INTERNATIONAL BUSINESS

Prof Bharat Nadkarni

 International Business
Theory of Country Size
•Theoretically, Bigness of Country is an advantage because
there is a good chance that they have different weather
conditions, Soil, Terrains in different regions. That helps them
to be more versatile and can develop absolute advantage in
varied natural resources. India is one such big country with
absolute advantage in Spices, Tea, Cotton, Jute and in many
other areas. If such country is also have a population to match
then in Industries also they can gain advantage of Mass
Production, Economies of Scale, Multi talented and multi
skilled labour force etc.
•However, Smallness of Country will be disadvantage in
natural resources as well as in industries.
•Regional Integration – Trade Blocs (Ex. EU – European
Union, SAARC, ASEAN, NAFTA, LAFTA)
 International Business
EU (15) : European Union
Austria, Belgium, Britain, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, Netherlands,
Portugal, Spain, Sweden.
Euro : Common currency of the EU was launched by 11
members on 1.1.1999, Britain, Denmark, Sweden did’nt join. Greece joined
in 1.1.2001
Maastricht Treaty of 1991 set the stage for the monetory
union.
EU Additions
With effect from May 1, 2004 the total membership of EU
increased to 25. Following ten countries were inducted.
Estonia, Latvia, Lithuania, Poland, Czech Republic, Hungary,
Slovenia, Slovakia, Cyprus and Malta.
Two more members, Bulgaria and Romania, were inducted in
2007, taking the tally to 27 countries.
SAARC (7): + Afghanistan (Total 8)
South Asian Association for Regional Cooperation
India, Pakistan, Sri Lanka, Nepal, Bhutan, Bangladesh,
Maldives (SAPTA – SAARC preferential trading agreement)

ASEAN (5) : The Association of South East Asian Nations

was formed by the Bangkok Declaration, 1967, by five
countries, viz., Indonesia, Malaysia, Philippines, Singapore
and Thailand.

NAFTA (3) : North American Free Trade Agreement

USA, Canada, Mexico

LAFTA (9) : Latin American Free Trade Area

Argentina, Brazil, Mexico, Chile, Peru, Uruguay, Paraguay,
Columbia, Ecuador
Levels of Regional Integration

Economic
Integration
Economic
Union

Common
Market

Customs
Union

FTA

PTA
Levels of Regional Integration

1. Preferential Trade Area (PTA) Ex. SAARC

2. Free Trade Area (FTA) Ex. ASEAN, NAFTA, LAFTA

3. Customs Union (CU) Ex. All moved to level 4

4. Common Market (CM) Ex. MERCOSUR, COMESA

5. Economic Union (EU) Ex. European Union

6. Economic Integration (EI) No one reached this level yet.

Levels of Regional Integration
1.A Preferential Trade Area (PTA) with lower tariffs applied
to intra-regional trade originating in member countries than to
extra-regional trade.
2.A Free Trade Area (FTA), in which no tariffs are levied on
goods from other member States whilst each member State
applies its own regime of tariffs to goods imported from outside
the region.
3.A Customs Union (CU) involving free trade amongst the
member States but with a Common External Tariff (CET)
according to which every member State applies the same
tariffs on goods from outside the region.
4.A Common Market (CM) with free movement of capital and
labour, considerable harmonisation of trade, exchange rate,
fiscal and monetary policies, internal exchange rate stability
and full internal convertibility.
5. Economic Union (EU) with a common currency and unified
macroeconomic policy.
• In summary, the unified economic space with the four freedoms
- goods, services, capital and labour - comprises the following
basic elements:
• a regional market without internal frontiers within which goods,
services, capital and labour can move freely;
• common policies aimed at structural change and regional
development;
• macroeconomic policy coordination
• competition policy and other measures aimed at strengthening
market mechanisms;
• assurance of the total and irreversible convertibility of
currencies;
• full integration of banking and other financial markets; and
• pursuit of measures for the eventual creation of a monetary
union.
6. Economic Integration : The ultimate form is full economic
integration characterised by the completion of the removal
of all barriers to intra-bloc movement of goods and factors,
unification of social as well as economic policies and all the
members bound by decisions of a supernational authority
consisting of executive, judicial and legislative branches.
 International Business
Theories
1. Mercantilism (ex Colonial rule)

2. Absolute advantage and Comparative advantage (ex

India – tea, US- wheat)

3. Theory of Country size (ex. India, Brazil, USA)

4. Factor Proportions Theory (ex. Developed Vs

Developing Countries)

5. The Product Life Cycle Theory (Raymond Vernon’s

Theory)
 Factor Proportion Theory
Factors required for developing Nation
1. Land
2. Labour
3. Raw Materials
4. Capital
5. Technology
6. Skills
Urban Region and Rural Region
• Manufacturing – Proximity to Raw Materials and Labour
• Services – Proximity to Markets and Customers
Effect of development on Factors
• Land gets utilized so land cost goes up.
• Labor gets utilized, turns unskilled to semiskilled. Cost goes
up.
• Raw Materials get overutilized and exhausts.

A situation of imbalance gets formed between developed

and less developed countries.
Strength of Developed and Developing Countries
Developed countries
1. Capital
2. Technology and Technical knowhow
3. Managerial Abilities
4. Marketing Expertise

Developing countries
1. Land
2. Labour
3. Raw Materials
4. Untapped Markets
Strength of Developed Countries are Movable and Strength of
Developing Countries are Immovable.

