MANAGEMENT OF INTERNATINAL BUSINESS (MS 203)

LECTURE 1
A. INTRODUCTION TO INTERNATIONAL BUSINESS The beverages you drink might be produced in India, but with the collaboration of a USA company. The tea you drink is prepared from the tea powder produced in Sri Lanka. The spares and hard disk of the computer you operate might have been produced in the United States of America. The perfume you apply might have been produced in France. The television you watch might have been produced with the Japanese technology. The shoe you wear might have been produced in Taiwan, but remarketed by an Italian company. Air France and so on so forth might have provided your air travel services to you. Most of you have the experience of browsing Internet and visiting different web sites, knowing the products and services offered by various companies across the globe. Some of you might have the experience of even ordering and buying the products through Internet. This process gives you the opportunity of transacting in the international business arena without visiting or knowing the various countries and companies across the globe. You get all these even without visiting or knowing the country of the company where they are produced. All these activities have become a reality due to the operations and activities of international business. Thus, international business is the process of focusing on the resources of the globe and objectives of the organizations on global business opportunities and threats. Evolution of International Business The business across the borders of the countries had been carried on since times immemorial. But, the business had been limited to the international trade until the recent past. The post World War II period witnessed an unexpected expansion of national companies into international or multinational companies. The post 1990s period has given greater fillip to international business. In fact, the term international business was not in existence before two decades. The term international business has emerged from the term international marketing, which in turn, emerged from the term export marketing. Nature of International Business The 1990s and the new millennium clearly indicate rapid internationalization and globalization. The entire globe is passing at a dramatic pace through the transition period. Today, the international trader is in a position to analyze and interpret the global social, technical, economic, political and natural environmental factors more clearly. Conducting and managing international business operations is a crucial venture due to variations in political, social, cultural and economic factors, from one country to another country. For example, most of the African consumers prefer less costly products due to their poor economic conditions, whereas the German consumers prefer high quality and high priced products due to their higher ability to buy. Therefore, the international businessman should produce and export less costly products to most of the African countries and vice versa to most of the European and North American countries. High priced and high quality Palmolive soaps are marketed in European countries and the economy priced Palmolive soaps are exported and marketed in developing Countries like Ethiopia, Pakistan, Kenya, India, Cambodia etc. International business houses need accurate information to make an appropriate decision. Europe was the most opportunistic market for leather goods and particularly for shoes. Bata based on the accurate data could make appropriate decision to enter various European countries. International business houses need not only accurate but timely information. CocaCola could enter the European market based on the timely information, whereas Pepsi entered later. Another example is the timely entrance of Indian software companies into the US market

compared to those of other countries. Indian software companies also made timely decision in the case of Europe. The size of the international business should be large in order to have impact on the foreign Economies. Most of the multinational companies are significantly large in size. In fact, the Capital of some of the MNCs is more than our annual budget and GDPs of the some of the African Countries. Most of the international business houses segment their markets based on the geographic market segmentation. Daewoo segmented its market as North America, Europe, Africa, Indian subcontinent and Pacific markets. International markets present more potentials than the domestic markets. This is due to the fact that international markets wide in scope, varied in consumer tastes, preferences and Purchasing abilities, size of the population etc. For example, the IBMs sales are more in foreign countries than in USA. Similarly, Coca-Colas sales, Procter and Gambles sales and Satyam Computers sales are more in foreign countries than in their respective home countries. Therefore, the international business houses should consider the consumers willingness to buy and also ability to buy the products In fact, most of the multinational companies, which entered Indian market after 1991, failed in this respect. They viewed that almost the entire Indian population would be the customers. Therefore, they estimated that the demand for consumer durable goods would be increasing in India after globalisation. And they entered the Indian market. The heavy inflow of these goods and decline in the size of Indian middle class resulted in a slump in the demand for consumer durable goods.

Importance of International Business The growing importance of international business is reflected in several macro economic and micro indicators. The Foreign Trade: GDP ratio has been rising significantly, indicating that national economies are becoming more and more export and import dependent. International investment, both direct and portfolio, have been growing rapidly. A corollary of the rapidly growing international investment is the fast growing international business. A connotation of the growing export-GDP ratio is that the export intensity of the companies in general are rising. Many firms makes the most of their business, like the leading IT firms such as TCS, Infosys, Wipro etc. and pharmaceutical firms such as Ranbaxy, Dr. Reddys etc. from foreign markets. These are the companies, which do 100 % of their business abroad.

LECTURE 2
B. CONCEPT AND DEFINITION OF INTERNATIONAL MANAGEMENT Took and Beeman define international management as the determination and completion of actions and transactions conducted in and/or with foreign countries in support of organization policy. Czinkotra and Grosse and Kojawa define international business as transactions devised and carried out across international borders to satisfy corporations and individuals. International management by these definitions, is viewed as a subset of international business. The focus of international business is on international transactions, whereas international management deals with managing such transactions with in the boundary set by corporate strategy. Thus, when a company decides to enter a foreign market, that decision incorporates planning to establish the ways by which business functions-marketing, accounting, human resource management, and so on-are to be managed in that distinct location. Managing the various functions and coordinating them with the parents companys overall strategy is the task of international management.

"International" covers both the crossing of national borders and the internal and external environmental diversity that organizations and their managers experience when functioning outside their home state. In other words, the concept "international," when applied to organizations, implies an interaction between two or more cultures. International Management is for All International management is a term that many people apply only to the realm of large corporations. This is a misconception, since medium and small- sized companies operate in the international arena, although the complexity may be less for the smaller firm. Let us put this in the context of a mediumsized ceiling fan manufacturer, which had been operating in the Eastern region of India since 1954. Its rate of return over the years had been more than adequate. Since the company did not foresee any worthwhile competitors on the horizon, it decided not to expand to other regions of the country.As soon as the government liberalized the economy in 1992, the company found itself cometing against similar products from foreign countries which penetrated rather quickly through licensing agreements with an Indian conglomerate. It becomes apparent that some drastic measures were necessary to match the competitors price, quality, and service. After several failed attempts at restructuring its portfolio, it had to get out of the business. A similar phenomenon is witnessed in most of the European countries and Russia. For instance, a soft drink manufacturer had been operating in the southern part of poland for the last 30 years. As the nation experienced a shift from a demand economy to a market- driven economy, Coke and pepsi landed like two sumo wrestlers and wiped out 90% of the firms business, forcing it to file for bankruptcy. Over 500 people lost their jobs, and the Polish government refused to follow the policy of protecting the sick industries that it once routinely followed. The lesson is clear. Your business may be limited to a certain region, or you feel that you are too small a company to be knocked out by the General Motiors-or the Mitsubishis of this world. Think again! As the economy becomes marketdriven, the need to operate with an international perspective becomes all the more important for all types and for all sizes of organizations. A Focus on International-Business Firms In US business schools, "international management" is predominantly applied to those firms engaged in private cross-border trade and foreign direct investment-mainly, importers, exporters, trade intermediaries, multinational enterprises and strategic-alliance partners. c. Who Are International Managers? A distinct group of people drive and handle the internationalization of firms, and are characterized by particular backgrounds, attitudes and behaviors. This issue has been particularly emphasized in the United States where the weight of the domestic market has long required an extra push to involve firms in exporting, importing, foreign licensing, investing and partnering. In other words, international management is the province of a particular breed and class of business managers who have been selected, trained and socialized in particular ways, and who can be studied in a comparative manner vis-a-vis their domestic and foreign counterparts. What Do International Managers Do? The managerial functions (planning, organizing, etc.) are rendered more complex on account of the addition of the "geographic" (or "area") dimension to the more traditional "product" and "function" (such as manufacturing and marketing) elements. International managers make decisions about "going international" and about implementing this process across areas, products and functions. Fayer-weather (1969, 1982) articulated this problem in terms of four key decisions: (1) what firmspecific economic advantages will allow firms to succeed in other countries; (2) which socio-cultural adaptations will be required in transferring and deploying these resources overseas; (3) how will political actors--particularly governments, but also interest groups and public opinion at home and abroad--be accommodated in reconciling the private and public interests associated with international trade and investment, and (4) how will foreign and domestic activities be integrated in the face of the

centrifugal pull of different markets, sovereignties and cultures--what Fayer-weather called the problem of "unification in the face of fragmentation?" How Are International Activities Structured? This problem is now articulated in terms of designing systems (authority and responsibility relationships, incentives, information flows, etc.) that provide some optimal if elusive combination of "national responsiveness and global integration". What Do International Managers Contribute? The benefits of good management are traditionally associated with efficiency and effectiveness, but the latter assume an expanded meaning in the context of the recent globalization that impacts most economies, societies, polities and cultures. "Good international management" now incorporates: (1) responding to a much greater variety of constituencies--at once domestic, foreign, international and supranational (2) providing models for other organizations that must also cope with globalization (3) contributing to worldwide development in all its facets--not only economic but also personal, political, social, cultural and ecological. This is the agenda of international firms, managers and management as seen through US businessfirm lenses. Some of it is shared around the world, and knowledge of multinational enterprises has significantly contributed to our understanding of how large business firms are managed around the world.

LECTURE 3
C. WHY GO INTERNATIONAL? We have discussed the nature of international business and the precautions that the multinational companies should take while operating in foreign countries. The basic question of why do the Business firms of a country go to other countywide? might have been in your minds. Therefore, we answer this question, before proceeding further. To achieve Higher Rate of Profits As we have discussed in various courses/subjects like Principles and Practice of Management, Managerial Economics and Financial Management that the basic objective of the business firms is to earn profits. When the domestic markets do not promise a higher rate of profits, business firms search for foreign markets, which promise for higher rate of profits. For example, Hewlett Packard earned 85.4% of its profits from the foreign markets compared to that of domestic markets in 1994. Apple earned US $ 390 million as net profit from the foreign markets and only US $ 310 millions as net profit from its domestic market in 1994. Expanding the Production Capacities beyond the Demand of the Domestic Country: Some of the domestic companies expanded their production capacities more than the demand for the product in the domestic countries. These companies, in such cases, are forced to sell their excess production in foreign developed countries. Severe Competition in the Home Country: The countries oriented towards market economies since 1960s had severe competition from other business firms in the home countries. The weak companies, which could not meet the competition of the strong companies in the domestic country, started entering the markets of the developing countries. Limited Home Market: When the size of the home market is limited either due to the smaller size of the population or due to lower purchasing power of the people or both, the companies internationalise their operations. For example, most of the Japanese automobile and electronic firms entered US, Europe and even African markets due to the smaller size of the home market. ITC entered

the European market due to the lower purchasing power of the Indians with regard to high quality cigarettes. Similarly, the mere six million population of Switzerland is the reason for Ciba Geigy to internationalise its operations. In fact, this company was forced to concentrate on global market and establish manufacturing facilities in foreign countries. Political Stability vs Political Instability Political stability does not simply mean that continuation of the same party in power, but it does mean the continuation of the same policies of the Government for a quite longer period. It is viewed that USA is a politically stable country. Similarly, UK, France, Germany, Italy and Japan are also politically stable countries. Most of the African countries and some of the Asian countries like Malaysia, Indonesia, Pakistan and India are politically instable countries. Business firms prefer to enter the politically stable countries and are restrained from locating their business operations Availability of Technology and Managerial Competence Availability of advanced technology and managerial competence in some countries acts as pulling factors for business firms from the home country. The developed countries due to these reasons attract companies from the developing world. In fact, American companies, in recent years, depend on Japanese companies for technology and management expertise. High Cost of Transportation Initially companies enter foreign countries through their marketing operations. At this stage, the companies realise the challenge from the domestic companies. Added to this, the home companies enjoy higher profit margins whereas the foreign firms suffer from lower profit margins. The major factor for this situation is the cost of transportation of the products. Under such conditions, the foreign companies are inclined to increase their profit margin by locating -their manufacturing facilities in foreign countries where there is enough demand either in one country or in a group of neighboring countries. For example, Mobil, which was supplying the petroleum products to Ethiopia, Kenya, Eritrea, Sudan etc. from its refineries in Saudi Arabia, established its refinery facilities in Eritrea in order to reduce the cost of transportation. Similarly, Caterpillar located its manufacturing facilities at different centers in order to reduce the cost of transportation. This company produces high glue added parts in limited locations and less valued and non critical components and assembles the final products in a number of foreign countries. Nearness to Raw Materials The source of highly qualitative raw materials and bulk raw materials is a major factor for attracting the companies from various foreign countries. Most of the US based and European based companies located their manufacturing facilities in Saudi Arabia, Bahrain, Qatar, Oman, Iran and other Middle East countries due to the availability of petroleum. Theses companies, thus, reduced the cost of transportation. Availability of Quality Human Resources at Less Cost This is a major factor, in recent times, for software, high technology and telecommunication companies to locate their operations in India. India is a major source for high quality and low cost human resources unlike USA, developed European countries and Japan. Importing human resources from India by these firms is costly rather than locating their operations in India. Hence these companies started their operations in India and other similar countries.

i. To Avoid Tariffs and Import Quotas It was quite common before globalization that governments imposed tariffs or duty on imports

to protect the domestic company. Sometimes Government also fixes import quotas in order to reduce the competition to the domestic companies from the competent foreign companies. These practices are prevalent not only in developing countries but also in advanced countries. For example, Japanese companies are competent competitors to the US companies. USA imposed tariffs and quotas regarding import of automobiles and electronics from Japan. Harley Davidson of USA sought and got five years of tariffs protection from Japanese imports. Similarly, Japan places high tariffs on imports of rice and other agricultural goods from USA. To avoid high tariffs and quotas, companies prefer direct investment to go globally. For example, companies like Sony, Honda and Toyota preferred direct investment if] various countries by establishing subsidiaries or through joint ventures in various foreign countries including USA and India, Similarly, General Electrical, and Whirlpool also have foreign subsidiaries. Xerox, Canon, Phillips, Unilever, Lucky Gold Star, South Korean Electronics Company, Pepsi, Coca Cola. Shell, Mobil etc. established manufacturing facilities in various foreign countries in order to avoid tariffs, import duties and quotas.

