International Business

Meaning of International Business

It is the process of focusing on the resources of the globe and objectives of organizations on global business opportunities and threats, in order to produce, buy, sell or exchange of goods /services world-wide.

Difference between Domestic and International Business

Importance of International Business

High level standards: Comparative cost advantage for the countries which have advantage over raw-materials, human resources, natural resources, and climatic conditions in producing particular goods can produce at low cost. Customers can buy more products with the same money. It can enhance the standard of living by consuming high quality products.

Importance of International Business

Increased socio-economic welfare: It enhances the consumption level and economic welfare of the people of the trading countries Wider market: Companies did not depend upon single market. e.g. MNCs like Toyota, Honda, Zerox and coca-cola, Big cola. Reduced effect of business cycle: Reduced risk: Both commercial and political risk is reduced due to spread in different countries. Large-scale economies: Reduces cost, will expertise, quality will improve etc. Potential untapped markets: For e.g. Bata sells shoes in the U.K at Rs 8000 and the same shoes is at Rs in 1200 in India.

Importance of International Business

Provides opportunity for and challenge to Domestic companies: These includes technology, management expertise, market intelligence, product development etc. Division of Labour and specialisation: For e.g. Brazil specialises in coffee, kenya in Tea, Japan in automobiles, and electronics, India in textile garments etc.

Importance of International Business

Economic Growth of the World: Specialization, division of labour, enhancement productivity, posing challenges, development to meet them, innovation and creation to meet the competition lead to the overall economic growth of the world. It helped particularly Asian nations, like Japan, Taiwan, Korea, Philippines, Singapore, Malaysia, and united Arab Emirates. Optimum and Proper utilisation of resources: The resources can flow from the country where it is in excess. Like human resources from India, consumer goods from UK, France, Italy and Germany to developing countries. Cultural transformation: Knitting the World into a closely Interactive traditional village:

Environmental Factors International Business

Environment means surroundings. International business environment means the factors those surround the IB. In other words factors that affect the IB.

Different environment factors

Internal External Internal factors: It influences the business from within. They include HRM, trade unions, organizational structure, financial mgmt, marketing mgmt and production mgmt, management /leadership style.

External environmental factors

It is divided in to two parts: Micro external factors: It includes the competitors, customers, market intermediaries, suppliers of rawmaterials, bankers and other suppliers of finance, shareholders and the other stake holders of the business. Macro External factors: Social and cultural factors Technological factors Economic factors Political and government factors International factors Natural factors

Social and cultural factors

It includes attitude of the people to work, attitude to wealth, family, marriage, religion, education, ethics, human relations, social responsibilities etc. The most important is to find the relative similarities and differences between the countries. One has to look the cultural factors strongly.

 Culture is derived mostly from the climatic conditions of the geographical region and economic conditions of the country. A set of traditional beliefs and values which are transmitted and shared in a given society and a total way of life and thinking patterns that are passed from generation to generation Norms, customs, art values etc.

 Prescriptive: It prescribes the kinds of behavior considered acceptable in the society. It limits product choices to those which are socially acceptable. For example, consumption of wine is acceptable in the West, but it is not socially acceptable in India and it is socially and legally unacceptable in Saudi Arabia. Similarly, smoking is medically unacceptable even in USA in the recent times.

Sr.No

Countries

Product

Current Situation on Consumption

Comments

1.

Thailand, China Beef and India

Against religion No market for Beef. KFC had to close down one unit when it used beef in food product. Well Accepted Good Mkt opportunities.

2. 3.

Japan US, Argentina

Beef Beef

Preferred more Huge Mkting opportunities.

Technological Environment:
Technology and its application are the key factors in determining the international competitiveness of a firm when conducting international business. Leadership is maintained through continuous R and D. Japan for electronic equipment. Germany for medical equipment. USA for pharmaceuticals. The time gap between the innovation and its adoption may vary from country to country. Country that innovate are few and country that follow are many.

Legal Environment
Labour legislation Taxes environment Pollution Investment Distribution contract The international environment has three aspects: Home country laws Host country laws International laws

 Home country law Conduct of firm in the domestic territory. Trade with other countries. Host country laws Investment regulations Tariffs Anti-dumping regulations And protection of local industries from unfair competition from industrialized countries. Super 301 against Indian nylon skirts imposed by USA as an inflammable fabrics and ban on sea food by the european community are some of the examples.

 International Laws: Treaty convention Agreement between nations Patents Trademark Privacy Law. European union sanctions international routes to those who follow Euro-dollar. Bilateral agreement, multilateral agreement and Trade blocks are part of the international legal environment.

Economic Environment
Basic economic system Growth strategy Industry Agriculture Infrastructure National and per-capita income Exports and imports Balance of payment position Population Literacy and longevity of citizens.

It is classified into three categories Home country economy: Venturing with the home country to exploring the business. But for this the economic envt. Of the country should be free. Host country Economy: Size of the market (BRIC nations) GDP Industrialization: Many countries in the developing world were interested into Europe and USA. The recent trends among Indian companies is to expand in Latin America, more specially in Brazil, Argentina, and Chile. This is due to industrialization programme in this countries.

