GLOBALIZATION

&
INTERNATIONAL BUSINESS
28
th
JULY, 2014

MBA Evening Program
Flow





What is international Business?

Factors Affecting International Business

Elements of International Business

Globalization

Drivers of Globalization

Entry to International Business

International Business Strategies




Example

Video Analysis of India
as a Favoured Destination
for
International business

Philips Case

Matsuhita Case

What is International Business?

International business can be defined as any business that crosses
the national borders of a country.

It includes importing and exporting; international movement of
goods, services, employees, technology, licensing, and franchising
of intellectual property (trademarks, patents, copyright and so on).

International business includes investment in financial and
immovable assets in foreign countries.

Contract manufacturing or assembly of products for local sale or for
export to other countries, establishment of foreign warehousing
and distribution systems, and import of goods from one foreign
country to a second foreign country for subsequent local sale is part
of international business.

Factors Affecting International Business

Elements of International Business
Legal and regulatory framework

Financial management

Trade barriers and tariffs

Accounting and taxation

Culture

Market forces
Legal and Regulatory Framework
This framework refers to companies having to comply with
the law of the land they operate in.

Companies involved in international business may have to
comply with laws of more than one country. This certainly
poses a challenge as each country has its own set of laws.

These companies have to ascertain that their scope of
business is within the regulatory framework set by the
authorities of that country.
Financial Management
In a domestic scenario, all the payments of a business involve the local
currency.

In an international scenario, for example, a company may pay in Chinese
Yuan for sourcing its materials from China, pay wages in Malaysian Ringgits
at its production base in Malaysia, and receive payments in Euros from its
customer in Germany.

Hence, a company has to deal with multiple currencies, exchange rate
mechanisms, hedging of currencies, banking systems, fluctuating interest
rates and so on.

Trade Barriers and Tariffs

In a domestic scenario, a company can move its goods
and services almost freely within the country. But in
international trade, companies face issues like
licensing, anti-dumping laws, quota restrictions, and
tariffs for their business operations in a foreign country
or region
Accounting and Taxation

Domestic businesses need to comply with the
accounting and taxation standards prevailing in
that country. A company with international
operations has to comply with the accounting
standards and tax laws of the foreign country as
well.
Culture
In a domestic market, a business deals with a
homogenous culture whereas a company with
international business has to deal with
heterogeneous cultures in multiple countries.

The company's management has to study
different cultures and get accustomed to different
languages, culture, sentiments, and traditions of
the foreign country in order to conduct business
productively.

Market Forces
Demographics of each country have its own perceptions
about different products and services. The local, political,
economic, and technological environments differ from
country to country. While these differences are at a macro
level, at the micro level we have to consider several other
factors. They may be in terms of customer preferences,
product placement, pricing, advertising, distribution channels
and so on.

An international company has to face the challenges of
multiple regional customers, each with unique requirements.

Globalization
Globalization is a process where businesses are dealt in
markets around the world, apart from the local and national
markets.

According to business terminologies, globalization is defined
as 'the worldwide trend of businesses expanding beyond their
domestic boundaries'.

It is advantageous for the economy of countries because it
promotes prosperity in the countries that embrace
globalization.
Drivers of Globalization
Global Market Place

International business has become easier since
the advent of internet and the emergence of e-
business.
A company must have a good product, the right
strategy and an appetite to take risk at the
global marketplace in order to do business
internationally.

Emerging Markets
Compared to developed countries, developing countries are growing at a
healthy pace, thus reducing the barriers of trade. Emerging markets
provide an unexplored marketplace with unlimited potential and scope for
business.
Any company with good or innovative products and services cannot afford
to ignore the opportunities provided by these emerging markets.
Foreign Direct Investment (FDI) policy of a nation lays down the
foundation for competitive and prosperous market conditions.
Embracing globalization has become a vital component of development
strategy for developing countries, and is being used as an effective
instrument of economic growth.
Some countries like China, India, and Philippines also provide tax holidays
to foreign companies for setting up their business (in certain sectors) in
these countries. Such incentives make these countries an attractive
destination for companies looking for low cost production.

Small Domestic Market

A company, which is mature in its domestic market, is
driven to sell in more than one country because the
sales volume achieved in its own domestic market is
not large enough to fully capture the manufacturing
economies of scale. For example, Nokia is an
international company based in Finland.

Diminishing Trade and Investment Barriers
The lowering of barrier to trade and investments (by most countries
around the world) also provides an opportunity to companies
looking for expanding their business.

Expanding into a foreign country provides access to low wage
labourers, highly skilled work force, larger market base and so on.
Companies have a chance to set up subsidiaries in low-cost
countries for manufacturing their products.

Easy flow of goods and services results in the company literally
designing the product in one country, manufacturing the various
components in different countries, assembling the final product in a
third country and marketing the product across the world.
Technological Innovation
The advent of internet and e-commerce, advancement of
telecommunication, information technology, and improvement
in logistics have changed the dynamics of business operations.