LECTURE 4
D. STAGES OF INTERNATIONALISATION The internationalization process generally includes fives stages. a. Domestic company b. International Company c. Multinational company d. Global company e. Transnational company Now, we will study stage of internationalization in detail. Stage 1: Domestic Company Domestic company limits its operations, mission and vision to the national political boundaries. These companies focus its view on the domestic market opportunities, domestic suppliers, domestic financial companies, domestic customers etc. These companies analyze the national environment of the country, formulate the strategies to exploit the opportunities offered by the environment. The domestic Companies unconscious motto is that, if its not happening in the home country, it is not happening The domestic company never thinks of growing globally. If it grows, beyond its present capacity, the company selects the diversification strategy of entering into new domestic markets, new products, technology etc. The domestic company does not select the strategy of expansion/penetrating into the international markets. Stage 2: International Company Some of the domestic companies, which grow beyond their production and/or domestic marketing capacities, think of internationalizing their operations. Those companies who decide to exploit the opportunities outside the domestic country are the stage two companies. These companies remain ethnocentric or domestic country oriented. These companies believe that the practices adopted in domestic business, the people and products of domestic business are superior to those of other countries. The focus of these companies is domestic but extends the wings to the foreign countries. Markets and extend the same domestic operations into foreign markets. In other words, these companies extend the domestic product, domestic price, promotion and other business practices to the foreign markets. Normally internationalization process of most of the global companies starts with this stage two process. Most of the companies following this strategy due to limited resources and also to learn from the foreign markets gradually before becoming a global company without much risk. The international company holds the marketing mix constant and extends the operations to new countries. Thus the international company extends the domestic country marketing mix and business model and practices to foreign countries.

Stage: 3 Multinational Company Sooner or later, the international companies learn that the extension strategy (i.e., extending the domestic product, price and promotion to foreign markets) will not work. The best example is that Toyota exported Toyopet cars produced for Japan in Japan to USA in 1957. Toyopet was not successful in USA. Toyota could not sell these cars in USA as they were over priced, underpowered and built like tanks. Thus these cars were not suitable for the US markets. The unsold cars were shipped back to Japan. Toyota took this failure as a rich learning experience and as a source of invaluable intelligence but not as failure. Toyota, based on this experience designed new models of cars suitable for the US market. The international companies turn into multinational companies when they start responding to the specific needs of the different country markets regarding product, price and promotion. This statue of multinational company is also referred to as multi domestic. Multi domestic company formulates different strategies for different markets; thus, the orientation shifts from ethnocentric to polycentric . Under polycentric orientation the offices /branches/subsidiaries of a multinational company work like domestic company in each country where they operate with distinct policies and strategies suitable to that country concerned. Thus they operate like a domestic company of the country concerned in each of their markets. Philips of Netherlands was a multi domestic company of this stage during 1960s. It used to have autonomous national organizations and formulate the strategies separately for each country. Its strategy did work effectively until the Japanese companies and Matsushita started competing with this company based oil global strategy. Global strategy was based on focusing the company resources to serve tile world market. Philips strategy was to work like a domestic company, and produce a number of models of the product consequently it increased the cost of production and price of the product. But the Matsushitas strategy was to give the value, quality, design and low price to the customer. Philips lost its market share as Matsushita offered more value to the customer Consequently Philips changed its strategy and created industry main groups in Netherlands which are responsible for formulating a global strategy for producing, marketing and R & D. Stage 4: Global Company A global company is the one, which has either global marketing strategy or a global strategy. Global company either produces in home country or in a single country and focuses on marketing these products globally, or produces the products globally and focuses on marketing these products domestically. Harley designs and produces super heavy weight motorcycles in USA and markets in the global market. Similarly, Dr. Reddys Lab designs and produces drugs in India and markets globally. Thus Harley and Dr. Reddys Lab are examples of global marketing focus. Gap procures products in the global countries and markets the products in its retail organization in USA. Thus gap is an example for global sourcing company. Harley Davidson designs and produces in USA and gains competitive advantage as Mercedes in Germany. The Gap understands the US consumer and got competitive advantage. Stage 5:Transnational Company Transnational company produces, markets, invests and operates across the world. It is an integrated global enterprise, which links global resources with global markets at profit. There is no pure transnational corporation. However, most of the transnational companies satisfy many of the characteristics of a global corporation.

LECTURE 5
E. MODES OF ENTRY Companies deciding to enter the foreign markets, face the dilemma while deciding the method of entry into a given overseas location. Analyzing the decision factors can reduce this dilemma.

Decision Factors Ownership Advantages Location Advantages Internationalization Advantages

Ownership Advantages: Ownership advantages are those designed by a company by owning resources. These benefits provide competitive advantage to the company over its competitors. Example Toronto-based Inco. Ltd., of rich, nickel-bearing ores allowed the company, to dominate the production of both primary nickel and nickel-based metal alloys. Similarly,, Tata Iron and Steel Company (TISCO) Ltd., owned its iron ore mines and coal mines. This ownership grants the advantage of low cost producer to the company. Location Advantages Certain locational factors grant benefit to the company when the manufacturing facilities are located in the host country rather than in the home country. These locational factors include: o Customer Needs, Preferences and Tastes o Logistic Requirements o Cheap Land Acquisition Cost o Cheap Labour o Political Stability o Low Cost Raw Materials o Climatic Conditions. If the company has locational advantages, it enters foreign markets through direct investment. Otherwise, if the location of manufacturing facilities in home country is advantageous than in host country, the company enters foreign markets through exporting. Internationalization Advantages Internationalization advantages are those benefits that a company gets by manufacturing goods or rendering services in the host country by itself rather than through contract arrangements with the companies in the host country. Sometimes the cost of negotiating, monitoring and enforcing an agreement with the host country's company would be difficult and costly. In such cases the company enters the international markets through direct investment. Otherwise, if the company thinks that the transaction costs are low, and the local companies in the host country can produce efficiently without jeopardizing the interest, the company can enter the foreign markets through contract manufacturing, franchising or licensing. Example Toyota enters foreign markets through direct investment and joint-ventures us the local companies in foreign countries cannot produce as efficiently as Toyota. companies with low cash reserves normally prefer licensing mode rather than foreign direct investment (FDI) Merck entered Israel by issuing license to Teva Pharmaceutical an Israel company in order to save the expenses of establishing in Israel. /n contrast, cash rich firms may prefer FDI. Firms also enter through FDI in order to take the advantage of economies of scale, and synergies between their domestic and international operations.

However, the software companies prefer licensing and franchising mode as they have to respond quickly to the market needs. For example, Microsoft and Compaq. Thus, different firms select different modes based on the nature of the industry. Now, we shall shift our discussion to the different modes of enter to the foreign markets. 1. EXPORTING

a. Indirect Exports b. Direct Exports c. Intra corporate Transfers 2. LICENSING International Licensing 3. FRANCHISING International Franchising 4. SPECIAL MODES a. Contract Manufacturing b. Management Contracts c. Turnkey Projects 5. FOREIGN DIRECT INVESTMENT 1. EXPORTING Exporting is the simplest and widely used mode of entering foreign markets. The advantages of exporting include: a. Need for Limited Finance : If the company selects a company in the host country to distribute, the company can enter international market with no or less financial resources. Alternatively, if the company chooses to distribute on its own, it needs to invest financial resources, but this amount would be quite less compared to that would be necessary under other modes. b. Less Risk: Exporting involves less risk as the company understands the culture, customer and the market of the host country gradually. The company can enter the host country on a lull scale, if the product is accepted by the host country's market. British company selected this mode to export jams to Japan. Forms of Exporting a. Indirect Exporting Indirect exporting is exporting the products either in their original form or in the modified form to a foreign country through another domestic company. Various publishers ill India including Himalaya Publishing House, sell their products, i.e., books to UBS publishers of India, which in turn exports these books to various foreign countries. b. Direct Exporting Direct exporting is selling the products in a foreign country directly through its distribution arrangements or through a host country's company. Baskin Robbins initially exported its ice-cream to Russia in 1990 and later opened 74 outlets with Russian partners. Finally in 1995 it established its ice cream plant in Moscow." c. Intracorporate Transfers Intracorporate transfers are selling of products by a company to its affiliated company in host country (another country). Selling of products by Hindustan Lever in India to Unilever in USA. This transaction is treated as exports in India and imports in USA. Factors to be considered while exporting a. Marketing factors like image, distribution networks, responsiveness to the customer, customer awareness and customer preferences. b. Logistical consideration: These factors include physical distribution costs, warehousing costs, packaging, transporting, inventory carrying costs. c. Distribution Issues: These include own distribution networks, networks of host county's companies. Japanese companies like Sony, Minolta and Hitachi rely on the disrtibution networks Of' their subsidiaries in the host country. Export Intermediaries

Export intermediaries perform a variety of functions and enable tile small companies to export their goods to foreign countries. Their functions include: handling transportation, documentation, taking ownership of foreign-bound goods, assuming total responsibility for exporting and financing. Types of export intermediaries include: a. Export management companies act as export department of the exporting firm (its client). b. These companies act as commission agents for exports or they take title to the goods. c. Cooperative Society: The domestic companies desire to export the goods form a cooperative society, which undertakes the exporting operations of its members. d. International Trading Company: This company is engaged in directly exporting and importing. It buys the goods from the domestic companies and exports. Therefore, the companies can export their goods by selling them to the international trading company. e. Manufacturers' Agents: They work on a commission basis. They solicit domestic orders for foreign manufacturers. f. Manufacturers' Export Agents: These agents also work on a commission basis. They sell the domestic manufacturers' products in the foreign markets and act as their foreign sales department. g. Export and Import Brokers: The brokers bridge the gap between exporters and importers and bring these two parties together. h. Freight Forwarders: Freight forwarders help the domestic manufacturers in exporting their goods by performing various functions like physical transportation of goods, arranging customs documents and arranging transportation services. Now, we shall discuss the next mode of entering foreign markets, i.e., International Licensing.

LECTURE 6
II. LICENSING In this mode of entry, the domestic manufacturer leases the right to use its intellectual property, i.e., technology, work methods, patents, copy rights, brand names, trade marks etc. to a manufacturer in a foreign country for a fee." Here the manufacturer in the domestic country is called 'licensor' and the manufacturer in the foreign country is called `licensee.' Licensing is a popular method of entering foreign markets. The cost of entering foreign markets through this mode is less costly. The domestic company need not invest any capital as it has already developed intellectual property. As such, the domestic company earns revenue without additional investment. Hence, most of the companies prefer this mode of foreign entry. The domestic company can choose any international location and enjoy the advantages without -incurring any obligations and responsibilities of ownership, managerial, investment etc. Kirin Brewery - Japan's largest beer producer entered Canada by granting license to Molson and British market by granting license to Charles Wells Brewery. Basic Issues in International Licensing Companies should consider various factors in deciding negotiations. Each international licensing is unique and has to be decided separately. Common factors affecting international licenses a. Boundaries of the Agreements: The companies should clearly define the boundaries of agreements. They determine which rights and privileges are being conveyed in the agreement. Example: Pepsi-Cola granted license to Heineken of Netherlands with exclusive rights of producing and selling Pepsi-Cola in Netherlands. Under this agreement the boundaries are

(i) Heineken should not export Pepsi-Cola to any other country, (ii) Pepsi supplies concentrated cola syrupand Heineken adds carbonated water to produce beverage and (iii) Pepsi can grnatclicence, to other companies in Netherlands to produce other products of' Pepsi like Potatochips b. Determination of Royalty: The most important factor in deciding the license is the amount of royalty. It is needless to mention that the licensor expects high rate of royalty while licensee would be unwilling to par much royalty. However,both the parties negotiate for a fair royalty for both the sides in order to implement the contract more c. Determining; Rights, Privileges and Constraints: Another important factor, in granting license is detremining clear and specifically the and constraints. For example, If the Indian licensee off Aiwa TV uses interior input; in order to reduce price, boost up sales and profit, the image Of the Japanese licensor would be damaged. The another constraint is that the licensee may under report the volume of the sales in order to reduce tile royalty payment to tile licensor. Therefore, the licensing agreement clearly and Specifically' indicate the rights, etc., of both the parties and reduces tile freedom of the licensee in order to reduce the hurdles in the implementation of tile agreement. d. Dispute Settlement Mechanism: The licensee and licensor should clearly mention the mechanism to settle the disputes as disputes are hound to crop up. This is because, settlement of disputes in courts is costly, time consuming and hinders business interests. e Agreement Duration: The two parties of the agreement specify the duration of the agreement. Licensing cannot he a short-term strategy. Hence, the duration of the licensing should not be of the short-term. It would always be appropriate to have long duration of the licensing. Tokyo Disneyland demanded on a 100-year licensing agreement With The Walt Disney Company. Advantages a. Licensing mode carries relatively low investment on the part of licensor b. Licensing mode carries low financial risk to the licensor. c. Licensor can investigate the foreign market without much efforts on his part. d. Licensee gets the benefits with less investment on research and development. e. Licensee escapes himself from the risk of product failure. For example, Nintendo game designers have the relatively safety of knowing millions of game system units. Disadvantages a. Licensing agreements reduce the market pportunities for both the licensor and licensee. b. Pepsi-cola cannot enter Netherlands and Heineken cannot sell Coca-cola. c. Both the parties have the responsibilities to maintain the product quality and promoting the product. Therefore, one party can affect the other through their improper acts. d. Costly and tedious litigation may crop up and hurt both the parties and the market. e. There is scope for misunderstanding between the parties despite the effectiveness of the agreement. The best example is Oleg Cassini and Jovan. f. There is a problem of leakage of the trade secrets of the licensor. g. The licensee may develop his reputation. h. The liensee may sell the product outside the agreed territory and after the expiry of the contract.

LECTURE 7
III. FRANCHISING

Franchising is a form of licensing. The franchisor can exercise more control over the franchised compared to that in licensing. International franchising is growing at a fast rate. Under franchising, an independent organisation called the franchisee operates the business under the name of another company called the franchisor. Under this agreement the franchisee pays fee to t e franchisor. The franchisor provides the following services to the franchisee: a. Trade marks b. Operating systems c. Product reputations d. Continuous support systems like advertising, employee training, reservation services, quality assurance programmes etc. Basic Issues in Franchising a. The franchisor has been successful in his home country. McDonnell was successful in USA due to the popular menu and fast and efficient services. b. The factors for the success of the McDonald are later transferred to other countries. c. The franchiser may have the experience in franchising in the home country before going for international franchising. d. Foreign investors should come forward for introducing the product on franchising basis. Franchising Agreements : The franchising agreement should contain important items as follows: a. Franchisee has to pay a fixed amount and royalty based on the sales to the franchisor. b. Franchisee should agree to adhere to follow the franchisor's requirements like appearance, financial reporting, operating procedures, customer service etc." c. Franchisor helps the franchisee in establishing the manufacturing facilities, services facilities. provides expertise, advertising, corporate image etc. d. Franchisor allows the franchisee some degree of flexibility in order to meet the local taste-, and preferences. McDonald restaurants in Germany sell beer also and McDonald restaurants in France sell wine also. Advantages a. Franchisor can enter global markets with low investment and low risks. b. Franchisor can get the information regarding the markets, culture, customs and environment of the host country. c. Franchisor learns more lessons from the experiences of the franchisees; which he could not experience front the home country's market. McDonald benefited from the world wide learning phenomenon. McDonald is convinced to open a restaurant in inner-city office building in Japan. This location has become a more successful one. Based on this lesson, McDonald opened its restaurants in downtown locations in various countries. d. Franchisee can early start a business with low risk as he selects an established and proven product and operating system, e. Franchise gets the benefits of R & D with low cost. f. Franchisee escapes form the risk of product failure. Disadvantages

a. International franchising may be more complicated than domestic

franchising. b. McDonald taught the Russian farmers the methods of growing potatos to meet its standards. c. It is difficult to control the international franchisee. As one of the French investor did not maintain the stores as per the standards, McDonald did revoke the franchise.

d. Franchising agents reduce the market opportunities for both the franchisor and franchisee. e. Both the parties have the responsibilities to maintain product quality and product promotion. f. There is scope for misunderstanding between the parties. g. There is a problem of leakage of trade secrets.