So, Movable should move to Immovable to create a

Win – Win situation for both.
 “Make in India” Concept

Emanating from Factors Proportion Theory

Product Life Cycle Theory
as explained by

Raymond Vernon
in International Business context
Raymond Vernon’s Product Life Cycle Theory
•This is Product Life Cycle Curve explained in the context of
International Business by Raymond Vernon.

•Product goes through Four stages of Life Cycle – (IGMD)

Introduction, Growth, Maturity and Decline
•“Innovate or Perish” is the pressure on World class
organisations in Developed countries because of fierce
competition and Customer demand.

•Customer is knowledgeable, choosy and with Buying Power

•How to keep Organisations innovative and survive?

a. Identify and Recruit Innovative people : Recruitment Cost
b. Need to pay more because they are Rare : Package Cost
c. Create healthy work environment : Work Environment Cost
d. Provide R & D facilities : R & D Cost
•So to remain innovative, Organisation needs more funds and
investment / cost.
•It’s not a cost but an investment which one recovers many
times over on inventing a New Product.

•New Product needs to be priced high and Go Global to

explore bigger markets and to recover the costs before
imitators and Copycats enter the market.
 PLC Curve as
explained by
Raymond Vernon No Decline

Maturity

Imitators and Copycats enter

Growth

Introduction
Vernon’s Product Life Cycle Curve in Int’l Business
Introduction Innovative Product – Price High and
Export all over the World to recover
Creation cost.

Growth More Demand attracts Competitors who

can manage to sell at lower price as
they have not incurred creation cost.
Maturity Innovator finds it difficult to manage at
lower price, therefore shifts the
production base to low cost countries.
Decline Keep on shifting production base to
less developed to less developed
countries (Waterfall Concept)
 International Business

International Business
International business can be defined as activities that buys
and sells goods and services across two or more national
boundaries, even if the management is located in a one
country. It includes any type of business activity that crosses
national borders. International business is related with
those enterprises which have operating units outside their
own country. There are institutional arrangements who
provide some managerial direction of economic activity
taking place abroad.
Conducting international business is really not like playing a
whole new ball game but it is like playing in a different ball
park, where the managers have to learn the factors unique to
 International Business

the playing field. The guiding principles of a firm engaged in

international business activities should incorporate a global
perspective. Incorporating an international outlook into the
firm’s basic statement will help focus the attention of
management on the opportunities outside the domestic
economy.
 International Business

Objectives of International Business

1. To integrate economies.

2. To offer new markets.

3. To facilitate transfer of ideas, services and capital across

the world.

4. To facilitate mobility of factors of production.

 International Business
Difference between Domestic and International business
1. Higher rate of profits (Absolute advantages, taxes,
concessions and incentives)
2. Expansion of production capacities
3. Competition (pull & push effects)
4. Wide market
5. Political stability
6. Technology
7. High cost of transportation
 International Business
Growing importance of International Business
• Current trends are towards the increasing globalisation
and interdependence of firms, markets and countries.
• Intense competition at global level
• Exchange rate developments – shift from –ve to +ve
growth
• Global capital flows to LDCs
• Differences in Price and Cost
• Restructuring the economy to integrate with global
economy
• Increased importance of CSR
• The growing importance on enhancing standard of living
in LDCs
 International Business

• Liberal trade policies and procedures

• Revolution in communication and transportation
Thank you
Foreign direct investment approvals will, however, be
subject to sectoral caps: (as on 31.03.2010)
• 20 percent (40'per cent for NRIs} in the banking sector;
•51 per cent in non-banking financial companies;
•100 per cent in power, roads, ports, tourism and venture capital funds;
•49 per cent in telecommunications;
•40 per cent (100 per cent for NRIs) in domestic air taxi operations/airlines;
•24 per cent in small-scale industries;
•51 per cent in drugs/pharma industry for bulk drugs;
•100 per cent in petroleum; and
• 50 per cent in mining ~ except for gold. silver, diamonds and precious
stones
 The Millennium Development Goals
… as defined by UN

Eradicate extreme poverty and hunger

Achieve universal primary education
Promote gender equality and empower women
Reduce child mortality
Improve maternal health
Combat HIV/AIDS, malaria and other diseases
Ensure environmental sustainability
Develop a global partnership for development
Stop Child Labour
 Survival Rate for Global Corporations
Age in Years Percentage Percentage
surviving Perishing
5 38 62
10 21 79
15 14 86
20 10 90
25 7 93
50 2 95
75 1 99
100 0.50 99.50
Topics covered by Prof Bharat Nadkarni
•Objectives of IB, Diff between Domestic Biz Vs IB, Growing importance of IB
• Approaches and Theories of IB, Balance of Payment
• E P R G Model
• Environmental challenges (S T E P I N ), Hoffstede and Ghemawat theories
• W T O / IMF/ IBRD – G 20, BRICKS.
• Market Entry Strategies, Strategies of Co-operation – M & A, JV, SA
• Globalisation – Driving and Restraining forces
• Mike Porter’s Diamond – National competitiveness Model
• MNC’s and F D I – Policies and Theories
• Regional Integration – Trade Blocs, 6 Levels
• Trade Barriers , Anti Dumping policy
• GDR – ADR – Euro issues, Bitcoins, Offshore Banking,
• Transnational Economy, Letter of Credit, Logistics
• International HR, CSR, Ethics,