same.

5. Access to skilled resources-You no longer need to invest in recruiting

and training expensive resources for your business.

6. Time zone advantage-Apart from the cost advantage, the other much
touted benefit has to do with the time zone differential between your
country and the location you are outsourcing to. Get your job done while
you are closed for the day and wake up to your service being delivered
the next morning. This unique advantage gives you the benefit of round-
the-clock business operations.

7. Faster and better services-Make your service offerings better with high
quality deliverables and decrease the lead time it takes for your product to
reach the marketplace. Thus you would be faster in getting your ideas
converted into products and better at delivering the value-added
proposition. (Flatworld, 2018).

Risks of Exporting

There are risks in relying on the export option. If you merely export to a
country, the distributor or buyer might switch to or at least threaten to switch to
a cheaper supplier in order to get a better price. Or someone might start making
the product locally and take the market from you. Also, local buyers sometimes
believe that a company which only exports to them isn’t very committed to
providing long-term service and support once a sale is complete. Thus, they
may prefer to buy from someone who’s producing directly within the country.
At this point, many companies begin to reconsider having a local presence,
which moves them toward one of the other entry options.

Global production, outsourcing, and logistics and factors to consider

 Cultural and linguistic differences. These affect all relationships and

interactions inside the company, with customers, and with the
government. Understanding the local business culture is critical to
success.

 Quality and training of local contacts and/or employees. Evaluating

skill sets and then determining if the local staff is qualified is a key factor
for success.

 Political and economic issues. Policy can change frequently, and

companies need to determine what level of investment they’re willing to
make, what’s required to make this investment, and how much of their
earnings they can repatriate.

 Experience of the partner company. Assessing the experience of the

partner company in the market—with the product and in dealing with
foreign companies—is essential in selecting the right local partner.

 Low Fixed Costs. Serve the world market out of one single location to
maximize economies of scale.

 High Fixed Costs. Operate locally out of multiple locations to be more

responsive to local market needs and be less dependent on any one
market or facility.

Global production, outsourcing, and logistics and minimum efficiency scale

The point at which economies of scale are exhausted and the unit price cannot
be pushed any lower. This is when a firm’s minimum efficient scale (MES) is
the lowest scale necessary for it to achieve the economies of scale required to
operate efficiently and competitively in its industry. No further significant
economies of scale can be achieved beyond this cale. Minimum efficient scale
affects the number of firms that can operate in a market, and the structure of
markets.

When Minimum efficient scale is low, relative to the size of the whole industry,
a large number of firms can operate efficiently, as in the case of most retail
business, like corner shops and restaurants. However, if minimum efficient
scale can only be achieved at very high levels of output relative to the whole
industry, the number of firms in the industry will be small. This is case with
natural monopolies, such as water, gas, and electricity supply. (Economics
Online, 2018)

Global production, outsourcing, and logistics and outsourcing pros and

cons

Over the course of the past couple of decades, outsourcing has become one of
the most hotly debated topics in American politics. Nobody likes to see jobs go
overseas, and lawmakers love to use a firm stance against the threat of
outsourcing as a rallying point for their wider business agendas.

But in the realm of small business, outsourcing doesn’t necessarily mean taking
work overseas. When small business owners talk about outsourcing, they’re
usually thinking of farming out content work to freelance writers, hiring an
accountancy firm to take on the book keeping or relying on an employment
agency to track down and deploy hired help.
In the right context and deployed shrewdly, outsourcing can be a fantastic way
for small business owners to improve efficiencies and bolster their company’s
bottom line. But that doesn’t mean the practice isn’t without its own
disadvantages, too. Outsourcing isn’t right for every situation, and so you’ve got
to think long and hard before investing time and energy in farming out work.
(Riggins,2017)

Benefits of Outsourcing

Companies are able to enjoy the following benefits through outsourcing:

 A decrease in operational expenses

 Increased reach

 Cost and efficiency savings

 Operation control

 Focus on tasks that can help yield more earnings

 Access to quality talents that are experts in handling non-core tasks

 Enhance the efficiency of business processes

 Enjoy a boost in sales given the mature process of attaining customer

satisfaction that a BPO company has

Disadvantages of Outsourcing

Outsourcing is the right approach for some companies – particularly those that
take the time to properly structure an agreement that drives cost reduction, takes
advantage of outsource provider best practices, clearly defines scope and
service levels that meet the company’s needs, and allows the company to focus
on its core competencies. When well planned and executed, outsourcing
relationships provide substantial benefits to an organization.