Banking Purchasing Power Foreign Exchange: Countries having a foreign exchange reserves, Liberal policy on repatriation, and the demand for the product and services are the ideal condition for the international business. Income levels Economic diversity: In the same country, a few urban centre's may offer outstanding business opportunities where in the other area may not. Like Nairobi in Kenya, Lusaka in Zambia, Johannesburg in South Africa.

 Global level Economy: Like OPEC, WTO, IMF, Asian Development Bank etc can affect the IB. Political Environment: It decides the investment decisions. Home country environment: It is always encouraging. Host country Environment: If foreign firm enters with contribution to ht e employment, taxes, and social security with the local population, the political atmosphere tends to be hospitable.

 Global Political Environment: Multinational agreement between international organization such as GATT, UNO, and common wealth may constitute an impediment of free trade as well as to the nature and scope of operations of international firms. Embargos, cartels, free trade pacts and custom unions allow a few nations to enjoy competitive advantages, while other lose their business prospects. For example Economic embargo on Irq by the security council of the UN in 1991 meant that conducting trade with that country was illegal for all international firms. China ordering Microsoft to Stop selling windows95 as it contained offensive material, including phrases like communist bandists, Microsoft agreed to change the material for re-entry.

 Competitive Environment: The current international business operations has to encounter competition at various stages , such as entry, operations, production, administration, human resources, technology, distribution and logistics.

Types of International (Foreign) Capital

Foreign Direct Investment Foreign Portfolio Investment Official Flows "Official flows" refers to public (government) capital. Popularly this includes foreign aid Commercial Loans Commercial loans were the largest source of foreign investment in developing countries. Commercial loans are also called as external commercial Borrowings (ECB). They include commercial bank loans, buyers' credit, suppliers' credit, securitised instruments such as Floating Rate Notes and Fixed Rate Bonds etc. Credit from official export credit agencies Such as International Finance Corporation, (IFC), Asian Development Bank (ADB), joint venture partners etc.

 Joint ventures: The flow of foreign capital is very useful through joint ventures Multilateral sources: The multilateral financial institutions such as World Bank and its affiliated institutions like Asian Development Bank, the International Monetary Fund Non resident Indian funds: The NRIs have invested in India through bank deposits, financial instruments, portfolio investments and direct investment skills. Mergers and acquisitions

FDI
Foreign Direct Investment The investment made by a company in new manufacturing and /or marketing facilities in a foreign country is referred to as Foreign Direct Investment (FDI).

Reasons for FDI

To Increase Sales and Profits: To Enter Fast Growing Markets: To Reduce Costs: To Acquire Technological and Managerial Know-How: To Consolidate Trade Blocs: MNCs prefer to do business with other member countries of the trade bloc. This is because the MNCs get preferential treatment in doing business.

To Protect Foreign Markets: To protect Domestic Markets: Some MNCs invest and operate in foreign markets with a view to avoid the competition with the weak domestic firms. In other words, they leave the domestic market to the less competitive domestic firms.

Why in India?

Opportunities here
Stabilized democratic government Low penetrated market Low labor cost Skill population Availability of resources Supportive policies and rules

FDI Strategies
Acquisition An international acquisition is a cross border investment in which a foreign investor acquires an establish local firm and makes the acquired local firm a subsidiary business within its global portfolio. For example, Unilever, Rank-Xerox, Grameen-Danone Greenfield Investment This may be defined as FDI in which investment involves the establishment of a completely new operation in a foreign land. The establishment of wholly owned project by Mercedes-Benz plant in Alabama is a classic example.

 Horizontal Foreign Direct Investment Horizontal FDI occurs when the MNE enters a foreign country to produce the same products produced at home (or offer the same service that it does at home). soft drinks Or cement, CEMEX acquiring RMC is an example of HFDI CEMEX is one of the world's largest building materials suppliers and cement producers CEMEX completed its $5.8 billion acquisition of the London-based RMC Group, which made CEMEX the worldwide leader in ready-mix concrete production and increased its exposure to European markets. RMC Group plc (formerly "Ready Mixed Concrete Limited") was a multinational ready mixed concrete, quarrying and concrete products company headquartered in United Kingdom

 Vertical Foreign Direct Investment Vertical FDI is a companys investment into an industry abroad, which provides control of the different stages of making its product from raw materials through production to its final distribution. Vertical FDI is understood better by dividing it into two forms: Backward vertical FDI Forward vertical FDI 1. Backward vertical FDI Occurs when the MNE enters a foreign country to produce intermediaries goods that are intended to use as inputs in its home country. For example, offshore extractive investment in petroleum by reliance petrochemical, Joint venture plants established by IFFCO in Oman to source natural gas and raw materials for the production of fertilizers etc. British Petroleum extracts the petroleum from the ores

2. Forward Vertical FDI When a multinational enterprise markets its homemade products overseas or produce final outputs in a host country using its homesupplied intermediate goods or materials. Volkswagen acquired a large number of dealers when entering the US market.

 Outward FDI Any investment made by your country in other countries will account for outward FDI. Inward FDI All the FDIs invested by other countries in your country are called inward FDI.