LECTURE 8
IV. SPECIAL MODES Sonic companies cannot make long-term investments or long-term contracts to enter markets. Therefore, they may use specialised strategies. These specialised strategies include: Contract manufacturing Management contract Turnkey projects a. Contract Manufacturing Some companies outsource their part of or entire production and concentrate on marketing operations. This practice is called the contract manufacturing or outsourcing. Example: i) Nike has contracted with a number of factories in south-east Asia to produce its athletic foot ware and it concentrates on marketing. ii) Bata also contracted with a number of cobblers in India to produce its foot ware and concentrate on marketing. iii) Mega Toys - a Los Angeles based company contracts with Chinese plants to produce Toys and Mega Toys concentrates on marketing. Advantages a. International business can focus on the part of the value chain where it has distinctive competence. b. It 'reduces the cost of production as the host country's companies with their relative cost advantage produce at low cost. c. Small and medium industrial units in the host country can also develop as most of the production activities take in these units. d. The international company `gets the location advantages, generated; by the host country's production. Disadvantages a. Host country's companies may take up the marketing activities also, hindering the interest of the international company. b. Host county's companies may not strictly adhere to the production design, quality standards etc. These factors result in quality problems, design problem and other surprises. c. The poor working countries in the host country's companies affect the company's, image. For example, Nike has suffered a string of blows to its public image, because of reports of unsafe and harsh working conditions in Vietnamese factories churning our Nike foot ware. b. Management Contracts The companies with low level technology and managerial expertise may seek tile assistance of a foreign company. Then the foreign company may agree to provide technical assistance

a. b. c.

and managerial expertise. This agreement between these two companies is called the management contract. A management contract is an agreement between two companies whereby one company provides managerial assistance, technical expertise and specialised services to the Second company of the argument for a certain agreed period in return for monetary compensation. Monetary Compensation may be in the form of: > A flat fee or > Percentage over sales and > Performance bonus based on profitability, sales growth, production or quality measures. Management contracts are mostly due to governmental inventions. The Government of the Kingdom of Saudi Arabia nationalised Armco and requested the former owners to manage the company. Exxon and other former owners of Armco accepted the offer. Delta, Air France and KLM often provide technical and managerial assistance to the small airlines companies owned by the Governments. Advantages

a.

Foreign company earns additional income without any additional investment, risks and obligations. b. Hilton Hotels provided these services to other hotels without additional investment and earned additional income.. c. This arrangement and additional income allows the company to enhance its image in the investors and mobilize the funds for expansion. d. Management contract helps the companies to enter other business areas in the host country. e. The companies can act as dealer for the business of, the host countrys business in the home country. Italys ENI (Ente Nazionale `Idrocarburi) used its knowledge of European energy industry 'to help the Algerian national oil firm: Later the Algerian national oil firm requested the ENI to increase their business in European petroleum 'market.` Under a management contract. ENI constructed network of Pipelines for the Algerian company to distribute petroleum in Europe." Disadvantages Sometimes the companies allow the companies in the host country even to use their trade marks and brand name. The host country's companies spoil the brand name, if they do not keep up the quality of the product service. The host countrys companies may leak the secrets of technology

LECTURE 9
c. Turnkey Project Indonesian Government during 1974 invited global tenders for construction of a sugar factory in the country. Indonesia Government received the tenders from the companies of USA, UK, France. Germany and Japan. One of the Japanese Company quoted highest price compared to all other Companies. Indonesian Government studied the quotation of this Japanese company. This quotation includes: development of the fields for growing sugarcane, development of seedlings, construction of sugar factory, roads, communication, power, water etc., connecting the factory, train the local people, development of the distribution channels in Indonesia, production Of' by-products and their market, plans for the export of surplus sugar etc." It also made a provision for the transfer of the factory along with the total package to the Indonesian Government and follow-up the activities after it is transferred to the Indonesian Government. Indonesian Government was very much satisfied with the total package and invited the Japanese company to implement the project. The Japanese company and Indonesian Government entered an agreement for implantation of this project by the Japanese company for a price. This project is called 'Turnkey Project.

A turnkey project is a contract under which a firm agrees to fully design, construct and equip a manufacturing/business/service facility and turn the project over to the purchaser when it is ready for operation for remuneration. The forms of remuneration include: A fixed price (firm plans to implement the project below this price) Payment on cost plus basis (i.e., total cost incurred plus profit) This form of pricing allows the company to shift the risk of inflation /enhanced costs to the purchaser. International turnkey projects include nuclear power plants, air ports, oil refinery, national highways, railway lines etc. Hence, they are large and multiyear projects. International companies involve in such projects include: Bechtel, Brown and Root, Hyundai Group, Kennengen, Friedrich Krupp Gmb H. etc. The companies normally approach the host country's Governments or International Finance, Corporation, Export-Import Bank of USA and the like for financial assistance as the turnkey projects require huge finances. The recent approach of turnkey projects is Build, Operate and Transfer (B-O-T). The company builds the manufacturing/services facility, operates it for some time and then transfers it to the host country's Government. In this approach, the contractor will not be paid the remuneration. Government of Gabon and the Electricity Supply Board International of Ireland and Campaginc Generale des Eaux of France agreed to establish electric supply system and water system in Gabon and operate for twenty five years and then transfer the ownership of these projects to the Government of Gabon. V. FOREIGN DIRECT INVESTMENT WITHOUT ALLIANCES Some companies, enter the foreign markets through exporting, licensing, franchising etc., get the knowledge and awareness of the foreign markets, culture of the country, customers' preferences, political situation of the country etc., and then establish manufacturing facilities by ownership in the foreign countries. Baskin-Robbins in Russia followed this strategy. In contrast, some other companies enter the foreign market through ownership and control of assets in host countries. Companies which enter the international markets through foreign direct investment (FDI) invest their money, establish manufacturing and marketing, facilities through ownership and control. Foreign firm needs to control the operations when It has foreign firm's need to control the operations when it has subsidiaries to achieve strategic synergies. The technology, manufacturing expertise, intellectual property rights have potentialities and their full utilisation needs planned exploitation. The US companies transferred their managerial expertise and technological skills to their subsidiaries operating in UK and hence these subsidiaries have become successful competitors to UK companies. Advantages a. Mostly, the customers of the host country prefer to the products produced in their country like -'Be American, Buy American, 'Be Indian. Buy Indian.'. In such cases FDI helps the company to gain market through this mode rather than other modes. b. Purchase managers of most of the companies prefer to buy local production in order to ensure certainty of supply, faster services, quality dependability and better communication with the supplier. c. The company can produce based on the local environment and changing preferences of the cutomers. Disadvantages a. FDI exposes the company (to a fullest extent) tothe host country's politicaL and economic risks.

b. c. d. e.

FDI also exposes the company to the exchange rate fluctuations. Some countries discourage the entry of foreign companies through FDI in order to protect thedomestic industry. Changing Government policies of the host country may create uncertainties to the company. Host country Governments, sometimes, ban the acquisition of local companies by foreign companies, impose restrictions on repatriation of dividends and capital. India has allowed IOO% convertibility.

The mode of FDI without alliances is Greenfield strategy. The Greenfield Strategy The term greenfield refers to starting with a virgin green site and then building is, greenfield strategy is starting of the operations of a company from scratch in a foreign market. The company conducts the market survey, selects the location, buys or leases land, creates facilities, erects the machinery, remits or transfers the human resources and starts the operations and marketing activities. This strategy is followed by Fuji in locating its manufacturing, facilities in South Carolina, by Mercedes-Benz in locating automobile assembly plant in Alabama and by Nissan in locating its factory in Sunderland, England." Disney management faced the problems in building Disneyland in Paris. These problems include: Problems in dealing with French construction contractors. Communication difficulties with painters. Local contractors demanded $150 million extra at the time of opening , and threatened the opening. Local employees resisted the firm's attempt to impose its US work values. Advantages a. The company selects the best location from all viewpoints. b. The company can avail the incentives, rebates and concessions offered by the host governments including local governments. c. The company can have latest models of the buildings, machinery and equipment technology. d. The company can, also have its own policies and styles of human resources management. e. The company can have its gestation period to understand and adjust to the new culture of the host country. Thus it can avoid the cultural shock. Disadvantages a. This strategy results in a longer gestation period as the successful implementation takes time and patience. b. Some companies may not get the land in the location of its choice. c. The company has to follow the rules and regulations imposed by the host country's Government in case of construction of the factory buildings. d. Host country's Government may impose conditions that the company should recruit local people and train them, if necessary, to meet the companys requirement.

LECTURE 10
VI. FOREIGN DIRECT INVESTMENT WITH STRATEGIC ALLIANCES Innovations, creations, productivity, growth, expansions and diversifications, in the recent years, are mostly accomplished by the strategic alliances adopted by various companies like mergers, acquisitions and joint-ventures. Strategic alliance is a co-operative and collaborative approach to achieve the larger goals. Strategic alliance takes different forms like licensing, franchising, contract manufacturing,

joint ventures etc. Alliance is a strategy to explore a new market which the companies individually cannot do. Example, Xerox of USA and Fuji of Japan collaborated to explore new markets in Europe and Pacific Rim. Two companies join hands in order to align their distinctive and different strengths. Dunlop and Pirelli - the two tyre making corporations -joined together in order to synergise the strength of marketing capabilities of Dunlop and R&D capabilities of Pirelli. a. Mergers and Acquisitions Domestic companies enter international business though mergers and acquisitions. A domestic company selects a foreign company and merges itself with the foreign company in order to enter international business. Alternatively, the domestic company may purchase the foreign company and acquires its ownership and control. Domestic business selects this mode of entering international business as it provides immediate access to international manufacturing facilities and marketing, network. Otherwise, the domestic company faces serious problems in gaining access to international markets. For example. ('()C Cola entered Indian market instantly 11V acquiring the Pane and its bottling units. In addition, the domestic company through this strategy of mercers and acquisition may also get access to new technology or a patent right. 1 Though mergers and acquisitions provide easy and instant entry to global business, it would be very difficult to appraise the cases of acquisitions and mergers. Some times it Would he cheaper to a domestic company to have a green field strategy than by acquisitions. Sometimes mergers and acquisitions also result in purchasing the problems of a fore Advantages a. The company immediately gets the ownership and control over the acquired firm's factories, employees, technology, brand names and distribution networks. b. The company can formulate international strategy and generate more revenues. c. If the industry already reached the stage of optimum capacity level or overcapacity level in the host country. This strategy helps the economy of the host country. Disadvantages a. Acquiring a firm in a foreign country is a complex task involving bankers, lawyers, regulations, mergers and acquisition specialists from the two distribution networks. b. This strategy adds no capacity to the industry. c. Sometimes host countries imposed restrictions on acquisition of local companies by the foreign companies. a. Labour problems of the host country's company are also transferred to the acquired company.

b. Companies adopt this strategy just as a means of entering foreign markets. Procter
and Gamble entered Mexican tissue products in 1997 by purchasing Loreto Y. Pena Pobre's manufacturing and marketing systems. b. Joint Ventures Two or more firms join together to create a new business entity that is legally separate and distinct from its parents. Joint ventures are established as corporations and owned by the funding partners in the predetermined proportions. American Motor Corporation entered into ajoint venture with Beijing Automotive Works called Beijing Jeep to enter Chinese market by producing jeeps and other vehicles. Joint ventures involve shared ownership. Joint Ventures are common in international business. Various environmental factors like social, technological, economic and political encourage the formation of Joint ventures. Joint ventures provide required strengths in terms of required capital, latest technology required human talent etc. and enable the companies to share the risks in the foreign markets. Joint ventures involve the local companies. This act improves the local image in the host country and also satisfies the governmental requirements regarding joint ventures. In fact,

support of the host country's Government is essential for the success of the joint venture. Massey-Ferguson entered into a 51% joint venture in Turkey to produce Tractors. It planned to produce 50,000 engines per year and called the Government to provide facilities for an additional production of 30,000 tractors a year. Massey-Ferguson failed to understand economic, political and Governmental factors in the country. The company needed Government support for its successful operation. The venture is terminated as the Government of Turkey did not provide he support to the company. Advantages a. Joint ventures provide large capital funds. Joint ventures are suitable for major projects. b. Joint venture spread the risk between or among, partners. c. Different parties to the joint venture bring different kinds of skills like technical skills, technology, human skills, expertise, marketing skills or marketing networks. d. Joint ventures make large projects and turn key projects feasible and possible. e. Joint ventures provide synergy due to combined efforts of varied parties. Disadvantages a. Joint ventures are also potential for conflicts. They result in disputes between or among parties due to varied interests. For example, the interest of a host country's company in developing countries would be to get the technology from its partner while the interest of a partner of an advanced county would be to get the marketing expertise from the host country's company. b. The partners delay tile decision-making once the dispute arises. Then the operations become unresponsive and inefficient. c. Decision-making is normally slowed down in joint ventures due to the involvement of a number of parties. d. Scope for collapse of a joint venture is more due to entry of competitors, changes in the business environment in the two countries, changes in the partners' strengths etc. e. Life cycle of a joint venture is hindered by many causes of collapse.

Life Cycle of a Joint Venture

i. Exploratory Stage The first stage of the life cycle of a joint venture begins with exploratory stage. During this stage the prospective partners start making: Alliances Project Collaborations Feasibility Studies ii. Growth Stage After making alliances, the growth phase of the joint venture takes place. If the interests of the parties vary at this stage, they will lead to collapse of the joint venture in this phase itself. If the partners work together, this phase leads to stability of the joint ventures. Even in the stability stage, the joint venture may collapse. If not, the changed interests of the parties force them to renegotiate regarding their interests and shares. If the renegotiation is not successful, the joint venture may collapse. The reasons for collapse include: Entry of new competitors Changes in Business Environment Changes in partners' strengths Today's partners may become tomorrow's competitors, Changes in partners' interests.