A variety of factors are driving some companies to revisit the outsource / in-
house service delivery equation. Whether your company’s outsourcing
agreement is well functioning or in a tenuous state, it behooves all customers to
retain visibility, understanding, and flexibility in their finances and service
delivery solutions. (Savitz, 2013)

 Lack of customer focus

 Failure to meet expectations

 Marketplace Pressures

 Financial Segmentation

 Synchronizing the deliverables

 Lack of Flexibility

 Confidentiality and security

3.3 Global Operations Management & Supply Chain

Management

Getting a product into the hands of a consumer is a complex process,

involving multiple internal and external processes and companies
along the way. Each player involved is overseeing its part in the
process through several types of oversight, including supply chain
management and operations management.
Despite some similarities, these are two distinct roles and processes.
It’s essential for business professionals to understand how
organizations use supply chain management and operations
management to enhance efficiency and value, ultimately boosting
profits.

Here, we assess the differences and commonalities between supply

chain management and operations management and what you should
consider to determine which path is best for you.

Supply Chain Management

Supply chain management includes the collection of materials, the

manufacture of products, and the delivery to the consumer. Supply
chain managers coordinate with key players in the supply chain:
suppliers, logistics teams, and customers, often working globally and
overseeing suppliers, purchasing orders, warehouses, and forecasting.

One critical facet of supply chain management is risk evaluation and

security. Today, this also means looking at cybersecurity in the supply
chain. Supply chain managers must regularly evaluate suppliers and
their strategies and protocols, forecast demand to avoid over-supply,
improve customer service, and coordinate with other departments in
the business including marketing, finance, sales, and quality
assurance.

Supply chain management is vital to businesses because it can help

reduce costs with better efficiency from suppliers and leaner
inventories, provide better customer services with faster delivery and
react faster to market demands and innovations. It also offers the
assurance of corporate responsibility in every facet of production.
Operations Management

Operations management focuses on running a business effectively and

efficiently, including maintenance, material planning, and the analysis
of production systems. Operations managers coordinate the internal
business operations, driving not how the product or service is moved,
but how it is developed. This generally requires professionals to be
skilled in building rapport with organizational stakeholders, current in
technology applications, and adept at analysis.

Operations managers should also be skilled at recent trends within

operations management, including Agile and Lean concepts to help
reduce waste and improve efficiency.

Regardless of industry, operations managers forecast sales, work to

increase responsiveness, ensure customer demands are met and uphold
quality standards.

Importance of Supply Chain Management in Operations

Management

Both operations management and supply chain management are

expected to add value to the business, supporting more efficient
processes and ultimately driving better revenue for the company. In
fact, in pursuit of those objectives, the two roles are inextricably
linked together. Supply chain management controls the process for
having the product produced; without it, operations management
wouldn’t have a product to oversee operations for.
Many industries require both supply chain management and operations
management, whether the business is moving services, products, raw
materials, data, or money into the hands of its customers.

In smaller organizations, it’s also possible for these roles to overlap or

be fulfilled by a single person or department, as the necessary
skillset for both roles is similar, including:

 Organization
 Decision-making
 Goal-setting
 Cross-functional leadership
 Communication

Difference Between Supply Chain Management and Operations

Management

The major difference between supply chain management and

operations management is that the supply chain is mainly concerned
with what happens outside the company – obtaining materials and
delivering products – while operations management is concerned with
what happens inside the company.

This means the supply chain manager spends time negotiating

contracts and evaluating suppliers, whereas the operations manager is
often planning and overseeing the daily operations and processes.
Supply chain management activities are generally the same across
industries; however, operations management roles and responsibilities
can vary widely depending on the product or service the business
produces.
3.4 Global Talent Management

If your company has embraced remote work (or is considering it), you’re
probably realizing that you’re no longer limited to a local talent pool. This
is exciting, because it opens up a whole world of possibilities—but finding
the right talent over such a vast area can feel daunting. If this sounds
familiar, then you may need to develop a global talent management strategy.