COSTS AND BENEFITS OF FDI

Benefits to Home Country Cost Advantages New Markets Exposure to other countries International Relations Costs to home Country Loss of Employment Problem of Repatriation Possibility of Loosing Competitive Advantage

 Benefits to Host Country Technology advancement Employment Effects Balance-of-Payments Effects FDI provides for the production of a number of goods and services domestically Market access Increase in Domestic investment Export promotion

Formation of Clusters: Groups of similar projects and manufacturing centers are formed in a specific location by way of providing common production, R&D, training and pollution control systems to a group of competing companies. Spin-offs: Individuals who trained with companies started their own ventures and became successful leaders in their respective fields. Even in India the machine tool industries of Ludhiana and Banglore are spin-offs of yesterday years popular companies, such as SKF, and MICO. Integration into global economy Increased competition Improved human resources

 Cost to host country Political Lobbying Exploitation of Resources:. Companies of other countries have been known to indiscriminately exploit the resources of hosts countries in order to get short run gains and profits. Threaten Small Scale Industries Technology: They do not transfer the latest technology to the host country with a fear that their home country may lose its competitive advantage

Ways of Entrance

ROUTES FOR FOREIGN DIRECT INVESTMENT

Routes available for FDI:
Automatic Route - No prior Government approval is
required if the investment to be made falls within the sectoral caps specified for the listed activities. Only filings have to be made by the Indian company with the concerned regional office of the Reserve Bank of India (RBI) within 30 days of receipt of remittance and within 30 days of issuance of shares.

AUTOMATIC ROUTE
The Reserve Bank of India accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving: foreign equity up to 50% in 3 categories relating to mining activities . foreign equity up to 51% in 48 specified industries. foreign equity up to 74% in 9 categories .

Continued..
FIPB Route - Investment proposals falling outside the
automatic approval. route would require prior Government

Foreign Investment requiring Government approvals are considered and approved by the Foreign Investment Promotion Board (FIPB). Decision of the FIPB usually conveyed in 4-6 weeks. Thereafter, filings have to be made by the Indian company with the RBI

 Application for all FDI cases, except NRI investments and 100% EOUs, should be submitted to the FIPB Unit, DEA, Ministry of Finance. Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy and Promotion (DIPP). Application can be made in Form FC-IL. Plain paper applications carrying all relevant details are also accepted. No fee is payable.

Continued..
CCFI Route Investment proposals falling outside the automatic route and having a project cost of Rs. 6,000 million or more would require prior approval of Cabinet Committee of Foreign Investment (CCFI). Decision of CCFI usually conveyed in 8-10 weeks. Thereafter, filings have to be made by the Indian company with the RBI - Investment proposals falling within the automatic route and having a project cost of Rs. 6,000 million or more do not require to be approved by CCFI

MAJOR BODIES CONSTITUTED FOR FDI

1991- Foreign Investment Promotion Board FIPB 1996- Foreign Investment Promotion Council FIPC 1999- Foreign Investment Implementation Authority FIIA 2004- Investment Commission Secretariat for Industrial Assistance (SIA)

FDI
SECTORAL GUIDELINES

AIRPORTS
Foreign Investment up to 100% is allowed in green field projects under automatic route Foreign Direct Investment is allowed in existing projects - up to 74% under automatic route - beyond 74% and up to 100% subject to Government approval

TELECOM
FDI in basic and cellular, unified access services, national/ international long distance , V-Sat, public mobile radio trunk services , global mobile personal communications services - Automatic up to 49% - FIPB beyond 49% but up to 74% Manufacture of telecom equipments - Automatic up to 100%.

DOMESTIC AIRLINES
FDI up to 49% (40%) permitted under automatic route Automatic Route is not available However, a foreign airlines are not allowed to have any direct or indirect equity participation 100% investment by NRIs/OCBs

DRUGS & PHARMA

FDI up to 100% is permitted under the automatic route for manufacture of drugs and pharmaceuticals (The following is the current position) FDI up to 74% in the case of bulk drugs, their intermediates Pharmaceuticals and formulations would be covered under automatic route. FDI above 74% for manufacture of bulk drugs will be considered by the Government on case to case basis

INSURANCE
FDI up to 26% allowed on the automatic route However, license from the Insurance Regulatory & Development Authority (IRDA) has to be obtained There is a proposal to increase this limit to 49%

MINING
Coal & Lignite mining for captive consumption by power projects, and for iron & steel and cement production Automatic up to 100%

Mining covering exploration and mining of diamonds and precious stones, gold, silver and minerals - Automatic up to 100%

PETROLEUM
Petroleum and natural gas sector, other than refining and including market study and formulation; setting up infrastructure for marketing - Automatic up to 100% For petroleum refining activity 100% FDI is permitted in Indian Private Companies under automatic route and up to 26% FDI is permitted in Public Sector Undertakings with Government approval

PRIVATE SECTOR BANKING

Foreign Investment up to 74% is permitted from all sources under the automatic route subject to guidelines for setting up of branches/subsidiaries of foreign banks issued by RBI from time to time.