LECTURE 11

STRATEGIES OF INTERNATIONALISATION The process of internationalisation of business could be managed with different strategies. These include a. Importing and exporting b. Licensing or franchising c. Strategic alliance or joint venture d. Direct investment. A brief overview of these strategies of internationalisation is given below. a. Importing and Exporting The oldest strategy of internationalisation by business firms is to engage in export and import of goods and services. Export means producing goods in one's own country and selling them to another country whereas import involves bringing goods into the home country from abroad. Exports and imports are subject to duties, tariffs and other regulations, which have to be taken care of by the firm's management. Otherwise managing the firm involves the routine problems of managing the domestic business. b. Licensing or Franchising Under this strategy, a company in one country (the licensor) enters into an 'agreement with a company in another country (the licensee) to use the manufacturing, processing, trademark or name, patents, technical assistance, marketing knowledge, trade secrets or some other skill provided by the licensor for an agreed compensation (royalty). The approach is appropriate when foreign production is preferable to production at home, but the licensor does not wish to engage in foreign production itself. Factors that lead to licensing arrangements include excessive transportation costs, government regulations and production costs in the home country. Where a firm allows some firm in a foreign market to use its trade mark and formula, it is known as franchising. Under this arrangement, a franchising firm (the franchiser) grants for a fee an independent foreign firm (the franchisee) the use of a trademark or other asset that is essential to the operation of the franchised business. This approach combines a proven, operating formula given by the franchiser with local knowledge and entrepreneurial initiative (possessed by the franchisee). It is appropriate for firms that have developed such a formula. The major advantage of licensing is that profitability can be increased by extending the brand into new markets This strategy is frequently used for entry into less developed countries where older technology is still acceptable and, in fact. may be state of the art The primary disadvantage of licensing is inflexibility- A firm can tie up control of its product or expertise for a -long period of time And if the licensee does no: develop the market effectively, the licensing firm can lose profits The second disadvantage is that licensees can take the knowledge and skill that they have been given access to for a foreign market and exploit them in the licensing firm s home market When this happens, what used to be a business partner, becomes a business competitor, c. Strategic Alliance The term 'strategic alliance' denotes a cooperative arrangement between two o or more firms for neutral benefit One such arrangement is joint venture A joint venture is a partnership arrangement in which the foreign operation is owned in part by the domestic company and in part by a foreign company. Thus, a joint venture (JV) consists of two or more partners 'sharing in a project through participation in equity capital_ Joint ventures may take many forms depending on what is shared, the degree of sharing that occurs, the number of partners involved, the type of the project and the time frame. As such, there are many options in this type of strategic alliance Strategic alliances might also involve non-equity arrangements. Such types of alliances have been entered into by different airlines to reduce costs and provide better customer services. Strategic alliances have both advantages and disadvantages. For example, they can allow quick entry into a market by taking advantage of the existing strengths of participants.

Japanese automobile manufacturers employed this strategy to enter the U.S. market by using the already established distribution systems of U.S. automobile manufacturers. Strategic alliances are also an effective way of gaining access to technology or raw materials. And they allow the firms to share the risk and cost of the new venture. One major disadvantage of this approach lies with the shared ownership of joint ventures. Although it reduces the risk for each participant, it also limits the control and the return that each firm can enjoy. : d. Direct Investment Many firms make direct investments in foreign countries to capitalize on lower labour costs and potentials of huge market. It involves building production facilities in a foreign country. Thus, foreign direct investment (FDI) takes place when a company registered in one country builds or acquires production facilities- or subsidiaries in a foreign country. The major benefits of direct investment are complete managerial control over operations and profits do not have to be shared as in case of a joint venture. Purchasing an existing firm provides additional benefits in that the human resources, plant and organizational infrastructure are already in place. Acquisition is also a way to purchase the brand-name identification of a product as was done by Coca Cola when it acquired Indian brands 'Thumps Up and 'Limca from Parle Drinks. However direct investment also increases complexity in decision-making and economic and political risks adjusting the management style with the foreign Culture may be another, significant problem

LECTURE 12
EVOLUTION OF GROWTH STRATEGIES IN INTERNATIONAL BUSINESS The evolution of growth strategies in international business may be categorised as follows: a. Passive to active pursuit of opportunities. b. External to internal handling of the business c. Limited to extensive modes of operations d. Few to many foreign locations. e. Similar to dissimilar environments a. Passive to Active Pursuit of Opportunities The companies generally move from passive to active expansion Initially 'he companies fear they may not succeed and they know very little about foreign trade Even the environment in the other land is unknown. Once they become sure of the opportunities abroad, they actively take on the assignment b. External to Internal Handling of Operations The companies initially use intermediaries or someone from the host country to carry the operations in the foreign land because they are not aware of the environment, rules & regulations of business in that land. Once the business grows successfully the company prefer to run the operations by it own staff. c. Limited to Extensive Modes of Operation The company generally starts its international operations by exporting or importing as this minimizes risk. Once they capture the market and are quite sure of their success, they would plan to invest and set up production unit. However, Foreign Direct Investment (FDI) is more risky than exporting and importing. It also requires more international commitment of the company's resources because the company has to send qualified technicians to the foreign country to establish and help run the new operations. d.Few to Many Foreign Locations The companies initially expand to those foreign locations, which are similar to their own country_ economically, culturally and geographically. Once they become familiar then

they may expand to the other neighboring countries of the host country. Thus, they move from few to many countries. There is also a perception of less risk because of greater familiarity with nearby areas, its common languages and level of economic development. Further, trading agreements help in the free movement of goods among the foundaries. e. Similar to Dissimilar Environment Now-a-days because of the advancement technology, like the use of internet, it has become easier from the companies to know about their market demand globally. Even they can market their products easily, without much expenses through website, cables. Thus, the companies instead of first moving to known countries alone, may reach out globally, both in similar and dissimilar environment. GLOBALIZATION Introduction to Globalisation What is Globalisation? Globalization is a relatively new idea in the social sciences, though some commentators argue that, while the term is new, what the term denotes is an ancient, or at least not novel, set of phenomena. The central feature of the idea of globalization that is current in the social sciences is that many contemporary problems cannot be adequately studied at the level of nation states, that is, in terms of national societies or international relations, but need to be theorized in terms of global transnational) processes, beyond the level of the nation-state Globalisation researchers have focused on two new phenomena that have become significant in the last few decades: one, qualitative and quantitative changes in economic structures through processes such as the globalisation of capital and production; and two, transformations in the technological base and subsequent global scope of the mass media. For these reasons, it is increasingly important to analyse the world economy and society globally as well as nationally. The standard resolution of the difficulties this conclusion raises for concrete empirical research is an often rather vague injunction to think globally, act locally, which appears to be as popular with the major transnational corporations (as we shall see) as it is with sociologists, anthropologists, geographers, environmentalists and the rest. Most theory and research on transnational communities proceeds in a similar fashion. Global system theory has its own version of think globally, act locally, where it is an expression of how the global capitalist system operates to maximize profits. Developing Countries and the Global Marketplace Is it true that globalisation is the cause of the impoverishment of the poor countries of the world? Again, by and large, you have to say no, I think. When you expand free trade, there is no doubt that it can have disruptive consequences for some poorer countries, when those countries are not prepared to engage with the economic forces that are released. However if you look at the statistics, you can show that engagement with the global economy is actually the condition of the economic development of poorer countries. No country, which has sought to disengage from the global economy, has prospered countries like Burma or North Korea that try to isolate themselves from the world system are among the poorest countries in the world. Poor countries which have kept fairly closed economies have only had a .04 growth rate, that is virtually no growth rate, over the past fifteen years. Poor economies that have been more open have had an average 4.5 percent growth rate over that period. So you cannot blame globalisation for these inequalities. The key question concerning economic development is really under what conditions can poorer countries engage with globalizing forces. And one should still remember, I think, that we have before us the most successful example of countries leveraging themselves out of poverty ever known, which is the East Asian economies. In spite of the crisis of 1997-98, there has never been an example in history of millions of people being leveraged out of poverty so quickly. This happened over a period of some twenty-five or so years. In 1970, for example, Korea was poorer than Portugal. Now Korea is richer than

Portugal per head of GDP. So there is a massive transformation, and these countries achieved it by engaging with the global economy, not by disengaging from it. Governments still have a Role to Play In order to produce a more egalitarian world and help the poorer countries to become richer, you cannot simply leave everything to the global marketplace. Market forces often tend to accentuate inequalities, rather than reduce them. That means what you are looking for is a new kind of relationship between governments and markets. Some of the best writing on this is by Joe Stiglitz, who was a famous economist at The World Bank. He wrote a series of articles about the International Monetary Fund, criticizing what he calls the Washington Consensus. Stiglitz argues that you need a certain measure of government involvement in order to facilitate economic development. He says that there is no known example of successful economic development where a government has not been involved, including the United States in its early years, the UK in its early years, European countries, Japan, the Asian economies, and so on. Stiglitz essentially argues for a third way in development studies, although he does not use that term. He says that, in the period after the Second World War, many people thought that the state was the main medium of economic development. And that failed. Countries that tried to develop through expansion of state institutions, like Tanzania or India, had abysmal economic records. As a result, many people thought, Ha, ha; well, if the state cannot do it, then we must turn toward the market, liberalize the market and everything will suddenly come right. Stiglitz says this does not work, either, and I believe this to be correct. You need a kind of partnership between government and market institutions. And I think Stiglitz is quite right in some of the subtle and acute observations he makes. For example, he says that it has proved to be much, much harder to establish market institutions than we ever imagined in countries that do not have them. The reason is that it is very hard to establish an appropriate legal system, very hard to establish appropriate norms of a cultural kind that underlie markets. You cannot have a successful market economy unless you have a successful civic culture. Having a successful civic culture is also the condition of democracy. Anyone who has studied recent events in Russia will know this. In Russia, what you had under the Soviet system was essentially an economy of favours. The way in which you got things done was not through the use of money, because that would not get you anywhere, it was through the use of favors. You would have to ring someone if you needed something, like getting a telephone quickly without waiting years for it. Out of this economy of favors has come a kind of corrupt gangster-style attempt at capitalism, which lacks the basic institutions out of which a successful capitalist economy and a successful democratic society can be built.

LECTURE 13
Whats New about Globalisation? On the one hand, there are those who are skeptical of the term globalisation. The skeptics say that, if you look back a hundred years to the late nineteenth century, there was already a good deal of trading across the world. At that time, there was also mass migration, as everyone who knows American history will be very conscious of. So the skeptics say essentially, What is new? You could call this view a nothing-new-under-the-sun kind of position. The old left, the traditional leftist parties across the world, including sectors of the Democrat Party in the US, tend to like this skeptical position. If you do not believe that too much is actually changing in the world, you do not have to make too many political changes, either. For example, you keep existing welfare institutions intact. That is one side of the great globalisation debate. On the other side is what I call the hyper-globalisers. They say not only are there fundamental changes going on, but they are so fundamental they have already transformed most of the basic systems and structures of the world. To my mind, there is no doubt that the truth is closer to the hyper-globalisers version. There are fundamental changes going on in the world economy which differentiate it from previous periods.

Recent research shows that the volume of trade in physical commodities is much, much higher than it was 100 years ago, and a lot higher than it was 30 or 40 years ago. The most important development in the global economy is not, of course, trade in physical commodities, it is trade in information and trade in currency. Globalisation from below When most people talk about globalisation, they talk about globalisation of markets. They ignore fundamental further aspects of globalisation, which I call globalisation from below. Globalisation from below is the way in which interest groups, self-help groups, third sector groups, and volunteer associations themselves draw upon international communication systems to establish themselves in the global arena. This is indeed what happened with the protests at the World Trade Organization meeting in Seattle. Everybody knows that the protesters who assembled in Seattle did so by using the Internet. There was a very funny poster that some guy was holding in Seattle that said, Join the worldwide movement against globalisation. If you go back 30 years, you only had about 1000 non-governmental groups in the world, groups like Greenpeace and so forth. Now you have by some estimates 30,000 such groups, many of them operating at a global level, many of them fairly well resourced. One of the themes of the Seattle protests was corporate power. My view is that the power of corporations can be readily exaggerated. You only have to consider the humbling of the Monsanto Corporation to see that, no matter how powerful you are as a corporation, you can be brought to your knees pretty quickly. At one moment, Monsanto seemed to have everything going for them in the area of genetic technology. But they underestimated the power of consumer groups, which play a crucial role in global society, especially in Europe. If you are running a corporation, you ignore these forces at your peril. No matter what you are doing, in whatever part of the world, you will be watched. So corporations flirt with disaster if they ignore the leverage that the counter power which globalisation from below is promoting in the world. Managing the Forces of Globalisation If you look back to the beginning of the twentieth century, you could say that was the first age of globalization, the open markets and so forth. A lot of people thought well, there is going to be a period of economic prosperity and global cooperation, we can build a League of Nations, and so forth. And what happened was a century of warfare, 200 million people killed in warfare in the twentieth century. I think we have an obligation to try again at the beginning of the twenty-first century. It is a much more intense age of globalisation. But if we do not effectively cope with issues, especially of expanding global inequalities, we will not be able to handle the forces which globalisation has released. ENTRY BARRIERS ENTRY BARRIER is any obstacle making it more difficult for a firm to enter a product / service market NON-TARIFF BARRIERS TARIFF BARRIERS Customs duties enforced on imported products (final products or intermediate products) Different tariff rates for different countries and different products. May be adjusted by political influence from trade associations Include all other entry barriers E.g. transportation costs, slow customs procedures, etc. The Role of Entry Barriers a. Intense competition among several differentiated brands b. Strong brand names charging a premium price over generic competitors

c. d. e. f. g. h.

Pro-domestic sentiment favoring local brands Limited distribution access Bureaucratic inertia Government regulations Limited access to technology Local monopolies

a. b. c. d. e. f. g. a. b. c. d. e. f.

More Entry Barriers Artificial Entry Barriers Natural Entry Barriers Tariffs Pro-domestic Markets Competition among differentiated brands, all companies compete on equal footing. Government regulations, limited distribution access, tariff barriers Entry Barriers Protect Domestic Turf Barriers and Mode of Entry When barriers are low, the firm will be likely to enter via exporting. When barriers are high, alternative modes of entry have to be chosen: License a local producer Create a joint venture Engage in a distribution alliance Invest in a wholly owned subsidiary

LECTURE 14
INDIA'S ATTRACTIVENESS With North American economies stuck in a condition of too much capital in pursuit of too few attractive opportunities, investors will do well to consider regions of the world where economic growth and expansion have greater potential than in North America. Obvious candidates include India and China - the two largest populated countries, in the world. These two countries will almost certainly enjoy far more rapid economic development than the rest of the world for years to come, if only because they have so far to go to catch up to the developed world. Policies and strategies are falling into place in both countries to assure that happens. China has been catching much of the investment community's attention lately, a, it goes through a change of leadership. In addition, tile return of Hon:; Kong; to the fold was widely perceived as the link China needed to the economically tree world mid its ways. In ?004 cross border merger and acquisition in sales recorded US$ I. -f; 1,1111011 and in purchases S0.86 billion recorded in India.