Global talent management is your organization’s strategy for finding,

utilizing the skills of, and retaining talent around the world. It’s an
important step for any business—multinational corporation or otherwise—
looking to improve how it sources international talent.

A good global talent management strategy can also deliver a sustained

competitive advantage for businesses in industries that are experiencing
localized talent shortages—or that are not yet fully embracing global talent.

Importance of Global Talent Management

Just as governments need different foreign affairs strategies for different

countries, so do multinational corporations wanting to hire top talent. The
recruiting, HR, and management strategies you use to acquire local high-
performance talent may not be as effective when applied to a global
workforce.

If you try to force it, you may find that you aren’t getting the right talent in
different locations, or you’re having a hard time retaining workers. This can
be due to a variety of factors, including:
  Lack of coordination between global recruiting teams

 Confusion about skills and attributes talent should have

 Different wants and needs of distributed remote workers vs. in-

house, full-time teams

 Varied cultural norms and expectations around the world

 Difficulties in applying older, in-person training strategies to a

newly remote workforce

 Loss of clarity around professional development and promotional

paths

When you think about hiring and retaining talent from a global perspective,
you can better address issues and craft policies that support the needs of
varying teams and regions. As a result, you can find the right talent and
retain them longer—no matter where they live.

The Process of Global Talent Management

The global talent management process starts at the top, but should be
adopted as a strategy by all key players in your organization. Ultimately,
your global talent management strategy will look something like this:

1. Identify the type or volume of talent needed to support your overall

business strategy or project goals.

2. Work with HR leaders in your organization to evaluate current

processes and develop a new strategy for global recruiting and
worker benefits.

3. Determine whether the process of sourcing and paying global talent

is something your internal team is equipped to handle, or if you’d
 prefer to work with an outside partner. Be sure to also consider how
you’ll support global team members’ growth.

4. If outside partners are preferred, vet possible options to find the best
fit for your business needs.

5. Work with employment lawyers or employers of record to support

compliance with local labor laws. Establish if there are any regions
you cannot hire talent in, due to an inability to comply with specific
regulations.

6. Begin recruiting high-potential human capital from the regions

you’ve identified as viable hiring markets.

7. Train internal management teams on how they can best support the
growth and development of global team members.

8. Place global talent in your existing teams, and remain in close

contact with both managers and workers.

9. Use meetings and feedback surveys to establish if there are any

weak points in your strategy that can be reinforced.

10. Continue to evolve and adapt your strategy using the six
principles of global talent management, as explained below.

And don’t forget—if your company has subsidiaries, you may need to tweak
your global talent management strategy to fit the unique needs of each
individual corporation.

The 6 Principles of a Global Talent Management Strategy

In 2012, researchers from the MIT Sloan Management Review detailed six
key principles that make up an effective global talent management strategy.
While the world of work has changed considerably, with more people than
ever working remotely, these six principles of global talent
management still hold true:

1. Alignment with strategy

2. Internal consistency

3. Cultural embeddedness

4. Management involvement

5. Balance of global and local needs

6. Employer branding through differentiation

Let’s take a closer look at how those six timeless principles apply to today’s
remote and independent workforce.

1. Alignment with strategy

Your global talent management practices should align with the broader
company strategy. This way, planning business goals directly aligns with
planning talent needs.

If your multinational enterprise’s business strategy involves expanding into

new markets, you’ll want to assess your current and future talent needs in
those regions. If your business plans to add a new service or increase its
global profits by 10% over the next five years, you’ll need to develop a
talent strategy that supports these goals.

2. Internal consistency

For a global talent management strategy to work, it needs to reach all areas
of recruiting, hiring, and management. If you devote time to bringing on
top-tier talent from around the world, but don’t also devote time to training,
nurturing, and promoting this talent, they may not stick around.

Your strategy also needs to be consistent between departments. This way,

you can maintain balanced hiring (and retention) across teams. Your team
members can then move between teams if needed without experiencing an
internal culture shock.