TRADING
Wholesale / cash & carry trading - Automatic upto 100% Trading for exports - Automatic upto 100% Trading of items sourced from small scale sector - 100% with Government approval Single Brand product retailing - 51% with Government approval

PRINT MEDIA
FDI upto 100% in publishing/printing scientific & technical magazines, periodicals & journals FDI upto 26% in publishing news papers and periodicals dealing in news and current affairs. All investments are subject to the guidelines issued by the Ministry of Information and Broadcasting

BROADCASTING
FDI permitted for setting up hardware facilities such as uplinking, HUB, etc up to 49% under Government approval route FDI permitted in Cable Network up to 49% under Government approval route Foreign Investment (FDI/FII) up to 49% allowed under Government approval route in Direct to Home Service Providers. FDI limited to 20% FDI permitted in FM radio up to 20% under Government approval route

INFRASTRUCTURE
100% FDI is permitted for the following activities: Electricity Generation (except Atomic energy) Electricity Transmission Electricity Distribution Mass Rapid Transport System Roads & Highways Toll Roads Vehicular Bridges Ports & Harbors Hotel & Tourism

SPECIAL INVESTMENT AVENUES

ELECTRONIC HARDWARE AND SOFTWARE TECHNOLOGY PARKS

100 percent foreign investment under automatic route is allowed in electronics and software industries set up exclusively for exports. Eligible to purchase, free of customs duty/ excise duty, their entire requirement of capital goods, raw materials and components, spares and consumables, office equipments etc.

EXPORT ORIENTED UNITS

100% foreign equity (is permitted through Automatic Route similar to SEZ units) in Export Oriented Units (EOUs) even if it is manufacturing an item reserved for the small scale sector EOUs enjoy several privileges like duty exemption on import and domestic procurement and also Income tax exemption till 31.03. 2009

Project with minimum investment of Rs.10 million and above in building, plant and machinery qualify to be considered under EOU scheme

Not applicable in case of certain industries like agriculture, floriculture, information technology, services, hand made jewellery, etc.

Exemption of Industrial Licensing for manufacture of items reserved for SSI sectors.

SPECIAL ECONOMIC ZONE

Special Economic Zone (SEZ) is deemed to be foreign territory for the purposes of trade operations and duties and tariffs No cap on Foreign investment for manufacturing items reserved for SSI as well as exemption from industrial licensing

An SEZ unit can be set up to undertake trading activities in addition to manufacturing of goods and rendering of services

ILLUSTRATIVE LIST OF SECTORS UNDER AUTOMATIC ROUTE FOR FDI UP TP 100%

Most manufacturing activities Drugs and pharmaceuticals Food processing Electronic hardware Software development Film industry Advertising Hospitals Pollution control and management Management consultancy Computer related Services Research and Development Services Construction and related Engineering Services Pollution Control and Management Services Health related & Social Services Travel related services

Summary of Sector Wise Limits of investments

Banking - 74% Non-banking financial companies (stock broking, credit cards, financial consulting, etc.) - 100% Insurance - 26% Telecommunications - 74% Private petrol refining - 100% Construction development - 100% Coal & lignite - 74% Trading - 51% Electricity - 100% Pharmaceuticals - 100%

Continued.
Transportation infrastructure - 100 % Tourism - 100% Mining - 74% Advertising - 100% Airports - 74% Films - 100% Domestic airlines - 49% Mass transit - 100% Pollution control - 100% Print media - 26% for newspapers and current events, 100 % for scientific and technical periodicals

FDI in major sectors in India

The major sectors of the Indian economy that have benefited from FDI in India are Financial sector (banking and non-banking). Insurance Telecommunication Hospitality and tourism Pharmaceuticals Software and Information Technology.

Forbidden Territories
FDI is not permitted in the following industrial sectors: Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc. Gambling and Betting Lottery Business Atomic Energy Agriculture (with certain exceptions) and Plantations (Other than Tea plantations

Government policy towards Foreign capital Before 1991

In 1972 the GOI decided to permit wholly own subsidiaries of foreign companies provided they export 100% of these output. If less than 100% is exported the foreign capital participation is subject to government negotiation. Government developed a precise formula setting out a limit of participation by Indians in foreign subsidiary companies if they undertook plans of output expansion.

 The companies with foreign holdings exceeding 75% would have to raise the 40% estimated cost of expansion by issue of additional equity to Indians. 60 to 70% --- 33.3%. 51 to 60% --- 25% Thus the government adopted the policy of Indianisation of Foreign subsidiary companies or to boost exports.

The Janta party and collaboration

The party didnt allow the foreign companies where the Indian skills and capital are available. If needed than will be purchased outright for technical know-how, technological skills and machinery. The provisions of FERA must be rigorously enforced in the sector of consumer goods industries. The foreign firms must be asked to go for Indianisation.

 Two major decisions were taken: Coca-cola company was asked to wind up its operations. Secondly, the IBM was asked to dilute its equity to 40% so as to conform to FERA guidelines. Since IBM did not agree it was also asked to fold up its operation. Still other MNCs continued to operate in non-priority areas like tobacco, toiletries, beverages, etc. For instance Hindustan lever was permitted 51% of foreign equity on grounds of introduction of sophisticated technology in India. But HL products included vanaspati, shampoo, toothpaste etc. becoz India could certainly this products so technology was a lame excuse.

Policy regarding Foreign investment 1991

It was announced by congress government. The important points of the policy was Approval should be given up to 51% of foreign equity in high priority industries. Clearance would be available if foreign equity covers the foreign exchange requirement for imported capital goods. The payment of dividends would be monitored through RBI so as to ensure that out-flows matches the export earnings 51% of foreign equity holdings would be allowed for trading companies engaged in export activities.