Improve Stay the same Deteriorate FIGURE Perceptions of Local Economic Performance over the Next 12 Months - Top 10 Scores. India is the only developing country in the world with a huge, highly educated, English speaking labour force available at a fraction of the cost of labour in most western countries. Furthermore, India has promoted the channelling of its educated population to the knowledge-based field of information technology services. With demonstrated capability in this field, India now has about 2 per cent of the world's market in IT services. Over the next 20 years, India should emerge as world leader and driving force in this field. Indian politicians and businessmen should expand upon this great strength. They should continue to work in a, proactive manner to make India a world leader in IT services. Based on neo IT (US based outsourcing consultancy firm) survey in October 2005, India is the hot spot for outsourcing of US corporates, owing to its skilled labour pool and mature level of service. (a) Impact o f Changes in FDI Policy According to World Investment Report, 2005, a more liberal investment regime led to a 25 per cent jump in India's FDI flow in 2004 to $5.33 billion compared to $9.26 billion in 2003. The effectiveness of the changes in the FDI policy depends on the domestic investment environment and the global outlook. FDI-GDP ratio in India is more 1.0 per cent compared to 4-5 per cent for China, Thailand and Malaysia. The recent removal of sectoral caps for FDI flow is expected to bring out a surge in foreign investments. Opening up of insurance sector, raising the limit in banking and permitting 100 per cent FDI in almost all manufacturing sectors, have not exactly accelerated the FDI inflows. The FDI capital in banking rose from 20 per cent to 49 per cent. With the factors like India being the fastest growing economy in the world, attractive valuations compared to other emerging markets (in May 2005 )forward P/E at 16.5 compared to 12.6 for Asia/ Pacific), and the government's ongoing divestment programme invariably made India an attractive destination. Net investments by FII in Indian equities touched a new peak of $8.0 billion in 2004. Mega offers from companies like ONGC, TCS, and NTPC, GAIL were a huge success on the back of huge demand from FIIs. The attractiveness of Indian fundamentals largely depends on the police measures of the government in earl}' 2003. Foreigners pumped a record of $7.7 billion into India in 2003 lifting the value c rupee by S.2 per cent and further $87 billion till September 200. The other factor that will play an imp important role in attracting FII flows is the continuation of domestic demand. While the demographics of the Indian subcontinent has been the biggest strength is boosting demand and generating employment, the government is working earnestly to create over 10 million jobs every year to maintain 8 per cent plus growth in the economy. (b) Performance of UPA Government in 2005 The United Progressive Alliance has had mixed fortunes as it completes one year in May 2005. Even though it has managed to keep inflation in check, it is still a cause for worry. Industrial progress has been better in 2003-4, but core sector growth shows signs of slowing down. On the upside, export growth has been better in 2003-4 and the economy is slated to grow at 6.9 per cent in 2004-5, much better than was initially expected (Table 1.1).

TABLE 1.1 UPA Report Card

Growth rates (%) 2003-4 WPI-based inflation Index of industrial production Index of infrastructure industries ..,Exports 4.6 7.0 6.2 21.3 2004-5 6.0 8.0 4.4 24.4

Gross domestic product Fiscal deficit as percentage of GDP BSE Sensex 5,069.87 (on 24 May, 2004) 6,451.54 (on 13 May, .2005) Note: ` expected " Revised estimates

8.S 4.5

6.9 ` 4.5 "

The index of industrial production, a measure of how the industrial sector has performed, reported a growth of 8 per cent in 2004-5, from 7 per cent in 2003-4, Manufacturing sector growth was up at 8.8 per cent, compared with 7.4 'per cent in 2003-4. Another good news is that exports, which grew at 21.31 per cent in 2003-4, grew further at 24.41 per cent in 20045. As almost 20 per cent of manufacturing are exported, it is a good sign for the industrial sector. However, with growth in major export markets expected to slow down in 2005-6, the prognosis on that front is not too good either. On the downside, deficits will increase in 20056. In 2004-5, the UPA managed to maintain fiscal deficit at 4.S per cent of GDP, The same as in 2003-4. The Index of core infrastructure Industries, a group of Six Industries - including coal, steel, cement and petroleum products -which constitute a Significant portion of the lll', however, grew by 4.4 percent against 6.2 per cent in 2003-04. The index showed a 0.6 per cent fall in production in these sectors in Feb 2005 and only 3 per cent growth in March 2005 GPD, the total value of good and services produced each year by a country, is expected to grow 6.9 per cent in 2004-5, mainly on account of better- than- expected growth in agriculture. This increased figure is on top of 8.5 percent growth in 2003-04. Measures soon to be adopted by the UPA government for further tax rationalisation, Would Include: removal of inverted taxes, CST and present a national market to the buyer; too many levels of taxes sale tax, CST VAT, excise, service tax, octroi - prevent industrialization.. Merging, all taxes into a, single VAT (GST) should be implemented In all stares at the earliest. high tax rate - the combined effect of all taxes constitutes 40 per cent of product price. Lowering would bring about better compliance. partial implementation of free Trade Agreement - only S2 items on the roster prevents, sourcing of components from abroad. Manufacturing in India becomes uncompetitive compared to imports. there should be a 5 per Lent gap between customs duties on finished goods - on raw material components to help manufacturing competitiveness. export,- infrastructure cost,,, logistics costs, transactional cost due to long delays in duty refunds of excise and drawback, inverted taxes like CST/ octroi and the differential cost of credit all contribute to our exports being high priced. The new Duty Entitlement Passbook Scheme (DEPS) substitute should look to subsidise exports to that extent. In a nutshell, it is positive that one step taken by the government in the direction of providing positive support to businesses will be doubly reciprocated by industry. This trend has been seen in all k the developed economies of the globe. Coinciding with Prime Minister Manmohan Singh's assessment of the UPA's performance in the last 12 months, India Inc has exhibited greater confidence in the F current regime as reflected in National Council of Applied Economic Research, (NCAER) latest political confidence index, which reflects the impact of political factors on economic growth. However, Trade balance is widening from $6,560 million in 2002-3 to $18,676 million deficit in 2004-5 (June 2005). The UPA's performance has improved on most of the parameters like managing economic reforms, growth, unemployment and external trade negotiations. However, India Inc's confidence fell on the government's handling of its finances, inflation, exchange rate and the political climate. The industry hoped that the UPA government will continue to push forward the economic reforms process in days to come. India Inc was bullish on UPA's handling of trade negotiations with the index going up from 41 t6 47. Net foreign investment in India has grown from $4,161 million to $11,944 million in 2004-5.

India Inc was not satisfied with the government's foreign exchange management as the index fe1l from 40 to 37. UPA faltered on the inflation front too with the index falling from 31 to 29. Among industry segments, the services sector turned out to be the most bullish recording a PCI of 134.6. Firms belonging to northern and southern parts of India showed greater confidence on UPA while it was the opposite in east and west. The current account balance has been positive $10,561 million in 2003-4 for India during 2(1111-4 and turned negative $6,431 million in 2005. This means a happy situation in which rest of the world parks a part of its savings in India and economy invests more and grows faster than what would be possible purely on the strength of domestic savings.

LECTURE 15
THE DIFFERENT FACETS OF CULTURE There is no universal definition of culture. Schneider and Barsoux (1997) identify 164 different definitions made by anthropologists. More relevant broad definitions of culture include `a shared pattern of behavior' (Margaret Mead, 1953), `system of shared meaning or understanding' (Claude Levi-Strauss, 1971; Clifford Geertz, 1973) or `a set of basic assumptions, shared solutions to universal problems ... handed down from one generation to another' (Edward Schein, 1985). All these definitions have in common the concept that culture is `shared', and imply an implicit decoding of an underlying pattern of cause and effect relationships, whether cognitive (meaning, assumptions), attitudinal/emotional (behavior) or decisional (solutions). Schein adds the dimension of generational transmission, which implies a certain degree of stickiness of culture over time. Instead of a definition, some scholars have attempted to describe the content of culture. There are three major layers of culture: Basic assumptions and meaning; values, beliefs and preferences; and behavior. In ascending order, basic assumptions are the least visible and probably the most entrenched, since they deal with ingrained models of understanding, meanings and causal relationships that have been shaped by history and transmitted through the educational process to children, pupils and students. Religious faith and assumptions about human nature belong to this category. Basic assumptions are difficult to change in adults. Values, beliefs and preferences are the explicit expression of assumptions incorporated into a set of codes or, norms that provide some sort of ethical and normative governance mechanisms for social groups. Values can be changed to some extent by new information and confrontation with new situations. A manager whose assumption about human nature is that men or women are fundamentally greedy, for example, will probably believe that only materialistic rewards will motivate employees. She/he may change this belief when exposed to situations where people sacrifice financial reward for others' benefit. Behaviour is the most visible part of the iceberg. It is manifested in action and can be modified through education as well as through some forms of `conditioning'. Behavioral change does not imply a modification of beliefs or assumptions. An autocratic leader may be told to change her/his style of leading a meeting although she/he still believes that employees `have to be told' (belief) based on the assumption that human beings are fundamentally divided into 'born leaders' and `passive followers'. In such a case, behavioural change will be superficial. In the management field that, by nature, is concerned with economic achievement of social groups (companies), culture will be manifest in four key dimensions: Corporate culture The accumulated assumptions, values, beliefs and behavioral norms resulting from the history of the company (good and bad experiences), its existing and past leadership imprint (the legacy of charismatic CEOs) its ownership structure (family-owned, publicly listed, private, and governmentowned) and its size (big or small). Industry culture: any rules derived from the professional norms of a particular industry: heavy manufacturing, services, oil and gas, etc. Professional culture

Derived from the training and professional norms/constraints of different functions within corporations: accountants, researchers, production personnel, sales and marketing people, etc. As Lawrence and Lorsh (1969) have described, professional orientation introduces a large amount of differentiation within organisations. National or ethnic culture: derived from the national, religious or ethnic origin of citizens or social groups Global companies, as any other firms, are confronted with corporate, industrial and professional cultural diversity, but this complexity is compounded by national and ethnic differences stemming from their worldwide implantation. National Cultural Differences The systematic analysis of national cultural differences in a business management context is the result of four main streams of research: 1. Ethnological research: 'silent language' differences 2. Managerial values and assumptions 3. Countries clusters: the grouping of nations according to similarities of cultural traits 4. Economic cultures differences: how business systems are organised and business interactions are governed. According to Hall (1960), cultures differ in the way they communicate through non-verbal means or `silent language'. They identify six `silent languages': a. Time b. Space c. Material goods d. Friendships e. Agreements f. Context. a. Time Cultures differ according to their perception of time. Time can be seen as sequential and scarce, as in the case of Germanic culture, leading to the quest for preciseness, punctuality and deadline-keeping. Some cultures see time as fluid, circular and abundant, as in Arabic countries, where people will be less punctual and not really disturbed by delays and postponements. Space Differences in the perception of space relates to the concept of social distance that measures not only the length of physical proximity in social interaction but also of emotional intimacy. In high-social distance cultures, people will tend to avoid physical and emotional proximity - a typical British trait-while in low-social distance cultures - the Latin countries - people will see no objection to physical contact and the sharing of emotions. Material goods The language of material goods is linked to the importance attached to financial wealth as a sign of status - a materialistic trait of Americans - as opposed other status signifiers such as family, education or seniority Friendships Friendship is built and maintained quite differently. In some societies, one can make friends rapidly but at the expense of superficiality and the friendship may not last long. The `silent language' of this sort of friendship may shock people coming from societies where friendships are not so quickly built but last longer. Agreements The `silent language' of agreement quite often opposes Western cultures to Eastern ones. In Western societies, most agreements or disagreements are explicitly stated and documented in writing. In Eastern cultures, verbal and sometime ambiguous agreements are accepted. In Indonesia, for instance, it is often difficult for a

b.

c.

d.

e.

f.

business partner to say a straight `no', but a 'maybe' may in fact have the same negative connotation Context. The 'silent language' of context attaches to the importance given to the person rather than the content in a communication. In high-context societies - mostly Asian, South American or Latin - the important part of an interaction is the person (with whom) and the emphasis given to the setting, the ambiance and ceremonials. In low-context societies - Anglo-Saxon, Nordic or Germanic - what dominates the communication, hence the importance attached to written documents and technical specifications.

LECTURE 16
Hofstede's work-related values differences Hofstede's research is probably some of the most frequently quoted in the international management literature, related to the vast amount of data collected by the author. Hofstede's original (1980) survey was made with 116,000 employees at IBM worldwide. He asked questions related to their preferences in management styles and work values and related the answers to national origin; he found that national cultures differed according to four main dimensions: power distance, individualism, Uncertainty avoidance and masculinity: Power distance is the extent to which people in certain societies accept inequality in power distribution or, on the contrary, have a somewhat egalitarian view of power distribution. High-power distance societies will accept hierarchical control and respect authority - as; for instance, in Malaysia while egalitarian societies will have a more democratic view of social control with no particular reverence for high-ranking functions - as, for instance, in Denmark. Individualism characterizes a culture in which individuals look after their own or immediate relative interests. This is the case in most Western cultures. This will translate into individual assertiveness and initiative in business contexts. Collectivist cultures, on the other hand, will put group interests above individuals: consensus anti harmony will be preferred to assertiveness. East Asian cultures commonly put society ahead of the individual. Uncertainty avoidance is typical of societies where ambiguity and unpredictability is not accepted, and there is a continual search to codify, plan and regulate the environment (Japan, Spain). At the opposite end of the scale, one will find social groups where tolerance and risk-taking is accepted and rewarded (United States, Sweden). Masculinity refers to the high value given to assertive, competitive behavior. Feminity; on the other hand, refers to societies where quality of life, nonaggressive behavior, interpersonal relations and concern for the weak are dominant values. THE IMPACT OF CULTURES ON GLOBAL MANAGEMENT TECHNOLOGICAL ENVIRONMENT Meaning of Technology Most of the people did not trust the arrangement made by `Lord Sri Krishna' to 'Drutharastra' to get the information of 'Kurukshetra War' instantly until the live telecast of `cricket rnatch' through TV become reality. Similarly, we did not believe the power of gods 'Devine Vision' (Drivya Drusti) until the video conferencing was introduced. Similarly, the power of the 'click-the-mouse' and 'get whatever you need at your door step' became reality while some of us did not believe the power of God waving his hand in the air like clicking the mouse on the computer and fulfilling the desire of his devotees. The days of 'touring-the-world within hours' like 'Narada' are not far-off. In fact, NASA has been researching in this direction and came with an aeroplane which could reach from one part of the world to the other part of the globe within two hours. Thus, the illusions are becoming reality mostly due to technology. Man of the third millennium is able to see any part of the world, get any product from any country, get messages from all over the globe with bare minimum cost by simply staying at his home or office. The distance is shrinked among the

