CMR Institute of Technology

#132, AECS Layout, IT Park Road,

BANGALORE -560 037.
INTERNATIONAL BUSINESS MANAGEMENT (08mba27)
MBA I Year Semester II

By Prof Bholanath Dutta

(Accredited Management Teacher- AIMA-CMS)

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 MODULE – I

♦ Introduction to International Business:

♦ Definition:

Globalization refers to the shift toward a more integrated and interdependent world
economy. Globalization has two main components: the globalizations of markets and the
globalisation of production.

The Globalization of Markets:

♦ The Globalization of Production:

♦ The Emerging Global Economy:

♦ Drivers of Globalization: Modes and entry strategies of international business:

(i) Declining Trade and Investment Barriers

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(ii) The Role of Technological Change:

- Microprocessors and Telecommunications:

- The Internet and World Wide Web:
- Transportation Technology:

♦ The globalisation debate: Arguments for and against:

Trends in International Trade:

♦ Differences between domestic and international business:

(i) - Countries are different,

(ii) - The range of problems confronted by a manager in an international business is wider and
the problems themselves more complex than those confronted by a manager in a domestic
business,
(iii) - Managers in an international business must find ways to work within the limits imposed by
government’s intervention in the international trade and investment system, and
(iv) - International transactions involve converting money into different currencies.

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 MODULE – II
♦ Cultural Aspects:
Edward Taylor defined culture as “ that complex whole which includes knowledge,
belief, art, morals, law, custom, and other capabilities acquired by man as a member of
society”.

♦ Values and Norms:

Values form the bedrock of a culture. They provide the context within which a society’s
norms are established and justified.

♦ Social Structure:
A society’s social structure refers to its basic social organization.
- Individual
- The Group
- Social Stratification
- Social Mobility
Religious and ethical systems:
- Christianity
- Islam
- Hinduism
- Buddhism
- Confucianism
♦ Language: Mr. Bholanath Dutta/CMRIT 4
♦ Education:
Formal education plays a key role in a society. Formal education is the medium through
which individuals learn many of the language, conceptual, and mathematical skills that are
indispensable in a modern society.

♦ Implications of cultural differences on business, International business environment:

International business is different from national business because countries and societies
are different. Societies differ because their cultures vary. Their cultures vary because of
profound differences in social structure, religion, language, education, economic
philosophy, and political philosophy.

- Cross-Cultural Literacy
- Culture and Competitive Advantage
- Culture and Business Ethics

♦ Political System:
Political system we mean the system of government in a nation. Political systems can be
assessed according to two related dimensions.

Collectivism and Individualism

Socialism
Individualism Mr. Bholanath Dutta/CMRIT 5
Democracy and Totalitarianism:
Democracy and totalitarianism are at different ends of a political dimension.
Democracy refers to a political system in which government is by the people,
exercised either directly or through elected representatives.

Democracy:
The pure form of democracy, as originally practiced by several city-states in ancient
Greece, is based on a belief that citizens should be directly involved in decision
making. Most modern democratic states practice what is commonly referred to as
representative democracy.

Totalitarianism:
In a totalitarian country, all the constitutional guarantees on which representative
democracies are built – such as an individual’s right to freedom of expression and
organization, a free media, and regular elections – are denied to the citizens.

♦ Economic Systems:

- Market Economy
- Command Economy
- Mixed Economy
- State-Directed Economy
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Legal Systems:

(i) Property Rights

- Private Action
- Public Action and Corruption

(ii) The Protection of Intellectual Property:

(iii) Product Safety and Product Liability:

♦ The Determinants of Economic Development:

♦ The Determinants of Economic Development:

(i) Differences in Economic Development:

(ii) Boarder Conceptions of Development Amartya Sen:

(iii) Political Economy and Economic Progress:

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(iv) Geography, Education, and Economic Development:

(v) States in Transition:

The spread of Democracy

- The New world order:
- The spread of Market Based Systems:

(vi) The nature of economic transformation:

- Deregulation:
- Privatization:
- Legal Systems:

♦ Ethical issues in international business:

(i) Ethics and Human Rights:

(ii) Ethics and Regulations:

(iii) Ethics and Corruption:

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 MODULE – III

♦ Mercantilism:

♦ Absolute Advantage:

♦ Comparative Advantage:

♦ Heckscher- Ohlin Theory:

♦ The Product Life-Cycle Theory:

♦ The New Trade Theory:

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 MODULE – IV

Instruments of Trade Policy:

Trade policy uses seven main instruments: tariffs, subsidies, import quotas,
voluntary export restraints, local content requirements, administrative
policies, and antidumping duties.

♦ Tariffs:
A tariff is a tax levied on imports. Tariffs fall into two categories. Specific
tariffs are levied as a fixed charge for each unit of a good imported (for
example, $3 per barrel of oil). Ad valorem tariffs are levied as a proportion of
the value of the imported good.

♦ Subsidies:
A subsidy is a government payment to a domestic producer. Subsidies take
many forms including cash grants, low-interest loans, tax breaks, and
government equity participation in domestic firms. By lowering production
costs, subsidies help domestic producers in tow ways: they help them
compete against foreign imports and they help them gain export markets.

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♦ Local Content Requirements:

A local content requirement is a requirement that some specific fraction of a good be

produced domestically. The requirement can be expressed either in physical terms (e.g., 75
percent of component parts for this product must be produced locally) or in value terms
(e.g. 75 percent of the value of this product must be produced locally). Local content
regulations have been widely used by developing countries to shift their manufacturing
base from the simple assemble of products whose parts are manufactured elsewhere into
the local manufacture of component parts.

♦ Administrative Policies:
Administrative trade policies are bureaucratic rules that are designed to make it difficult
for imports to enter a country. Some would argue that the Japanese are the mass-barriers
have been among the lowest in the world.

♦ Import Quotas and Voluntary Export Restraints:

An import quota is a direct restriction on the quantity of some good that may be imported
into a country.

A variant on the import quota is the voluntary export restraint (VER). A voluntary export
restraint is a quota on trade imposed by the exporting country, typically at the request of
importing country’s government.
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♦ Antidumping Policies:
In the context of international trade, dumping is variously defined as selling gods in a
foreign market at below their costs of production, or as selling goods in a foreign market
at below their “fair” market value.

♦ Political Arguments for Intervention:

- Protecting Jobs and Industries:

- National Security
- Retaliation
- Protecting Consumers:

♦ Furthering Foreign Policy Objectives:

Governments sometimes use trade policy to support their foreign policy objectives. A
government may grant preferential trade terms to a country it wants to build strong
relations with. Trade policy has also been used several times to pressure or punish “rogue
states” that do not abide by international law or norms. Iraq has labored under extensive
trade sanctions since the UN coalition defeated the country in the 1991 Gulf War.

♦ Economic Arguments for Intervention

♦ The Infant Industry Argument
♦ Strategic Trade Policy Mr. Bholanath Dutta/CMRIT 13
♦ Development of the world trading system:

- 1947 – 1979: GATT, Trade Liberalization, and Economic Growth:

- 1980 – 1993: Disturbing Trends:

- The Uruguay Round and the World Trade Organization:

- Services and Intellectual Property

- The World Trade Organization

- WTO: Experience to Date:

- WTO as a Global Policeman:

- The Future:

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 MODULE – V
♦ Regional Integrations:

♦ Levels of Economic Integration:

- The Free Trade Area:

- The Customs Union:
- The Common Market:
- The Economic Union:

♦ Arguments Surrounding Economic Integration:

- Trade Creation and Trade Diversion:

- Reduced Import Prices:
- Increased Competition and Economies of Scale:
- Higher Factor Productivity:
- Regionalism Versus Nationalism:
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♦ Major Regional Trade Association:

AFTA: ASEAN Free Trade Area – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar,
Philippines, Singapore, Thailand, and Vietnam.

ANCOM: Andean Common Market- Bolivia, Colombia, Ecuador, Peru and Venezuela.