 Automatic permission would be given for foreign technology agreement in high priority industries up to lump sum payment of Rs. 1crore, 5% royalty for domestic sales and 8% for exports, subject to total payment of 8% of sales over a 10 year period from date of agreement or 7 years from commencement of production. In 1998-99 projects for electricity generation, transmission and distribution, roads and highways, ports and harbours, vehicle tunnels and bridges were permitted foreign equity participation up to 100% under the automatic route. FERA 1973 has been amended and restrictions placed on foreign companies by the FERA have been abolished. It enables free flow of foreign investment and technology.

 The restriction on FERA companies with regards to borrowing of funds and raising deposits in India as well as taking over and creating any interest in business in Indian companies have been removed. Moreover the use of foreign brand names for goods manufactured by domestic industries has been allowed. Government has allowed Foreign Institutional Investors (FIIs) to invest Indian capital market with SEBI and getting RBI approval. Foreign Investment Implementation Authority (FIIA) was established within the ministry of Industry to ensure that approvals for foreign investment, including NRI investments are quickly transferred to projects.

What is protectionism?
Protectionism represents any attempt by a government to impose restrictions on trade in goods and services between countries: Tariffs - import taxes. Quotas - quantitative limits on the level of imports allowed. Voluntary Export Restraint Arrangements where two countries make an agreement to limit the volume of their exports to one another over an agreed period of time. Embargoes - a total ban on imported goods. Intellectual property laws (patents and copyrights). Export subsidies - a payment to encourage domestic production by lowering their costs. Import licensing - governments grants importers the license to import goods. Exchange controls - limiting the amount of foreign exchange that can move between countries

Political argument
One common political argument for government intervention is that its is necessary for protecting jobs and industries from unfair foreign competition. Countries sometimes argue that it is necessary to protect certain industries because they are important for national security. Defense related industries often get this kind of attention (e.g. aerospace, advanced).

Opportunities and Outcomes of International Strategy

Figure 8.1 81

Identifying International Opportunities

International strategy A strategy through which the firm sells its goods or services outside its domestic market Reasons to having an international strategy International markets yield potential new opportunities. New market expansion extends product life cycle. Needed resources can be secured. Greater potential product demand.

82

Classic Rationale for International Diversification: Extend Products Life Cycle

Product Demand Develops and Firm Exports Products

Foreign Competition Begins Production

Firm Introduces Innovation in Domestic Market

Firm Begins Production Abroad

Production is standardized and relocated to low cost countries.

83

International Strategy Benefits

Increase market share Domestic market may lack the size to support efficient scale manufacturing facilities Return on investment Large investment projects may require global markets to justify the capital outlays Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators

84

International Strategy Benefits (contd)

Economies of scale or learning
Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R&D or distribution Can spread costs over a larger sales base Can increase profit per unit

85

International Strategy Benefits (contd)

Competitive advantage through location
Low cost markets aid in developing competitive advantage by providing access to: Raw materials Lower cost labor Key customers Energy
86

I. Context

To be successful in an increasingly globalised world, companies have to enter into new foreign markets and to adapt their strategies.

Typology of strategies

Efficiency

Efficiency Responsiveness Learning

Learning

Responsiveness

Typology of strategies

International strategy
Trying to create value by transferring core competencies to foreign markets where indigenous competitors lack those competencies.
Miniature replica of parent Production and marketing function in each host

LEARNING

Centralised decision making I.E. Hilton Carrefour

Typology of strategies

International strategy STRENGTHS

Facilitates transfer of core competencies Moderation of operational costs Great amounts of profits

WEAKNESSES
No integration economies Little local responsiveness

Typology of strategies

Multi-domestic strategy
Strategic and operating decisions are decentralized to Strategic Business Units in each country to allow products to be tailored to the local market.

De-centralised decision making

RESPONSIVENESS Local operations

I.E. Johnson & Johnson

Multidomestic Strategy
Strategy and operating decisions are decentralized to strategic business units (SBU) in each country Products and services are tailored to local markets Business units in one country are independent of each other Assumes markets differ by country or regions Focus on competition in each market Prominent strategy among European firms due to broad variety of cultures and markets in Europe

92

Multi-Domestic Strategy (Multi-Local Strategy)

Headquarters delegates considerable autonomy to each country manager allowing him/her to operate independently and pursue local responsiveness. With this strategy, managers recognize and emphasize differences among national markets. As a result, the internationalizing company allows subsidiaries to vary product and management practices by country. Country managers tend to be highly independent entrepreneurs, often nationals of the host country. They function independently and have little incentive to share knowledge and experiences with managers elsewhere. Products and services are carefully adapted to suit the unique needs of each country.