countries due to technology. All this, `once-upon-a-time's' illusion has become reality. The latest information technology has dissolved the national boundaries and the advancements of transportation technology_ have reduced the distance among the world nations. These technological changes-enabled international business to take-up the shape of transnational business through the concept of global business. International business, in fact gained significance due to the amazing advancements in technology. Technological environment has significant and direct influence on business in general and international business in particular. Technology is application of knowledge. J. K. Galbraith defines technology as "a systematic application of scientific or other organised knowledge to particular tasks". Technology advanced phenomenally during the past 50 years. Technology changes at a faster rate. In fact, it brings change in the society, economy and politic~. Technology affects all walks of life, all countries and the entire globe. As stated by Alvin Toffler, "Technology feeds on itself. Technology makes more technology possible." Thus, technology is selfreirrforcing. Technology brings the globe closer. Technology flows from the advanced countries to the developing world through the multinational corporations (MNCs), joint-ventures, technological alliances, licensing and franchisina. Influence of Technology Technology influences the way we live, we cook (electric rice cooker), we drink even water (filtered and mineral water), communicate (telephone, fax, e-mail, video conferencing, e-mail chatting etc.), preparing for a class or a case or reading a news paper through internet, marriage alliances through internet, computer aided design, production, selling (e-ccmmerce), satellite networks, electronic fund transfers, lasers, fibre optics, unmanned factories, miracle drugs, new diagnostic methods. Investment in Technology Advanced countries spend considerable amount on research and development for further advancement of technology. Germany spends 50% of its R & D budget on product innovation and the remaining 50% on process innovation. Japan spends only 30% on product innovation and the remaining 70% on process innovation. In contrast, USA spends 70% on product innovation and only 30% on process innovation. The Japanese auto manufacturers gained incredible competitive advantage over US counterparts by reducing new products' time to market. Japanese companies introduce the products in three year whereas US firms need five years for the same job. Japanese are investing money in innovations and creations in biotechnology. Others also follow Japan as this is an emerging area. Exhibit 1shows the ranks of Asian countries in technology development/advancements. Exhibit 1 : The Asian Technology Leaders Rank . 2 3. . . . . National orientation Singapore Japan ~ South Korea Malaysia & Taiwan Hongkong Indonesia ChinaIndia Socio-economic Technological infrastructure infrastructure Taiwan Singapore Japan South Korea Hongkong alaysia ' Indonesia China Japan South Korea Singapore China Taiwan Malaysia India Indonesia Productive capacity** Japan Singapore Malaysia South Korea Taiwan Hongkong India China & ?ndonesia

'

* Evidence that a nation is taking direct action to become competitive. * Physical and human resources devoted to manufacturing products and the efficiency with which these are used. Note: In socio-economic infrastructure, India's position is No. 9. Source : Business World, 16-31 March 1997.

LECTURE 17

Technology and Economic Development Technology is one of the significant factors which determines the level of economic development of a country. The difference between the nations is mostly reflected by the level of technology. For example, though India had vast natural resources, it remained as a major importing country due to its low level technology before 1991. Japan with its high level technology could export finished goods to India, by importing the raw material from India itself. Thus, though Japan is endowed with poor natural resources, Japanese became rich and advanced due to technology. As such, developing countries allow MNCs entry into their countries inorder to have benefits of latest technology and to develop the domestic industry. But often, it is criticised that the MNCs transfer obsolete technology to developing countries.

Technology Transfer Technology and global business are interdependent. International business spreads technology from advanced countries to developing countries by: establishing the subsidiaries in developing countries establishing joint ventures with the host country's companies acquiring the host country's companies or by merging with the host country's firms arranging technological transfer to the companies of developing countries through technological alliances. Technology and Location of Plants In addition, MNCs relocate their manufacturing facilities based on the technology. In other words, MNCs locate the plants with high technology in advanced countries and establish the labour driven manufacturing facilities in developing countries, in order to get the advantages of cheap labour. Scanning of Technological Environment The level of the technology is not the same in all the countries. Advanced countries enjoy the fruits of latest technology while the developing nations face the consequences of obsolete or outdated technology. Therefore, the MNCs have to understand the technology, analyse it before entering the foreign markets. MNCs have to procure the technological environmental information regarding: The level of technology of the industry in the home country. The level of the technology of the industry in the proposed host country. Compatibility of the home country's technology with the host country's technology. If the technology is not compatible, then select the appropriate technology for the host country, if possible. If not, select the host country's that suits the home country's technology. Study the compatibility of the technology to the culture of the host country including the taste and preferences of the host country's customers. Study the host country's governmental policies regarding technology transfer. Study the modes of technology transfer like joint ventures, technological alliances etc. Study the impact of the technology on the environment of the home country including the laws pertaining to environmental pollution.

Appropriate Technology As indicated earlier, technology that suits one country may not be suitable to other countries. As such the countries develop appropriate technologies those suit their topographical conditions, climatic conditions, soil conditions, conditions of infrastructure etc. For example, Japanese automobile industry and Korean automobile industry design different types of cars those suit to the Indian Roads. TECHNOLOGY AND GLOBALISATION The industrial revolution resulted in large-scale production. Added to this, the recent technological revolution led to the production of high quality products at lower costs. These factors forced the domestic companies to enter foreign countries in order to find markets for their products. Thus, technology is one of the important cause for globalisation.

Information Technology and Globalisation As indicated earlier, the information technology redefined the global business through its developments like internet, www sites, e-mail, cyberspace, information super highways. Computer Aided Design (CAD), Computer Aided Production (CAP) and on-line transactions brought significant development to the global business. These facilities, accordino to M.J. Xavier, help the global companies in: Reducing the size of inventories Reducing delivery time Reducing unproductive waiting time Reducing the incidents of stock-outs and lost sales Responding to market changes at a faster rate Reducing Rush Orders. Cutting down over production Reducing unnecessary movements of forwarding and back-tracking Reducing paper work and wasteful process Planning production levels accurately Reducing/avoiding physical movement of employees, suppliers, and customers.

LECTURE 18
E-Commerce The method of doing business electronically (e-cornnzerce), brought vital developments in favour of global business. The concept of telemarketing is slowly being replaced by the concept of ecommerce. The B,2B portal enables a business firm in one country to have on-line production and marketing tieups with other business firms of a foreign country. For example, Sundaram Fasteners has access to General Motor's production and inventory plans through intranet. The B2C portal enable the company in one country to sell its products to any customer of any country without the involvement of market intermediaries. Thus, e-commerce is creating revolution in retail business. The future revolution of information technology is expected to reduce the need for environmental scanning by the MNC for the purpose of deciding where to enter. This is because, information technology will reduce the gaps in the level of technologies of world countries. As such, MNCs have to understand and analyse more of economic environment of the foreign countries for strategy formulation. Hence, we now discuss the economic environmental factors of the global countries. ECONOMIC ENVIRONMENT International business is mostly and directly influenced by the economic environment of various countries. In fact, international economic environment and global business interact with each other. Global economy has undergone a sea change during the last 50 years. The change is revolutionary after 1990. The results of these changes are emergence of global markets, establishment of World Trade Organisation, emergence of global business houses and global competitors rather than local competitors. The major changes include: ECONOMIC SYSTEMS Economic system is an organisation of institutions established to satisfy human needs/wants. There are three types of economic systems: a. Capitalism b. Communism c. Mixed Economic systems are based on resource allocation in the system. They are market allocation in case of capitalistic, command/central allocation in case of communistic and mixed allocations in case of mixed economic system. In fact, there are no examples of pure capitalistic or communistic

economies. All actual systems are mixed economic systems of varied degrees of market allocations and command allocations." a. Capitalistic Economic System Under this system, customer allocates resources. Customers' choice for product/services decides what will be produced by whom. This economic system provides for economic democracy, thus giving the customer, his choice for products/services. This system emphasises on the philosophy of individualism believing in private ownership of production and distribution facilities. The limitation of this economic system made the Governments to introduce the welfare state concept which includes: workmen's compensation law, provision for social security, labour legislations for state and housing, agriculture, medical, food, transportation, communication, security, education, water, power supply etc. USA, Japan and UK are the examples of capitalistic countries. Most of the other countries like India, France, Italy and Malaysia have started shifting their economic systems towards this economic system. b. Mixed Economic System Under this economic system, major factors of production an distribution are owned, managed and controlled by the state. The purpose is to provide the benefit to the public more or less on equity basis. The other factors of mixed economic system are developmen of strong public sector, agrarian reforms, control over private wealth, regulation of private investmen and national self-reliance. This system does not distribute the existing wealth equally among the people, but advocate. the egalitarian principle. It believes in full employment, suitable rewards for the workers' efforts. This is also called 'Fabian socialism.' As mentioned earlier, there is no pure capitalistic system or communistic economic system. All capitalistic systems have a command sector and communistic systems have a market sector. The command sector accounts for 32 per cent in USA, 40 per cent in India and 64 per cent in Sweden. The trend that is taking place in the globe today is the move towards privatisation, i.e., move towards market allocation. UK, France, Holland and India, for exarnple, have reduced their command sector after 1990. c. Communistic Economic System : In this, economic system, private property and property rights to income are abolished. The state owns all the factors of production and distribution. Communism is also called Marxism. Lenin set up a communist state in Russia after the Great October Revolution of 1917. Later, the ideology spread to Czechoslovakia, China, Rumania, Yugoslavia, Poland and Sweden. Most of the East European countries follow the Marxist ideologies. In communistic/command allocation countries, the resource allocation decisions are made by the government planners. The number of automobiles, shoes, shirts, television sets - their size, colour, quality, features etc., motor cycles, scooters are determined by government planners." Under this system, consumers are free to spend their income on what is available. The major lintitations of this system include: i. It reduces individual freedom of choice due to restrictions on items to be produced. ii. It fails to get total commitment of people to work and country's welfare. iii. It failed to achieve significant economic growth. iv. It could not achieve equality - the main plank of Marxism. v. The rules of this system did not set fine examples for the executors to follow or implement. vi. It has been obsessed with rights of workers. Communism collapsed in the former USSR. Similarly, communism collapsed in most of the African countries. This is mostly due to the changes towards privatisation. The degree of command allocation has been declining even in China. Cuba is an example of the last remaining predominantly communistic country.

LECTURE 19

BUSINESS DEVELOPMENT Stages of Business Development Different countries in the world are at different stages of development. Countries are segments based on GNP per capita. World countries are divided into four categories a. Low-Income Countries b. Lower-Middle-Income Countries c. Upper-Middle Income Countries d. High-Income Countries. a. Low-Income Countries These countries are also known as third world countries or preindustrial countries. They are also those with 1992 incomes of less than US $ 400 per capita. Characteristics of these countries include: Limited industrialisation, and excessive dependency of population on agriculture High birth rates Low literacy rates Heavy reliance on foreign aid Political instability and unrest Concentrated in Africa, South of the Sahara Excessive unemployment and underemployment Technological backwardness Underutilisation of natural resources Excessive dependency on imports Industrial development is characterised by consumer goods industries The vicious circle of poverty.

b. Lower-Middle-Income Countries These countries are also known as less developed countries. These countries are with a GNP per capita of US $ between 400 and 2000 (1992). Characteristics of these countries include: Early stages of industrialisation. Expansion of consumer markets. Availability of cheap and motivated human resources. Domestic markets are dominated with the products like clothing, batteries, tires, building materials, packaged foods etc. Locations for production of standardised/mature products like clothing for exports. Pose threat to the rest of world in labour-intensive products due to cheap labour. Have competitive advantage in mature and labour intensive products. c. Upper-Middle Income Countries These countries are also known as industrialising countries. GNP per capita of these countries ranges between US $ 2,000 and 12,000. Characteristics of these countries include: Less dependency on agriculture. Occupational mobility of the people from agriculture to industry. People migrate from rural to urban areas which results in increased urbanisation. Increase in literacy, formal education and increased wage rates. Low wage costs compared to advanced countries. Formidable competitors due to lower wage costs and with the capability of advanced countries. High exports and rapid economic development. d. High-Income Countries.

These countries are also known as advanced countries, industrialised, post industrial or First World countries. The GNP per capita (1992) of these countries is more than US $ 12,000. The characteristics of these countries include: Oil-rich countries are excluded from this category. Countries reached the income level of more than US $ 12,000 through the process of industrial growth are included in this category. Countries developed through the codification of theoretical knowledge rather than from random inventions are included in this category. Service sector contributes more than 50 per cent to the GNP. Development of information sector. Development of intellectual Technology over machine technology. Domination of scientists and professionals over engineers and semi-skilled workers. Emphasis on the future plans. Japan's work culture (mainly co-operation and harmonious interaction) suits to the basic requirements o: post industrialised society. UK's work culture (mainly distrust and absence of sound relations) is in contrast to the needs of rapid industrialisation. High income countries mostly aim at building the information society. These countries face the problems like pollution, excessive urbanisation, economic depression, increase in aged population etc. Deindustralisation is in the process in these countries. These countries shift to information society. Product innovations are more prevelant in post industrial society compared to that in industrial society.

LECTURE 20
Business and Economic Development Business helps for identification of people's needs, wants, production of goods, supply them to the people. Thus, it creates for the conversion of inputs into output and enables for consumption. Ultimately, it leads to economic development. The developing countries concentrate on allocation of scarce resources, increasing production and productivity to meet the growing needs of the population. Further, business also streamlines the distribution of goods from the manufacturing centres to the customers. International business houses establish their manufacturing centres in various counties and distribute the goods to the customers of a number of countries. Thus, international business contributes for the economic development. POLITICAL ENVIRONMENT Political environmental factors also influence the operations of international business firms enormously. The influence of the political system of a country influences the business from multiangles, viz., deciding, promoting, fostering, encouraging, sheltering, directing and controlling the business activities. The success and growth of international business depend upon the stable, dynamic, honest, people participative, secured political system in a country. POLITICS AND ECONOMICS DO NOT MIX LTV, a bankrupt U.S. defense contractor which has operated under bankruptcy court protection for six years, had to sell its missile and aircraft business. The Carlyle Group and Thomson (58 per cent owned by the French government) submitted a bid of $ 450 million which was accepted by the bankruptcy judge. However, a storm of controversy ensued. The critics and media were quite upset. first, they did not like the idea of foreign companies buying U.S. properties. Second, this particular instance was worse because it had to do with the purchase of a large U.S. defense contractor developing top-of-the-line military technology. Third, a foreign government-owned company was a buyer. Finally, the fact that the government in question was France did not help the matter since France has always been willing to sell arms to almost anyone.

Based strictly on the economic perspective, Thomson's bid made sense and should benefit both Thomson and LTV. However, because of the U.S. government's intense opposition, Thomson had to withdraw its takeover offer.