The use of mobile telephony, wireless communications, and
satellite connectivity has reduced the time needed for decision
making at an international level.

Constant innovation in technology has enhanced information
flow between geographically remote areas, thus bringing the
markets of different countries closer and paving the way for
international business.

Changing Demographics
Most developed countries face challenges in sourcing
workforce as the average age of the population is getting
older.

In the next 10 years, most of the industrialised nations will
have to depend on sourcing its workforce from countries like
India, China and other countries, where the population is
young, with abundance of skilled labour.

India alone produces close to five lakh engineers and one
million English speaking graduates and other diploma holders
per year.
Entry to International Business
For a company that wants to expand internationally, there are
several available entry options. They are listed as follows:

Export strategy.

Licensing.

Franchising.

Foreign direct investment.


Export Strategy
This method remains the most common means of entry into
international markets.

Export strategy is a very attractive option that is merely an
extension of domestic operations.

It also minimizes the risk component as well as the capital
requirement.

The host company's involvement in the international market is
limited to identifying customers for marketing its products.

Licensing
A domestic company can license foreign firms to use the company's
technology or products and distribute the company's product.

By licensing, the domestic company need not bear any costs and risks
of entering foreign markets on its own, yet it is able to generate
income from royalties.

The reverse of this arrangement is the risk of providing valuable
technological knowledge to foreign companies, and thereby losing
some degree of control over its use.

Monitoring licenses and safeguarding company's Intellectual Property
Rights can prove to be challenging in an international scenario. Puma
adopted licensing strategy post 1999.

Franchising
Licensing works well for manufacturing companies but
franchising is a better option for international expansion efforts
of service or retailing companies.

Franchising has the same advantages as licensing. The franchisee
bears almost all the costs and risks in establishing the foreign
operations.

The franchiser's contribution is limited to providing the concept,
technology and training the franchisee in the already established
model. Maintaining quality poses the biggest challenge to the
franchiser. McDonalds uses franchising model.

Foreign Direct Investment (FDI)
FDI is the investment made by a company in a foreign country to start its operations. Various options available for
an FDI are as follows:

Whole owned subsidiary - This option is viable if a company is willing to take all the risks of all the
operations pertaining to its business in a foreign country. A subsidiary can be formed from scratch (green
field investment) to manufacture and market its products and services in a foreign country. A firm can also
export its products or services to other countries from its subsidiaries. American Airlines is a wholly owned
subsidiary of AMR Corp.

Joint Ventures (JV) - This is a very popular mode of entry into foreign markets, as it minimizes business risk
and investment. It is owned by one or more firms in proportion to their investment. If a JV is done with an
existing competitor, it could be termed as a strategic alliance. Sony Ericsson is an example of joint venture
between Sony, a Japanese company and Ericsson, a Swedish company.

Merger or acquisition - A company can merge into or acquire an existing company with established
operations in a foreign country. It saves a lot of time in construction, initial setup, and regulatory approvals
and so on. In the bargain, the acquiring company can use all the established brand names, distribution
networks and so on of the acquired company. Eg. Proctor and Gamble

Strategic investment - Any firm to a share in the profits, if any. The shareholding can be a minority stake can
purchase a stake in a foreign company, whereby they are entitled and may be without voting rights.
Generally, the investing company does not participate in the management of the target company.

Types of International Strategies

Multi Domestic Strategy
Global Strategy
A fully multi-local value chain will have every function from R&D to
distribution and service performed entirely at the local level in each
country. At the other extreme, a fully global value chain will source each
activity in a different country.
Multi Domestic Strategy Global Strategy
Product customized for each market Product is the same in all countries
Decentralized control - local decision
making
Centralized control - little decision-making
authority on the local level
Effective when large differences exist
between countries
Effective when differences between
countries are small
Advantages: product differentiation, local
responsiveness, minimized political risk,
minimized exchange rate risk
Advantages: cost, coordinated activities,
faster product development
Philips case
Philips is a good example of a company that followed a multidomestic strategy. This
strategy resulted in:
Innovation from local R&D

Entrepreneurial spirit

Products tailored to individual countries

High quality due to backward integration

The multi-domestic strategy also presented Philips with many challenges:

High costs due to tailored products and duplication across countries

The innovation from the local R&D groups resulted in products that were R&D driven
instead of market driven.

Decentralized control meant that national buy-in was required before introducing a
product - time to market was slow.

Matsuhita Case
Matsushita is a good example of a company that followed a global strategy. This
strategy resulted in:
Strong global distribution network

Company-wide mission statement that was followed closely

Financial control

More applied R&D

Ability to get to market quickly and force standards since individual country buy-in was
not necessary.

The global strategy presented Matsushita with the following challenges:

Problem of strong yen

Too much dependency on one product - the VCR

Loss of non-Asian employees because of glass ceilings


QUESTIONS
?
Source of Information
Books to be referred
International Business by John Daniels,
Pearson Education, Latest Edition