93

Advantages of Multi-Domestic Strategies If the foreign subsidiary includes a factory, locally produced goods and products can be better adapted to local markets. The approach places minimal pressure on headquarters staff because management of country operations is delegated to individual managers in each country. Firms with limited international experience often find multi-domestic strategy an easy option as they can delegate many tasks to their country managers (or foreign distributors, franchisees, or licensees, where they are used).
94

Disadvantages of Multi-Domestic Strategy

The firms foreign managers tend to develop strategic vision, culture, and processes that differ substantially from those of headquarters. Managers have little incentive to share knowledge and experience with those in other countries, leading to duplication of activities and reduced economies of scale. Limited information sharing also reduces the possibility of developing knowledge-based competitive advantage. Competition may escalate among the subsidiaries for the firms resources because subsidiary managers do not share a common corporate vision. It leads to inefficient manufacturing, redundant operations, a proliferation of products designed to meet local needs, and generally higher costs of international operations than other strategies

95

Multi-Domestic Industries Companies in the food and beverage, consumer products, and clothing and fashion industries often may resort to a country-by-country approach to marketing to specific needs and tastes, laws, and regulations. Industries in which competition takes place on a country-by-country basis are known as multidomestic industries. In such industries, each country tends to have a unique set of competitors.
International Business: Strategy, Management, and the New Realities

96

Typology of strategies

Global strategy
Strategy focusing on increasing profitability by reaping cost reductions from experience curve and location economies.
Centralised decision making EFFICIENCY Dispered value/supply chain

Global integration I.E. Standardized product The wireless industry, the credit card industry (American Express)

Global Strategy
Products are standardized across national markets Decisions regarding business-level strategies are centralized in the home office Strategic business units (SBU) are assumed to be interdependent Emphasizes economies of scale Often lacks responsiveness to local markets Requires resource sharing and coordination across borders (hard to manage)

99

Global Industries Industries such as aerospace, automobiles, telecommunications, metals, computers, chemicals, and industrial equipment are examples of global industries, in which competition is on a regional or worldwide scale. Formulating and implementing strategy is more critical for global industries than multi-domestic industries. Most global industries are characterized by the existence of a handful of major players that compete head on in multiple markets.

100

Global Strategy
With global strategy, the headquarters seeks substantial control over its country operations in an effort to minimize redundancy, and achieve maximum efficiency, learning, and integration worldwide. In the extreme case, global strategy asks why not make the same thing, the same way, everywhere? It favors greater central coordination and control than multi-domestic strategy, with various product or business managers having worldwide responsibility. Activities such as R&D and manufacturing are centralized at headquarters, and management tends to view the world as one large marketplace.
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Advantages of Global Strategy

Global strategy provides management with a greater capability to respond to worldwide opportunities Increases opportunities for cross-national learning and cross-fertilization of the firms knowledge base among all the subsidiaries Creates economies of scale, which results in lower operational costs. Can also improve the quality of products and processes -primarily by simplifying manufacturing and other processes. High-quality products promote global brand recognition and give rise to customer preference and efficient international marketing programs.

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Limitations of Global Strategy

It is challenging for management, particularly in highly centralized organizations, to closely coordinate the activities of a large number of widely-dispersed international operations. The firm must maintain ongoing communication between headquarters and the subsidiaries, as well as among the subsidiaries. When carried to an extreme, global strategy results in a loss of responsiveness and flexibility in local markets. Local managers who are stripped of autonomy over their country operations may become demoralized, and lose their entrepreneurial spirit.
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Examples of Global Industries

Kodak must contend with the same rivals, Japans Fuji and the European multinational Agfa-Gevaert, wherever it does business around the world. American Standard and Toto dominate the worldwide bathroom fixtures market. Caterpillar and Komatsu compete head-on in all major world markets.
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GMs Global Brand Hierarchy

Global

International

Europe, Middle East, Asia

North America, Middle East, Europe

North America, Asia

North America

North America

Local
United Kingdom Australia Korea

Transnational Strategy
Seeks to achieve both global efficiency and local responsiveness Difficult to achieve because of simultaneous requirements: Strong central control and coordination to achieve efficiency Decentralization to achieve local market responsiveness Must pursue organizational learning to achieve competitive advantage

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Transnational Strategy: A Tug of War

A coordinated approach to internationalization in which the firm strives to be more responsive to local needs while retaining sufficient central control of operations to ensure efficiency and learning. Transnational strategy combines the major advantages of multi-domestic and global strategies, while minimizing their disadvantages. Transnational strategy implies a flexible approach: standardize where feasible; adapt where appropriate.

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107

What Transnational Strategy Implies Exploiting scale economies by sourcing from a reduced set of global suppliers; concentrating the production of offerings in relatively few locations where competitive advantage can be maximized. Organizing production, marketing, and other valuechain activities on a global scale. Optimizing local responsiveness and flexibility. Facilitating global learning and knowledge transfer. Coordinating competitive moves --how the firm deals with its competitors, on a global, integrated basis.
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How IKEA Strives for Transnational Strategy

Some 90% of the product line is identical across more than two dozen countries. IKEA does modify some of its furniture offerings to suit tastes in individual countries. IKEAs overall marketing plan is centrally developed at company headquarters in response to convergence of product expectations; but the plan is implemented with local adjustments. IKEA decentralizes some of its decision-making, such as language to use in advertising, to local stores.
International Business: Strategy, Management, and the New Realities 109

International Business: Strategy, Management, and the New Realities

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IV. Case study: Procter and Gamble

Case study: Procter & Gamble

Procter & Gamble Presentation

Founded: 1837 Headquarters: Cincinnati, Ohio, USA Chairman and CEO: A.G. Lafley Products: consumer goods Slogan: Touching lives, improving life Employees: 138 000 worldwide 25th largest US company by revenue, 81th in the world (2006)

Case study: Procter & Gamble

Procter & Gamble products

Three categories: Beauty Household Care Health & Well-Being

More than 250 brands, including 23 brands which have more than a billion dollars in net annual sales

I.E.