Countries with stable political system enjoyed the successful business operations. USA is the best example for political stability and dynamism. Hence, business people prefer to locate their business operations in USA. According to John Kenneth Galbraith, no country with a stable and honest Government have or has not had a reasonably satisfactory state of economic progress."" The Government, in addition to being stable should also be efficient. Tanzania had a stable government during 1965 and 1985 with Mr. Nyerere as the head of the Government. He resigned in 1985 leaving a near-ruined country behind him. Zaire had similar experience with Mr. Mobutu and Zambia with Mr. Kenneth Kaunda. John Kenneth Galbraith argues that, in all the advanced coup-tries, "the early emphasis was not on capital investment but on political and then on cultural development. In USA, West Europe and more recently in Japan, a secure political context was stressed in both thought and action on economic development; it was considered the first requisite for economic progress."19 In addition to the stable and dynamic governments, the political environment includes the policies and characteristics of political parties, the nature of the constitution and government system. Some countries do not differ from other countries regarding the philosophies of the political parties, some other countries differ radically. Some countries are highly bureaucratic in decisionmaking regarding foreign investment, technology imports etc., while some other countries have simple and quick decision-making mechanisms with their democratic approach. The characteristics of bureaucratic and communistic countries include: Limitations, controls and curbs on private enterprises. Rule of the trade is state trading and counter trading. Many restrictions on imports and foreign capital both inflow and outflow. Restrictions on international/multinational corporations. It does not mean that communist countries do not allow multinational corporations. In fact, the former USSR allowed the Pepsi when India did not allow it to enter. Similarly, even non-communistic countries, encouraged public sector companies. This is more so in most of the developing countries including India, before 1991. Even today India reserved nine strategic industries exclusively for public sector. Even USA has public sector organisations. As discussed in economic environment, there are command sectors in market economies and market sectors in communistic countries! The trend has changed even in communistic countries. They have been progressively shifting towards liberalisation, privatisation and globalisation (LPG). As many as 8,500 public sector enterprises were brought under the umbrella of private sector in over 80 countries upto 1991. The erstwhile communist countries including the former USSR countries, and the China are in the direction from Marx to the Market. The political philosophy of the developing countries shifted from self-sufficient to self-reliant. As such they compete among themselves to woo foreign capital, technology and managerial expertise. The political philosophy of most of the governments seems to be broadly one of convergence. However, they differ widely in imposing restrictions and regulations, scope, trade policies, procedures, taxes, custom duties, incentive systems etc.

POLITICAL RELATIONS AND INTERNATIONAL BUSINESS Political friendship/friendly diplomatic relations result in the growth of bilateral or multilateral trade. For example, the friendly diplomatic relations between India and the former USSR helped not only the Indian companies but also the MNCs operating in India to have close business linkages with the former USSR. Similarly, the friendly diplomatic relations between Pakistan and USA helped Pakistan companies to have close business linkages with USA.

Hostilities between countries affect the international business among the companies of these countries. Arab countries did not prefer to carry on business with the business firms of Israel. These countries prefered business relations with those countries which boycotted the business with Israel. In fact, Arab countries insisted the companies to produce Israel boycott certificate. Hence countervailing laws were adopted in USA to prevent US companies from complying with this boycott. In USA, the firms follow the policy of `maintenance of arm's length' with the competing firms. But in other countries, particularly in Europe and India, they come to an agreement among themselves regarding price, product design, division of markets etc. This difference is mostly due to the fact that, US market is large enough to accommodate any number of firms to operate independent of competing firms. But the size of the European countries is very small and the firms cannot enjoy large scale economies. Therefore, European firms, divide the market among themselves either in terms of products, geographical areas or customers in order to have large scale economies. Types of Political Systems : Appraisal of political systems helps us in having an idea of political systems and their impact on international business. Governments may be parliamentary (open) or absolutist (closed). a. In parliamentary governments people are consulted and are allowed to participate in decision-making on all important issues. b. Under absolutist government,the ruling government dictates government policies, rules and regulations on all citizens without considering the latter's needs or views. Though Saudi Arabia and North Korea claim that they are of parliamentary type political system, they do not allow the people to express their voice. Hence they are classified as monarchies and dictatorships. The business in these countries is completely based on government policies rather than the people's needs. Government may also be classified as two-party system, multiparty, single party and one-party dominated. Two party system : Two major parties take turn of controlling the government under twoparty system. USA and UK are the examples of two-party system. Republican party in USA (is viewed as) represents the business interest and the Democratic party represent the Labour. Multiparty system : There would be many parties and no party is strong to gain the control of the Government in multiparty system. Germany, France, Israel, India (during 1996-2000) and Poland are examples for multiparty system. Single party system : In this system only one dominant party almost gets the opportunity to control the Government, though several parties exist. Egypt is the best example for this. Even in India, Congress party ruled the country until 1997. Thus a single party rules the Government during the early stages of development. One-party Dominated system : In this system, though there are more than one party, the dominant party rules the government and it does not allow any opposition party to come up. The former USSR, Cuba, Libya are examples of this system.

LECTURE 21
Level of Economic Development and Political Stability : South Africa and Italy are economically developed countries. South Africa has been facing internal and external problems and Italy has been facing labour problems and internal dissension. Vietnam is politically stable but economically developing country. India is politically unstable and also a developing country. This is due to varied regional, ethnic, language, religious issues/problems. Political Risks : International business firms face political risks as and when there are changes in Government policies and /or changes in political parties in power. Risks are based on the host government's actions like confiscation, expropriation, nationalisation, domestication and creeping expropriation. Confiscation : The process of nationalisation of a property without compensation is called confiscation. Chinese government's seizure of US property in 1949 when Chinese communist party took power is an example of confiscation.

 Expropriation : Expropriation is the process of nationalisation of a property with

compensation. Indian Government nationalised commercial banks with compensation in July 1969. Nationalisation : Nationalisation is the process of shifting the ownership of private property from private individuals or institution to the Government. Burma nationalised entire foreign trade. Poland and Czech communists nationalised 100 per cent of their economy. Domestication : In domestication, foreign business firms relinquish control and ownership in favour of domestic investors either partly or fully. For example, Indian Leaf Tobacco Development Company Ltd., in India, Pepsi, General Motors and Barclays Bank in South Africa. General Instability Risk : These risks are due to social, political, religious unrest in the host country like the recent coup in Fiji and problems due to Muslim rebels in Philippines. Operation Risk: These risks are due to the imposition of controls on the foreign business operation (like production levels, marketing, finance and human resource) by the host Government.

Indicators of Political Instability Political instability can be viewed from the social unrest, attitudes of nationals and policies of host governments.

Social Unrest : Social unrest is caused by clashes between or among community groups,
religious groups and ethnic groups. For exaniple, Christian-Muslim conflict in Lebanon,Hindu-Muslim conflict in India, white-black conflict in USA, the civil war between Serbs and Croats in 1991 in Yugoslavia, ethnic conflict between Christian in Armenia and Muslims in neighbouring Azerbaijan etc.

Attitudes of Nationals : The negative attitude of nationals towards foreign business and
foreigners is a greater risk. These negative attitudes include exploitation, colonialism, repatriation, employment to foreigners etc. Policies of the Host Government : Host Government's policies affect the operation of international business firms directly and internally or externally. For e.rnniple, Janata Government in India asked Coca-Cola to leave the country in 1977 due to the policy of discouraging the multinationals. The dispute between Chile and Arcentina, made Argentina to restrict exports (including the foreign cornpanies operating in the country like General Motors, Peugeot and Renault) to Chile. The Enron Corporation's experience is another example.

THE ENRON CORPORATION'S EXPERIENCE The experience of Enron Corp, with the $ 2.8 billion Dabhol project in India is a good example. In 1992, Enron and Prime Minister Narasimha Rao's reformist government quickly signed a memorandum of understanding to build a massive power complex. Having no domestic partner, the deal's secrecy coupled with the company's effort to keep the details confidential, the lack of competitive bidding, government loan guarantees, and a high rate of return (23 per cent) all contributed to a negative public perception. The company failed to seriously consider the sentiment of an opposition coalition led by the Bharatiya Janata Party. The Party's 1995 campaign for state elections called for a revaluation of the 2,015megawatt Dabhol project. Enron responded by quickly beginning the construction, believing that it would become more difficult for a new government to reverse the process. Since the coalition pledged during the campaign that they would review the project, it had to do so after winning the election. Enron's request that the U.S. Energy Department intervene only invited even more backlash. In the end, the project was suspended before being renegotiated. HOW TO MINIMISE POLITICAL RISKS? Political risks cannot be completely eliminated. However, they can be minimised by contributing to the change of the attitudes of the people and Government of the host country like stimulation of the host country's economy, employment of nationals, sharing ownership, being civic minded, political neutrality, behind-the-scenes lobby, observation of political mood and reduction of exposure.

Stimulation of the Local Economy : The foreign company can stimulate the economic development of the host country by investing in their priority areas / portfolios. Further, the foreign company may encourage the local companies by purchasing the raw materials and other inputs from the latter, assist the local companies in technological aspects, using the local companies as ancillary units etc. For example, IBM is the foreign company allowed to sell switchboards in France. Similarly, the foreign company can stimulate the host economy by being export oriented. For example, ATST entered France with an agreement with Gencrale de Electricite of France to produce digital switches and export to USA. Employment of Nationals : Mostly foreign companies feel that the people of developing countries are lazy, unintelligent, unmotivated, and less educated. As such foreign companies hire the people from advanced countries and do not employ the local people." Multinational companies can minimise political risks by employing, developing and promoting the local people Sharing Ownership : If the multinational company owns the entire capital by itself, it magnifies political risks. Hence, it is suggested that the foreign company should allow the domestic investors to invest and share the ownership by converting the company into a public limited company. In fact, some countries have imposed a condition that the foreign companies can enter the domestic country only with the participation of local investors. Eritrea is an example in this case. Ownership can be shared through joint ventures. Ford chose to merge its automobile operations in South Africa with Anglo American by reducing its share to a minority position of 40 per cent. abroad. The MNCs in addition to doing business in foreign countries, they should also be good corporate citizens there. MNCs may help the foreign countries in different ways like constructing schools, hospitals, roads, water reservoirs etc. Du Pont supplied 1.4 million water jug filters to eight African countries. H.J. Heinz spent US $ 94,000 to fund infant nutrition studies in China. IBM donated computer equipment and expertise worth $ 60,000 to Costa Rica. Political Neutrality : It is criticised that the MNCs actively involve in political affairs of developing countries. It is suggested that the MNCs should not involve in political affairs or disputes among the local groups of the host countries from the point of view of long-run interests. Brazilian companies for example, do not involve in the political activities of Central American countries. issued newspaper advertisements urging US to sell missiles to Saudi Arabia.. Pizza Hut came to China's rescue when the US mushroom industry asked for a quota against imports from China."

Being Civic Minded : US based MNCs sometimes encounter the `Ugly American' label

Behind-the-Scenes Lobby : Firms attempt to influence political decisions. Mobil corporation

LECTURE 22
INTERNATIONAL LEGAL ENVIRONMENT As indicated earlier in this chapter, business policies and regulations have much to do with the political system and the characteristics of the political parties and politicians. There are wide variations between countries in the policies and regulations regarding the conduct of the business. For example, certain trade practices or promotional methods/strategies allowed in some countries may be regarded as unfair by the laws of some other countries. In many countries there is a lot of restriction on the use of the media. Radio and Television, in particular, are under State monopoly or under strict state control in a number of countries. The advent of cable T.V., however, is creating problems for regulation.

In most countries, apart from those laws that control investment and related matters, there are a number of laws that regulate the conduct of the business. These laws cover such matters as standards of product, packaging, promotion, ethics, ecological factors etc. In many countries, with a view to protecting consumer interests, regulations have become stronger. Regulations to protect the purity of the environment and preserve the ecological balance have assumed great importance in many countries. Some governments specify certain standards for the products (including packaging) to be marketed in the country: some even prohibit the marketing of certain products. In most nations, promotional activities are subject to various types of controls. Several European countries restrain the use of children in commercial advertisements. In a number of countries, including India, the advertisement of alcoholic liquor is prohibited. Advertisements, including packaging, of cigarettes must carry the statutory warning that "cigarette smoking is injurious to health." Similarly, baby foods must not be promoted as a substitute for breast feeding. In countries like Germany, product comparison advertisements and the use of superlatives like best or excellent in advertisements is not allowed. In the United States, the Federal Trade Commission is empowered to require a company to provide sufficient evidence to substantiate the claim concerning the quality, performance or comparative prices of its products. There are host of statutory controls on business in India. Although the controls have been substantially brought down as a result of the liberalization, a number of controls still prevail. Many countries today have laws to regulate competition in the public interest. Elimination of unfair competition and dilution of monopoly power are the important objectives of these regulations. Certain changes in government policies such as the industrial policy, fiscal policy, tariff policy etc. may have profound impact on business. Some policy developments create opportunities as well as threats. In other words, a development which brightens the prospects of some enterprises may pose a threat to some others. For example, the industrial policy liberalizations in India have opened up new opportunities and threats. They have provided a lot of opportunities to a large number of enterprises to diversify and to make their product mix better. But they have also given rise to serious threat to many existing products by way of increased competition; many seller's markets have given way to buyer's markets. Even products which were seldom advertised have come to be promoted very heavily. This battle for the market has provided a splendid opportunity for the advertising industry. Kinds of Legal Systems The legal systems that exist in different countries across the world may be classified into three categories, viz., common law, civil law or code law, and theocratic law. The basis for common law is tradition, past practices, and legal precedents set by the courts through interpretations of statutes, legal legislation, and past rulings. Common law seeks "interpretation through the past decisions of higher courts which interpret the same statutes or apply established and customary principles of law to a similar set of facts." Code law, on the other hand, is based on an allinclusive system of written rules (codes) of law. Under code law, the legal system is generally divided into three separate codes: commercial, civil, and criminal. The civil law system, also called a codified legal system, is based on a detailed set of laws that make up a code. Rules for conducting business transactions are a part of the code." The common law, derived from English law, is found in England, the United States, Canada, and many other countries which were once under English influence. The civil or code law, derived from Roman law, is found in Germany, Japan, France, and in many other countries. The two legal systems differ primarily in that common law is based on the courts interpretations of events, while civil law is based on how the law is applied to the facts. An example of an area in which

the two systems differ in practice is contracts. In a common law country, contracts tend to be detailed, with all contingencies spelled out. In a civil law country, contracts tend to be shorter and less specific because many of the issues that a common law contract would cover already are included in the civil code. So, when entering into contracts abroad, it is important for the manager to understand which type of legal system will establish the contract. Also civil law tends to be less adversarial than common law because judges rely on detailed legal codes rather than on precedent. The theocratic law system is based on religious precepts. The best example of this system is Islamic law, which is found in Muslim countries. Islamic law, or Shair'a, is based on the following sources: The Koran, the sacred text; the Sunnah, or decisions and sayings of the Prophet Muhammad; the writings of Islamic scholars, who derive rules by analogy from the principles established in the Koran and the Sunnah; and, the consensus of Muslim countries' legal communities. The Islamic law is found in Muslim countries.36 Also see the reference to the Islamic banking system in the sub-section Religion in this chapter. Categories of Laws There are broadly, three sets of laws and regulations relevant to international business, viz., International laws, treaties, conventions, etc. Laws of foreign countries. Laws of home country (i.e., India), related to foreign trade.