3. Cultural embeddedness

Cultural embeddedness is about making sure your global talent management

strategy helps find, cultivate, retain, and mentor talent that is a great
corporate culture fit. At the same time, it’s also about being willing to
adjust corporate culture to meet the needs of your workforce.

Some companies look for cultural fit by including different assessments

(that may address work styles and technical skills) in the hiring process.
Others choose to select new hires strictly on skill and train their team
members on soft skills and elements of company culture.

You’ll want to decide what management practices your company will

employ when creating a global talent management strategy. This will in turn
influence the way you hire and train new team members.

Regardless of the path you choose, it’s important to focus on things that are
important to the job at hand, remain aware of potential unconscious bases,
and get feedback from your team members regarding their feelings on
company culture.
4. Management involvement

While a global talent management strategy may be originally directed from

the top down, it can’t stop at HR or the executive suite. Everyone involved
in the hiring process needs to be actively committed to the strategy,
including managers at all levels of leadership.

Managers need to keep global talent management strategy in mind when

considering their hiring needs, developing training plans, and succession
planning for key roles. After all, what good is having access to an entire
world of talent if you aren’t leveraging it in every way possible?

5. Balance of global and local needs

When you work with teams of professionals around the world, you’ll need
to have a solid understanding of what clusters of talent need based on their
location.

For example, if your company is headquartered in Germany, your teams in

Argentina may have different needs based on time zone, working hours,
regional labor laws, local economies, and more. You’ll also still need to
balance this with the requirements of your country and any others that you
do business in.

6. Employer branding through differentiation

As more companies begin to hire global talent, you may find yourself in the
war for talent with competitors. You can make your opportunities stand out
from the rest by building global brand awareness as a quality employer.
To do this, you may want to focus on initiatives that are important to your
ideal candidates, contribute directly to the communities in emerging
markets, and build messaging around how your organization supports its
workers.

Take the first step toward a smarter talent strategy

The Main Challenges of Global Talent Management

All six principles of global talent management are influenced and shaped by
shared challenges.

You might not have every challenge perfectly solved by the time you’re
ready to hire your first global team member. If you’re committed to solving
these challenges over time, though—with the help of trusted partners and
listening to the needs of the people you work with—you’ll be able to
cultivate a strong and reliable talent management strategy.

Recruitment and selection

Finding top talent in a new region can be difficult. You don’t know the
market yet, and you may be up against competitors who also want the same
talent for themselves.

Working with a recruiter who is familiar with the regions you’re hiring in is
helpful. These professionals can educate you on the hiring market in
specific cities and countries, help you connect with the right talent, and
build out a staffing pipeline.
Training and career development

You’ll need to come up with an approach to training and professional

development that works for global teams. This can involve:

 Creating training modules and performance management guidelines

in more than one language

 Adapting the content in training modules to fit the work practices

and responsibilities of team members in specific regions

 Identifying possible top performers and finding ways to nurture

their growth remotely

 Remaining selective so you aren’t nurturing more team members

than you can actually promote down the line

 Finding ways to create ongoing connections with team members

who work asynchronously

Compensation and benefits

You’ll want to have a clear handle on how you’ll compensate your team
members in different locations based on currencies, exchange rates, and
available benefits.

Let’s say you’re running a company based in London and plan to expand
into the U.S. Your company offers tuition reimbursement, paid time off, and
flexible work hours to all of your team members in the U.K. You don’t offer
any private health insurance benefit as your team members receive
healthcare through the National Health Service.

Because workers in the U.S. often receive their health insurance through
employers, you may need to adapt your strategy to include healthcare
benefits based on a team member’s location. This can make your positions
more attractive to talent in the U.S.

You’ll also need to give similar consideration to salary compensation. What

is a liveable wage in your country or city may not be livable in other
locations around the world. It’s absolutely possible to work all of these
details out—and taking the time to do so before launching a new global
hiring push can help you attract the best talent.