APEC: Asia Pacific Economic Cooperation- Australia, Brunei, Canada, Chile, china, Hong Kong,
Indonesia, Japan, Malaysia, Mexico, new Zealand, Papua New Guinea, Philippines, Russia,
Singapore, south Korea, Taiwan, Thailand, US, Vietnam.
CACM: Central American Common Market- Antigua and Barbuda, Bahamas, Barbados, Belize,
Dominica, Grenada, Guyana, Jamaica, Monteserat, St. Kitts Nevis, St. Lucia, St. Vincent and
the Grenadines, Suriname, Trinidad-Tobago.

ECOWAS: Economic Community of West African States- Benin, Burkina Faso, Cape Verde,
Gambia, Ghana, Guinea, Guinea-Bissau, Ivory Coast, Liberia, Mali, Mauritania, Niger,
Nigeria, Senegal, Sierra Leone, Togo.

EU: European Union- Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, Netherlands, Portugal, SPAIN, Sweden, United Kingdom.

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EFTA: European Free Trade Association- Iceland, Liechtenstein, Norway, Switzerland
GCC: Gulf Cooperation Council- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, ,
United Arab Emirates.

LAIA: Latin American Integration Association- Argentina, Bolivia, Brazil, Chile,

Colombia, Cuba, Ecuador, Mexico, Paraguay, Peru, Uruguay, Venezuela.

Mercossur: Southern Common Market- Argentina, Brazil, Paraguay, Uruguay

NAFTA: North American Free Trade Agreement – Canada, Mexico, US.

SAARC: south Asian Association for Regional Cooperation- Bangladesh, Bhutan,

India, Maldives, Nepal, Pakistan, and Sri Lanka.

SACU: Southern African Customs Union- Botswana, Lesotho, Namibia, South

Africa, Swaziland.

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♦ Organizational Structure:

Organizational structure means three things: (i) the formal division

of the organization into subunits, which we shall refer to as
horizontal differentiation; (ii) the location of decision-making
responsibilities within that structure, which we shall refer to as
vertical differentiation; and (iii) the establishment of integrating
mechanisms.
- Vertical Differentiation:

A firm’s vertical differentiation determines where in its hierarchy

the decision-making power is concentrated

- Arguments for Centralization

- Arguments for Decentralization

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Strategy, Manufacturing, and Logistics:

- Increases productivity because time is not wasted manufacturing

poor-quality products that cannot be sold, leading to a direct
reduction in unit costs.

- Lowers rework and scrap costs.

- Lowers warranty costs.

♦ Where to manufacture
♦ Country Factors
♦ Technological Factors
♦ Fixed Costs
♦ Minimum Efficient scale

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♦ Make-or-Buy Decisions:

The Advantages of Make:

 Lower Costs:

 Facilitating Specialized Investments:

 Proprietary Product Technology Protection:

 Improved Scheduling:

The Advantage of Buy:

 Lower Costs
 Offsets
 Trade-Offs

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 MODULE – VII

Foreign Exchange Market:

The Functions of the Foreign Exchange Market:

The foreign exchange market serves two main functions. The first is to convert the currency
of one country into the currency of another. The second is to provide some insurance
against foreign exchange risk, by which we mean the adverse consequences of
unpredictable, changes in exchange rates.

Currency Conversion:

Each country has a currency in which the prices of goods and services are quoted. In the
US, it is the dollar ($); in Great Britain, the pound (£); in France, Germany, and other
members of the euro zone it is the euro (E); in Japan, the yen (¥); and so on. In general,
within the borders of a particular country, one must use the national currency. A US tourist
cannot walk into a store in Edinburgh, Scotland, and use US dollars to buy a bottle of
Scotch whisky. Dollars are not recognized as legal tender in Scotland; the tourist must use
British pounds. Fortunately, the tourist can go to a bank and exchange her dollars for
pounds. Then she can buy whisky.