Case study: Procter & Gamble

P&Gs strategies

Case study: Procter & Gamble

International expansion of Procter & Gamble

Long time to internationalize: almost 100 years before P&G undertook operations internationally 1930: P&G began to sell its products overseas (International Strategy) 1950s: P&G focused on the largest emerging market in the world (China) with a multi-domestic strategy 1980s: P&G chose to benefit from the large experience of the company (more than a century) by using a transnational strategy

Case study: Procter & Gamble

Strengths of P&Gs international strategy

Ability to respond effectively to the new and complex demands of their international business environments (emerging markets) Ability to attain economies of scale Ability to increase learning Global competitiveness

Case study: Procter & Gamble

Weaknesses of P&Gs transnational strategy

Time: The transnational strategy is not easy to build and the history of P&G shows that the transition from a strategy to a transnational strategy requires time.

Management: There were also big managerial challenges for Procter & Gamble in order to have a transnational strategy

V. Managerial implications
A transnational strategy confronts managers to three main challenges: Coordinate the decision making between each subsidiary and the parent company Transfer knowledge Set up a strong marketing strategy which meets the local customers requirements

VI. Conclusion

The strategys choice depends on the industry or the product. This strategy is not static

Environmental Trends
Liability of foreignness Legitimate concerns about the relative attractiveness of global strategies Global strategies not as prevalent as once thought Difficulty in implementing global strategies Regionalization Focusing on particular region(s) rather than on global markets Better understanding of the cultures, legal and social norms

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Choice of Market Entry Mode

Value Chain of an MNE

Company Infrastructure R&D Production Advanced Technology & KnowHow Marketing and Sales IndustrySpecific Marketing Expertise

Innovative Capabilities

Organization, Coordination & HRM What additional resources may the MNE need to enter a foreign market? Local expertise: marketing, government relations, etc.

Typical Value Chain of a Local Firm

Company Infrastructure R&D Production Older Technology and KnowHow Marketing and Sales CountrySpecific Marketing Expertise

Imitative Capabilities

Organization, Coordination & HRM What may the MNE desire from a local firm? Complementary resources Not necessarily strength in every area

Complementarity of Resources
MNEs Resources Innovative capabilities Advanced technology and know-how Industry-specific marketing expertise Organization structure and systems Local Firms Resources Imitating capabilities Older technology and know-how Country-specific marketing expertise Country specific organization skills

Figure12.1 Choosing a Mode of Entry

Exporting

Decision Factors: Ownership advantages Location advantages Internalization advantages Other factors Need for control Resource availability Global strategy

International Licensing International Franchising Specialized Modes Foreign Direct Investment

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Going it Alone: Export

HOME COUNTRY Revenues HOST COUNTRY

MNE

Customers

Export of Goods

Going it Alone: Export

Advantages Low initial investment Reach customers quickly Complete control over production Benefit of learning for future expansion Disadvantages Potential costs of trade barriers
Transportation cost Tariffs and quotas

Foregoes potential location economies Difficult to respond to customer needs well

When Is Export Appropriate? Low trade barriers Home location has cost advantage Customization not crucial

Motivations for Exporting

Proactive motivations: pull a firm into foreign markets as a result of opportunities available there Reactive motivations: push a firm into foreign markets because opportunities are decreasing in the domestic market

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Forms of Exporting
Indirect exporting Direct exporting Intracorporate transfers

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Figure 12.2 Forms of Exporting

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Export Intermediaries
Export Management Company Webb-Pomerene Association International Trading Company Other intermediaries

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Figure 12.3 The Licensing Process

LICENSEE Uses the intellectual property to create products for local sale Pays a royalty back to the licensor

LICENSOR Leases the right to use its intellectual property Earns new revenues with relatively low investment

Basic Issues 1. Set the boundaries of the agreement 2. Establish compensation rates 3. Agree on the rights, privileges, and constraints 4. Specify the duration of the agreement
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Licensing Agreement
HOME COUNTRY HOST COUNTRY Licensing of Technology

MNE

Local Firm
Fees and Royalties

Licensing Agreement
Advantages Low initial investment Avoids trade barriers Potential for utilizing location economies Access to local knowledge Easier to respond to customer needs Disadvantages Lack of control over operations Difficulty in transferring tacit knowledge
Negotiation of a transfer price Monitoring transfer outcome

Potential for creating a competitor

When Is Licensing Appropriate? Well codified knowledge Strong property rights regime Location advantage

Franchising
A franchising agreement allows an independent entrepreneur or organization, called the franchisee, to operate a business under the name of another, called the franchisor, in return for a fee.

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Basic Issues in International Franchising Does a differential advantage exist in the domestic market? Are these success factors transferable to foreign locations? Has franchising been a successful domestic strategy?