Local regulations

Every region has its own laws related to employment protections and how
remote work relates to taxation. Taking these variants into consideration is
an important part of a global talent management strategy. You’ll want to
consider:

 Whether or not hiring team members in a specific municipality or

country will change how you are taxed

 What your responsibilities are under employment laws in different

locations

 How you should classify new hires (i.e. employee or independent

contractor)

Working with an employer of record service or employment lawyer familiar

with the region you’d like to expand into can help mitigate possible
complications.
Cultural differences

As you begin to work with more team members from around the world,
you’ll be exposed to different cultural norms. While some companies can
feel that this is a difficulty and hard to navigate, it’s actually a great
positive!

By working with team members from around the world, you can leverage
their individual skill sets and knowledge of local cultures to create stronger
relationships with international customers. You may also find that elements
of workplace culture in one region translate well when applied across your
entire company. This can be a great help in developing the right kind of
corporate culture for all of your team members.

General global talent management strategies to adopt

Whether you’re already part of a multinational company or are simply ready

to tap into the remote workforce for the first time, start building your global
talent management plan with a focus on these do’s and don’ts:

 Do remember that great talent doesn’t stop at acquisition—build

worker support and retention into your overall plan.

 Do evaluate your benefit and compensation packages to come up

with options that are attractive to top talent in different regions.

 Do consider different hiring options, including freelance and

contract-to-full-time hires.

 Don’t overlook remote talent for promotion and advancement

opportunities. Figure out how to create equitable opportunities for
all team members, whether they are in-office or around the world.
  Don’t keep your global talent management strategy isolated to HR
professionals. Train hiring managers and leaders to implement the
strategy for all new and current team members around the world.

 Don’t write off talent from another region of the world because you
aren’t sure how you’ll hire them. Lawyers, employers of record, and
platforms like Upwork can help with this.

Global Talent Management Case Studies and Examples

While a global talent management strategy will look different for every
company, these three businesses are great examples of how rethinking the
hiring approach to suit a global workforce supports company growth.

Zendesk

Because Zendesk serves customers all around the world, they knew they
needed to build a global team that understood the unique challenges faced
by customers in different markets.

The Zendesk team started by identifying a country they’d like to hire talent
in. Next, they reached out to partners (in this case, Upwork) to help them
get to know the talent in the region and build a recruiting pipeline.

The company also had to rethink how they assessed competencies and hired
talent—for example, relying on someone’s portfolio and Upwork profile
rather than having them sit down and do in-person skills tests. While
developing this process required thinking in new ways, in the long run, it
supported Zendesk’s ongoing success.
Amway

Amway is a unique example of how an international business can rethink its

hiring strategy to better leverage global talent. While the direct-sales
company has had independent Amway Business Owners representing its
products around the world for many years, most of Amway’s corporate
operations are headquartered in Grand Rapids, Michigan.

When the Amway team needed to create marketing materials that resonated
with different global audiences, they turned to independent professionals in
each region. By doing this, Amway was able to leverage their talent’s skills
and knowledge of different cultures to create effective messaging.

Thumbtack

Thumbtack is an app- and web-based service that connects individuals with

contractors and other skilled professionals in their area. Because many of
Thumbtack’s users have an immediate need they need help with, such as a
home repair, providing strong customer service is essential.

Thumbtack leveraged global, remote talent to create a chat-based customer

service help option that is available 24 hours a day, seven days a week.
Because Thumbtack uses Upwork to pay remote team members, they don’t
have to worry about coordinating payroll across multiple countries. Instead,
they can focus on building their distributed teams and creating a company
culture of customer-focused support.

Understanding the Global Trends in Talent Management Strategies

If you’re beginning to develop your own global talent management strategy,
it’s helpful to work with a pro. Independent talent management experts can
help you:

 Understand how changing global trends impact your talent

management

 Develop recruitment processes that work across borders

 Identify the best ways to build a talent pipeline

Log into your Upwork account now (or create one!) to begin viewing the
profiles of talent management professionals, or create a job post to receive
proposals from qualified experts.

3.5 Aspects of Global Financial Management

Unit IV: Broad Issues in Globalization
4.1 E-Commerce in Globalization
4.2 Ethics in Globalization
4.3 Corporate Social Responsibility in Globalization
4.4 Sustainability dimensions of International Business
4.5 The Social Responsibility of the Global Firm
4.6 International Negotiations
4.7 Cross-Cultural Communication
4.8 Future of International Business and other emerging concepts.