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Insuring Against Foreign Exchange Risk:
A second function of the foreign exchange market is to provide insurance to protect against
the possible adverse consequences of unpredictable exchanges in exchange rates (foreign
exchange risk):

Spot Exchange Rates:

When two parties agree to exchange currency and execute the deal immediately, the
transaction is referred to as a spot exchange.

Forward Exchange Rates:

The fact that spot exchange rates change continually as determined by the relative demand
and supply for different currencies can be problematic for an international business. A US
company that imports laptop computers from Japan knows that in 30 days it must pay yen to a
Japanese supplier when a shipment arrives The company will pay the Japanese supplier
¥200,000 for each laptop computer, and the current dollar/yen (i.e. 1,667=200,00/120). The
importer knows she can sell the computers the day they arrive for $2,000 each; the importer
will not have the funds to pay the Japanese supplier until the computers have been sold. If
over the next 30 days the dollar unexpectedly depreciates against the yen, say to $1=¥95, the
importer will still have to pay the Japanese company ¥200,00 per computer, but in dollar terms
that would be equivalent to $2,105 per computer, which is more than she can sell the
computers for. A depreciation in the value of the dollar against the yen from 1= ¥120 to 95
would transform a profitable deal into an unprofitable one.

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Currency Swaps:
A currency swap is the simultaneous purchase and sale of a given amount of foreign
exchange for two different value dates. Swaps are transacted between international
businesses and their banks, between banks, and between governments when it is desirable
to move out of one currency into another for a limited period without incurring foreign
exchange risk. A common kind of swap is spot against forward.

The Nature of Foreign Exchange Market:

The foreign exchange market is not located in any one place. It is a global network of
banks, brokers, and foreign exchange dealers connected by electronic communications
systems. When companies wish to convert currencies, they typically go through their own
banks rather than entering the market directly.

Economic Theories of Exchange Rate Determination:

At the most basic level, exchange rates are determined by the demand and supply of one
currency relative to the demand and supply of another.

Prices and Exchange Rates:

To understand how prices are related to exchange rate movements, we first need to discuss
an economic proposition known as the law of one price. Then we will discuss the theory of
purchasing power parity (PPP), which links changes in the exchange rate between two
countries’ currencies to changes in the countries’ price levels.

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 The law of one price:
The law of one price states that in competitive markets free of transportation costs and
barriers to trade (Such as tariffs), identical products sold in different countries must sell for
the same price when their price is expressed in terms of the same currency.

Purchasing Power Parity:

If the law of one price were true for all goods and services, the purchasing power parity (PPP)
exchange rate could be found from any individual set of prices. By comparing the prices of
identical products in different currencies, it would be possible to determine the “real” or PPP
exchange rate that would exist if markets were efficient (An efficient market has no
impediments to the free flow of goods and services, such as trade barriers).

Money Supply and Price Inflation:

In essence, PPP theory predicts that changes in relative prices will result in a change in
exchange rates. Theoretically, a country in which price inflation is running wild should expect
to see its currency depreciate against that of countries in which inflation rates are lower. If we
can predict what a country’s future inflation rate is likely to be, we can also predict how the
value of its currency relative to other currencies – its exchange rate – is likely to change. The
growth rate of a country’s money supply determines its likely future inflation rate. Thus, in
theory at least, we can use information about the growth in money supply to forecast
exchange rate movements.
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Exchange Rate Forecasting:

A company’s need to predict future exchange rate variations raises the issue of
whether it is worth while for the company to invest in exchange rate forecasting
services to aid decision making. Two schools of thought address this issue. The
efficient market school argues that forward exchange rates do the best possible job of
forecasting future spot exchange rates, and, therefore, investing in forecasting
services would be a waste of money. The other school of thought, the inefficient
market school, argues that companies can improve the foreign exchange markets’
estimate of future exchange rates by investing in forecasting services. In other words,
this school of thought does not believe the forward exchange rates are the best
possible predictors of future spot exchange rates.