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Yum! Brands Franchise Opportunities

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Franchising
Advantages Low financial risks Low-cost way to assess market potential Avoid tariffs, NTBs, restrictions on foreign investment Maintain more control than with licensing Franchisee provides knowledge of local market
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Disadvantages Limited market opportunities/ profits Dependence on franchisee Potential conflicts with franchisee Possibility of creating future competitor

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Foreign Acquisition
HOME COUNTRY HOST COUNTRY

Investment

MNE
Profit

Local Firm

Foreign Acquisition
Advantages Access to targets local knowledge Control over foreign operations Control over own technology Disadvantages Uncertainty about targets value Difficulty in absorbing acquired assets Infeasible if local market for corporate control is underdeveloped

When Is Acquisition Appropriate? Developed market for corporate control Acquirer has high absorptive capacity High synergy

Going it Alone: Green Field Entry

HOME COUNTRY HOST COUNTRY

MNE
Profit

Investment

New Subsidiary Company

Going it Alone: Green Field Entry

Advantages Normally feasible Avoids risk of overpayment Avoids problem of integration Still retains full control Disadvantages Slower startup Requires knowledge of foreign management High risk and high commitment

When Is Green Field Entry Appropriate? Lack of proper acquisition target In-house local expertise InEmbedded competitive advantage

Specialized Entry Modes

Contract Manufacturing Management Contract Turnkey Project

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Contract manufacturing
Definition Production of goods by one firm, under the label or brand of another firm. Contract manufacturers provide such service to several (even competing) firms based on their own or the customers' designs, formulas, and/or specifications. Also called private label manufacturing.

Contract Manufacturing
Advantages Low financial risks Minimize resources devoted to manufacturing Focus firms resources on other elements of the value chain
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Disadvantages Reduced control (may affect quality, delivery schedules, etc.) Reduce learning potential Potential public relations problems

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Turnkey project
-- a project in which a builder/developer contracts to construct a completed facility that includes all items necessary for use and occupancy. All that is required of the buyer to begin using the facility is to turn a key in the new door lock and enter.

Turnkey project
Turn-key refers to something that is ready for immediate use, generally used in the sale or supply of goods or services. Turnkey is often used to describe a home built on the developer's land with the developer's financing ready for the customer to move in. If a contractor builds a "turnkey home" they frame the structure and finish the interior. Everything is completed down to the cabinets and carpet. "Turnkey" is commonly used in the construction industry, for instance, in which it refers to the bundling of materials and labor by sub-contractors. 'Turnkey' is also commonly used in motorsports to describe a car being sold with drivetrain (engine, transmission, etc.) to contrast with a vehicle sold without one so that other components may be re-used. Similarly, this term may be used to advertise the sale of an established business, including all the equipment necessary to run it, or by a business-to-business supplier providing complete packages for business start-up. An example would be the creation of a "turnkey hospital" which would be building a complete medical center with installed high-tech medical equipment. Turnkey is also the name given to a civilian or Police officer working in a Scottish police office whose duties are to assist in looking after prisoners and detainees.

Turnkey Projects
Advantages Focus firms resources on its area of expertise Avoid all long-term operational risks Disadvantages Financial risks
Cost overruns

Construction risks
Delays Problems with suppliers

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Management Contract
HOME COUNTRY HOST COUNTRY Management Fees

MNE
Profit

Local Firm
Managerial Service

Technological Inputs

Wholly-Owned Subsidiary

Management Contract
Advantages Access to local management skills Avoids buying unwanted assets Retains strategic control Disadvantages Potential incentive problem Potential adverse selection problem
How do you know the competencies of the manager?

When Is a Management Contract Appropriate? Manager has a reputation to protect

Hotels Consulting companies

PerformancePerformance-based contract provides no perverse incentives

Joint Venture
HOME COUNTRY HOST COUNTRY

MNE
Inputs

Local Firm
Inputs Share of Profit Joint Venture Company

Share of Profit

Joint Venture
Advantages Access to partners local knowledge Reduction of concern about overpayment Both parties have some performance incentives Significant control over operation Disadvantages Potential loss of proprietary knowledge Potential conflicts between partners Neither partner has full performance incentive Neither partner has full control

When Is a Joint Venture Appropriate? Both partners contribute hard-to-measure inputs hard-toLarge expected mutual gains in the long-run longTrade secrets can be walled off

Common Market Entry Modes

HOME COUNTRY Licensing Acquisition HOST COUNTRY

MNE
Export Joint Venturing Green Field Entry

Local Firm
Joint Venture Company New Subsidiary Company

Intl Sourcing
HOME COUNTRY HOST COUNTRY

Design, spec and/or technology

MNE
OEM goods Payment

Local Firm

Applicable to manufacturing of mature products (e.g., shoes) Access to location economies Competition among OEM producers lowers costs.

Compensation Trade
HOME COUNTRY Equipment and technology HOST COUNTRY

MNE
Output

Local Firm

Common reason: Local firms lack money to buy equipment Economic benefits
Enhanced incentives for MNE to make sure that equipment works MNEs skills in marketing the products in its home country

Kumar & Subramaniam (1997) A Contingency Framework for the Mode of Entry Decision
Risk Return Control

Modes of entry
Exporting Contractual Agreeme nt Risk Return Control Integration Low Low Moderate Negligible Low Low Low Negligible Joint Venture Moderate Moderate Moderate Low Acquisition Greenfield Investm ent High High High High

High High High Moderate