LECTURE 23
INTERNATIONAL REGULATIONS International business is governed or influenced by several laws, treaties, agreements, conventions, etc. Several attempts have been made to unify some of the commercial laws. For example, The international Institute for the Unification of Private Law drafted two Uniform Laws on International Sales, and these were adopted by a conference at The Hague in 1964. These are The Uniform Law on lnternationalSale Goods (Uniform Law on the Sales) and the Uniform Law on the formation of Contract for the International Sale of Goods (Uniform Law on Formation). The former aims at the unification of the substantive law of international sales, in particular the obligations of the buyer and seller and the passing of the risk. The latter is complementary to the former: it attempts to reconcile the differences of common and civil law on offer and acceptance lending to the conclusion of an international contract. However, these laws are yet to be given effect to by a number of countries. There are, however, several, international regulations of the trade between countries. As pointed out in chapter 6, The WTO principles and regulations have a very important bearing on the international business. Incoterms In Incoterms brought out by the International Chamber of Commerce are common sale or trade terms used in international trade to express the sale price and the corresponding rights and responsibilities of the seller and the buyer. The purpose of the Incoterms is to provide a set of international rules for interpretation of the most commonly used trade terms in foreign trade. Settlement of Disputes Disputes are not uncommon in international trade. Disputes of certain nature are settled by the WTO or in accordance with WTO principles. In other cases there are broadly two avenues for the settlement of the disputes

i. Judicial dispute settlement. ii. Extra-judicial dispute settlement. In the first case, the dispute is settled by litigation, i.e., by judicial court. Litigation often takes very long time, is very expensive and strains relationship between the parties involved. Therefore, extrajudicial dispute settlement may be preferred. If the firm favours extra-judicial dispute settlement, a conciliation clause or an arbitration clause be incorporated in the sales contract. The difference between conciliation, also called mediation, and arbitration lies in the different aims of these procedures. It has been stated: "If parties agree on conciliation, they want an amicable settlement of their dispute with the active assistance of a third person, the conciliator, or they hope at least that an amicable settlement can be achieved. But if they agree on arbitration, they intend to adopt an adversary stance and will demand the resolution of their dispute by a decision, though a decision of private judge of their choice and not judges appointed by the state. Arbitration is thus closer to court proceedings than conciliation. For an international businessman, arbitration offers distinct advantages over litigation, because it is quicker, cheaper and private. Further, the arbitration award, at least in principle, is final but a court case may go to appeal to higher courts. It is desirable to entrust arbitration to established institutions, so as to avoid ad hoc judgements, like international Chamber of Commerce (ICC), International Council for Commercial Arbitration (ICCA) and the International Centre for Settlement of Investment Disputes. The Indian Council of Arbitration promotes arbitration as a means of settling commercial disputes and popularises arbitration. Laws of Foreign Countries A firm doing business abroad has to consider the relevant laws and regulations of the concerned foreign countries. The national laws governing business may be different in different countries. Laws related to product packaging and labelling, price, promotion, trade practices etc., are among the important regulations which the exporter should consider. Regulations Related to Products Product Standards: Many countries have established standards for many of the products. Such standards pertain to quality, safety, health consideration, etc. For example, ISO 9000 accredition is necessary for certain products for selling in markets like the European Union. Each country may have its own product standards or specifications. If the motor vehicle is taken as an example, in some countries the steering wheel should be on the left-side while in others it should be on the right side. There may be specifications about things such as the distance between the head lights, the height of the head lights, etc. In some countries, the product quality will have to be accredited by an approved organisation. Disclosures.- In case of several products, in many countries it is mandatory to make certain disclosures about the products like the ingredients, potency, shelf life, possible adverse effects (if any), etc. Environmental Laws.- Regulations related to environmental protection are growing in a number of countries. Products the production or harvesting of which cause serious ecological problem may not be permitted to be marketed in some countries. Similarly, biologically non-degradable packaging may not be allowed or penalties or fees may have to be paid for the social costs of using such materials. Product Liability: In several countries, if a person suffers any damage because of a product, the injured person has to prove - that the producer was at fault in respect of the defect in the product (causing the damage, to get compensation for it. But the product liabilities laws of countries like the USA and several European countries place the consumer

in a very comfortable position: the consumer does not have to prove that the producer was at fault. Where the liability of the producer is based simply on the fact that the damage has been caused by a defect although no fault on his part is involved, then the loss or damage suffered by the consumer is passed on to the producer. Packing and Labelling Regulations Many countries have their own regulations regarding packaging and labelling. There may be regulations regarding the packaging materials, method of packaging, packaging standards, etc. Similarly, there maybe regulations regarding the different aspects of packaging. There may be certain mandatory disclosures to be made. Labelling in local language is compulsory in some countries. For example, in Canada, use of both French and English is compulsory. Regulation of Price Many countries have laws regulating price. This is true of even the market economies. Regulation of Promotion Promotional activities are, generally, subject to various types of controls. The nature of the controls vary widely between countries. In some countries like Libya media advertising is not possible. In some countries, certain products like alcoholic drinks, tobacco products etc., are not allowed to be advertised in any or some of the media. A number of countries have regulations controlling false claims. In the USA the Federal Trade Commission (FTC) may require a company to provide sufficient evidence to substantiate the company's claims concerning the quality, performance, or comparative prices of its products. Product comparison advertisements are not permitted in some countries. The use of superlatives like best, better or excellent is prohibited for product comparisons in some countries. Some countries have restrictions on illustrations and use of photographs of women in advertisements. In most of the countries, product promotion is subject to various types of controls. For example, in India, Door Darshan does not entertain advertisements of certain products like alcoholic drinks; cigarettes, cigars, beedies and pan masala; baby food etc. Alcoholic drinks are not allowed to be advertised in other media too. In many countries, including India, the package and advertisements of cigarettes shall carry the statutory warning that cigarette smoking is injurious to health. Baby food marketers are not allowed to promote the product as a substitute for breast feeding.

LECTURE 24
Regulation of Trade Practices Many countries have laws regulating trade practices like restrictive trade practices. Similarly, there are also laws designed for consumer protection. Indian Laws There are some important legislations in India pertaining to exports. The Foreign Trade (Development and Regulation) Act: The most important law regulating the foreign trade of India is the Foreign Trade (Development and Regulation) Act, 1992, which has replaced the Imports and Exports (Control) Act, 1947. The objective of the Foreign Trade (Development and Regulation) Act, 1992, is to provide for the development and regulation of foreign trade by facilitating imports into, and augmenting imports from India and matters connected therewith or incidental thereto. The Act empowers the Central Government to: (i) Make provisions for the development and regulation of foreign trade by facilitating imports and increasing exports; and (ii) Make provisions for prohibiting, restricting or otherwise regulating the imports and exports of goods. Under the Act, the Central Government has appointed a Director General of Foreign Trade (DGFT) for carrying out the Government orders issued under this Act. Government has also appointed officers subordinate to the Director General, known as Joint Director Generals. According to this Act, no person shall make any import or export except under an ImportExport Code number granted by the DGFT or the officer authorised by him. The Act empowers the Government to control the import or export of any commodity by licensing. It also empowers the Government to prohibit the import or export of any goods. Besides the Foreign Trade (Development and Regulation) Act and Foreign Exchange Management Act (FEMA) there are some laws which control the trade in certain items. For example, the export of antiquities is regulated under the Antiquities and Art Treasures Act, 1972; export of coffee is regulated by the Coffee Board under the Indian Coffee Act, 1942; and export of tea is regulated under the Tea Act, 1953. No export of any goods can be made without obtaining customs clearance under the Customs Act, 1962. According to this Act, no carrier can accept any export cargo for shipment to foreign destination without ensuring that the formal permission has been granted by the Customs authorities. The Customs authorities at the ports exercise full control over entry inward, unloading, entry outward and loading of the export cargo in terms of the statutory provisions. Another important legislations for export regulation is the Export (Quality Control and Inspection) Act, 1963. This Act, which is intended to provide for the sound development of the export trade of India through quality control and inspection and for matters connected therewith, empowers the Central Government to: (i) Notify commodities which shall be subject to quality control or inspection or both prior to export; (ii) Specify the type of quality control or inspection which will be applied to a notified commodity; (iii) Establish, adopt or recognise one or more standard specifications for a notified commodity; (iv) Prohibit the export of the notified commodity, unless it is accompanied by a certificate to the effect that the commodity satisfies the conditions relating to quality control or inspection.

LECTURE 25
DEMOGRAPHIC ENVIRONMENT Peter Drucker, who emphasises the tremendous economic and business implications of demographic changes, suggests that any strategy, that is any commitment of present resources to the future expectations, has to start out with demographics." Demographic, factors such as size of the population, population growth rates, age composition, ethnic composition, density of population, rural-urban distribution, family size, nature of the family, income levels etc. have very significant implications for business.

Population Size The size of the population is an important determinant of demand for many products. There are countries with less than a lakh of people on the one hand and those with thousands of millions on the other hand. Poor countries with small population are generally not attractive for business. However, even such countries may hold out opportunities for some companies. As these markets may not be of interest for large companies, small firms may find promising niches in these markets. Advanced countries, particularly with large population, are generally attractive markets. The major part of the international trade and foreign investments naturally take place between these nations. Because of the large potential of these markets, competition is generally strong in them. Falling Birth Rate and Changing Age Structure True, there has been an explosive growth of the global population, particularly in the developing countries. The universal trend now, however, is fall in birth rates, although the total population is still growing at over one per cent annually. Developing countries are also experiencing significant decline in the population growth rates. In developed countries the fall in the birth rate is so steep that the population size would shrink drastically. Because of the declining birth rate population is already peaking in a number of countries. The collapse of population size has serious implications for business. The Collapsing Birth Rate and National Suicide The most important single new-certm bout future - if only because there is no precedent for it all of history - is the collapsing birthrate in the developed world. In Western and Central Europe and in Japan, the birthrate has already fallen well below the rate needed to reproduce the population. That is, below 2:I live births for women of reproductive age. In some of Italy's richest regions; for exampls; in Balagna, the birthrate by the year 1999 had fallen to 0.$; in Japan to 13 . In fact, Japan and all ,of Southern Europe - Portugal, Spain, Southern France, Italy, Greece are drifting toward collective national suicide by the end of the 21st century. By then Italy's population, for instance -- now 60 million - might be down to 20 or 22 million; Japan's population - now 125 million -- might be down to 54 or'SS million. But even in Western and Northern Europe the birthrates are down to 1.5 and falling. But in the United States, too, the birthrate is now below 2 and going down steadily. And it is as high as it is only because Qf the large number of recent immigrants who still, for the first' ,generafion, tend, to retain the high , birthrates of ,their country of origin for example, Mexico. Source: Peter F. Drucker, Management Challenges for the 215' Century The declining birth rate poses a problem for many businesses. Because of the decline in the birth rates and the consequent fall in the size of the baby population, the market for baby products has shrunk. This has prompted some companies, such as Johnson and Johnson, to reposition their products (originally introduced as baby products) and to pay more importance to international business. The declining birth rate has, however, been a boon to certain industries. For example, industries such as hotels, airlines and restaurants have benefited from the fact that young childless couples

have more time and income for travel and dining out. Small families have also similar advantages when compared with large families. It is obvious that business should necessarily ponder over whether the falling birth rate and the shrinkage in the number of young people - and especially of people under eighteen, that is, babies, children and teenagers - is a threat or an opportunity. As Drucker points out, for a business that makes its living making goods for small children, the collapsing birth rate may be an opportunity. It is conceivable that having fewer children means that the child becomes more and more precious and that a larger share of the disposable income is spent on it. This apparently has already happened in China where a majority of families have only one child. Many families, there, despite their poverty, apparently spend more on the single child than they used to spend on three or four children. There are signs in other countries like Germany, Italy and even in the United States of similar developments." Although birth rates have fallen in developing countries, the population growth rates are still very high. This coupled with a steady increase in income drives fast the growth of the markets of a number of developing economies. When the population is very large, even if the country is generally poor, there could sizeable market even for those goods and services which are regarded luxuries in these count For example, if just five per cent of the Indian population is well to do, the absolute num (more than 50 million) is larger than the total population of many of the high income economies. High population growth rate also implies an enormous increase in the labour supply. W the Western countries experienced industrial revolution, the population growth was comparati slow. Labour shortage and rising wages encouraged the growth of labour intensive method production. Capital intensive technologies, automation, and even rationalisation, are opposed labour, and many sociologists, politicians and economists in developing countries. Cheap la and a growing market have encouraged many multinationals to invest in developing count Many companies in the developed countries have relocated their production facilities, wholl partially, in the developing countries to reduce the labour costs.

The problems of developing countries due to the population explosion also indicate the enormous scope for several industries. A very significant share of the Indian population is below $e poverty line. Although these people, who do not have sufficient income even to meet the bare minimum basic necessities of life, do not come within the market for a large variety of goods and services, the existence of such a large size of poor population has a lot of other implications. To solve the basic problems, the additional number of children to be educated, the additional number of people to be provided with medical care, water supply etc. during one Five Year Plan in India are more than what most nations have done over centuries. While it is a formidable national challenge, it also indicates enormous business opportunities. The occupational and spatial mobilities of population too have implications for business. If labour is very mobile between regions and occupations, labour problems are likely to be less than would otherwise be the case. If the labour is highly heterogeneous in respect of language, religion and caste, ethnicity etc., personnel management is likely to become a more complex task. A highly heterogeneous population with its varied tastes, preferences, beliefs, temperaments etc. give rise to differing demand patterns and calls for differing marketing strategies. The falling birth rate and rising longevity will significantly alter the age distribution within Ihe population. The proportion of aged in the total population will go up. For example, of those 20-odd million Italians by the year 2080, a very small number will be under fifteen, and a very large number at least one-third of the population - well above sixty. In Japan the disproportion between younger people and people above any traditional retirement age will be equally great if notgreater. In the United States, the young population is already growing much more slowly than the older population,

past traditional retirement. Still, up to the year 2015 or so, the number of young people will still be growing in absolute numbers in the United States. But then it is likely togo down and quite rapidly. The share of old in the total population will increase in the future in almost every nation.