♦ The efficient market school:

Approaches to Forecasting:

Assuming the inefficient market school is correct that the foreign exchange market’s
estimate of future spot rates can be improved, on what basis should forecasts be
prepared. Here again, there are two schools of thought. One adheres to fundamental
analysis, while the other uses technical analysis.
- Fundamental Analysis
- Technical Analysis Mr. Bholanath Dutta/CMRIT 34
Currency Convertibility:

Until this point we have assumed that the currencies of various countries are freely
convertible into other currencies. This assumption is invalid. Many countries restrict the
ability of residents and nonresidents to convert the local currency into a foreign currency,
making international trade and investment more difficult. Many international businesses
have used “counter trade” practices to circumvent problems that arise when a currency is
not freely convertible.

Convertibility and Government Policy:

Due to government restrictions, a significant number of currencies are not freely

convertible into other currencies. A country’s currency is said to be freely convertible when
the country’s government allows both residents and nonresidents to purchase unlimited
amounts of a foreign currency with it. A currency is said to be externally convertible when
only non-residents ay may convert it into a foreign currency without any limitations. A
currency is nonconvertible when neither resident not nonresidents are allowed to convert it
into a foreign currency.

Counter trade:
Counter trade refers to a range of barter like agreements by which goods and services can
be traded for other gods and services. Counter trade can make sense when a country’s
currency is non-convertible.
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IMF:

The IMF is another important player in the international monetary system. The IMF does
not simply lend money to a country in trouble. In exchange for the loan, it requires that
the government adopt policies designed to correct whatever economic problems caused
the depreciation in the nation’s currency.

The Role of the IMF:

The IMF Articles of Agreement were heavily influenced by the worldwide financial
collapse, competitive devaluations, trade wars, high unemployment, hyperinflation in
Germany and elsewhere, and general economic disintegration that occurred between the
two world wars. The aim of the Bretton Woods agreement, of which the IMF was the
main custodian, was to try to avoid a repetition of that chaos through a combination of
discipline and flexibility.

- Discipline:

- Flexibility:

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The Role of the World Bank:
The official name for the World Bank is the International Bank for Reconstruction and
Development.

The bank lends money under two schemes. Under the IBRD scheme, money is raised
through bond sales in the international capital market. Borrowers pay what the bank
calls a market rate of interest- the bank’s cost of funds pulls a margin for expenses. This
“market” rate is lower than commercial banks’ market rate. Under the IBRD scheme, the
bank offers low-interest loans to risky customers whose credit ratting is often poor.

HR in the global scenario:

Staffing Policy:

Staffing policy is concerned with the selection of employees for particular jobs. At one
level, this involves selecting individuals who have the skills required to do particular
jobs. At another level, staffing policy can be a tool for developing and promoting
corporate culture. By corporate culture, we mean the organization’s norms and value
systems.

In firms pursuing transnational and global strategies, we might expect the HRM
function to pay significant attention to selecting individuals who not only have the skills
required to perform particular jobs but who also fit the prevailing culture of the firm.

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Types of Staffing Policy:
Research has identified three types of staffing policies in international
businesses: the ethnocentric approach, the polycentric approach, and the
geocentric approach.

(i) The ethnocentric Approach

(ii) The polycentric Approach
(iii) The Geocentric Approach

♦ Expatriate Managers:
Two of the three staffing policies – the ethnocentric and the geocentric rely
on extensive use of expatriate managers as defined earlier, expatriates are
citizens of one country who are working in another country. Sometimes the
term inpatriates is used to identify a subset of expatriates who are citizens
of a foreign country working in the home country of their multinational
employer.
♦ Expatriate Failure Rates:
Expatriate failure represents a failure of the firm’s selection policies to
identify individuals who will not thrive abroad. The costs of expatriate
failure are high.
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♦ Expatriate Selection:

- Self- orientation
- Others-orientation
- Perceptual ability
- Cultural Toughness

Training for Expatriate Managers:

- Cultural Training
- Language Training
- Practical Training

Repatriation of Expatriates:
A largely overlooked but critically important issue in the training and development of
expatriate managers is to prepare them for reentry into their home-country
organization.
The End

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