I.

INTRODUCTION TO INTERNATIONAL BUSINESS : MEANING AND CONCEPT

International business includes all business transactions involving two or more countries.
These business relationships may be between private individuals, companies, groups of
companies, non-profit organizations or government agencies. In some ways, international
business is an extension of domestic business, but it is different for two reasons. The first
reason is that international business objectives are likely to be different from domestic
business objectives; the second and more significant is that the environmental conditions
in which international business is conducted are usually of greater complexity than is the
case with domestic business.

International business can be defined as set of those business activities that involves the
crossing of national boundaries. The set of activities includes:

Import and export of commodities and manufactured goods

Investment

of

capital

in

manufacturing,

extractive,

agricultural,

transportation and communication assets

Supervision of employees in different countries

Investment in international services like banking, advertising, tourism,

retailing and construction

Transactions involving copyrights, patents, trademarks and process

technology.

International business covers all business transactions involving two or more countries.

EVOLUTION OF INTERNATIONAL BUSINESS

The post 1990s period has given greater fillip to international business. In fact, the term
international business was not in existence before two decades. The term international business
has emerged from the term international marketing, which in turn, emerged from the term
export marketing.
International Trade to International Marketing: Originally, the producers used to export
their products to the nearby countries and gradually extended the exports to far-off countries.
Gradually, the companies extended the operations beyond trade. For example, India used to
export raw cotton, raw jute and iron ore during the early 1900s. The massive industrialization
in the country enabled us to export jute products, cotton garments and steel during 1960s.
India, during 1980s could create markets for its products, in addition to mere exporting. The
export marketing efforts include creation of demand for Indian products like textiles,
electronics, leather products, tea, coffee etc., arranging for appropriate distribution channels,

attractive package, product development, pricing etc. This process is true not only with India,
but also with almost all developed and developing economies.
International Marketing to International Business: The multinational companies which
were producing the products in their home countries and Marketing them in various foreign
countries before 1980s, started locating their plants and other manufacturing facilities in
foreign/host countries. Later, they started producing in one foreign country and marketing in
other foreign countries. For example, Unilever established its subsidiary company in India,
i.e., Hindustan Lever Limited (HLL). HLL produces its products in India and markets them
in Bangladesh, Sri Lanka, Nepal etc. Thus, the scope of the international trade is expanded
into international marketing and international marketing is expanded into international
business.
NATURE OF INTERNATIONAL BUSINESS : book

Wider Scope: Foreign trade refers to the flow of goods across national political borders.
Therefore, it refers to exporting and importing by international marketing companies plus
creation of demand, promotion, pricing etc. As stated earlier, international business is
much broader in scope. It involves international marketing, international investments,
management of foreign exchange, procuring international finance from IMF, IBRD, IFC,
IDA etc., management of international human resources, management of cultural
diversity, international marketing, management of international production and logistics,
international strategic management and the like. Thus, international business is broader in
scope and covers all aspects of the system.

Inter-country Comparative Study: International business studies the business

opportunities, threats, consumers preferences, behavior, cultures of the societies,
employees, business environmental factors, manufacturing locations, management styles,
inputs and human resource management practices in various countries. International
business seeks to identify, classify and interpret the similarities and dissimilarities among
the systems used to anticipate demand and market products. The system presents intercountry comparison and intercontinental comparison/comparative analysis helps the
management to evaluate the markets, finances, human resources, consumers etc. of
various countries. The comparative study also helps the management to evaluate the
market potentials of various countries

II.

CONCEPT AND DEFINITION OF INTERNATIONAL MANAGEMENT

-

The study of international management is gaining importance as firms expand their

operations to various countries. International management deals with the processes of

planning, organizing, staffing, leading and controlling organizations engaged in

international business. Companies go international for various reasons: gain access to
new markets, to increase profits, or to acquire products for the home market. These are
called aggressive reasons for going international.
-

International Management and International Business are two separate concepts. While
IB is transactions devised and carried out across international borders to satisfy
corporations and individuals, IM deals with managing such transactions within a
boundary set by corporate strategy.

The maintenance and development of an organization's production or market interests

across national borders with either local or expatriate staff

The process of running a multinational business made up of formerly independent

organizations

The body of skills, knowledge, and understanding required to manage cross-cultural

operations

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

INTERNATIOANL BUSINESS APPROACHES : ERPG

Douglas Wind and Pelmutter advocated four approaches of international business. They are:
1. Ethnocentric Approach
The domestic companies normally formulate their strategies, their product design and
their operations towards the national markets, customers and competitors. But, the
excessive production more than the demand for the product, either due to competition or
due to changes in customer preferences push the company to export the excessive
production to foreign countries. The domestic company continues the exports to the
foreign countries and views the foreign markets as an extension to the domestic markets
just like a new region. The executives at the head office of the company make the
decisions relating to exports and, the marketing personnel of the domestic company
monitor the export operations with the help of an export department. The company
exports the same product designed for domestic markets to foreign countries under this
approach. Thus, maintenance of domestic approach towards international business is
called ethnocentric approach.
Managing
Director

Manager
R& D

Assistant
Manager
North India

Manager
Finance

Manager
Production

Assistant
Manager
South India

Manager
Human
Resources

Manager
Marketing

Assistant
Manager
Exports

This approach is suitable to the companies during the early days of internationalization and also
to the smaller companies.
2. Polycentric Approach
The domestic companies, which are exporting to foreign countries using the ethnocentric
approach, find at the latter stage that the foreign markets need an altogether different
approach. Then, the company establishes a foreign subsidiary company and decentralists
all the operations and delegates decision making and policy-making authority to its
executives. In fact, the company appoints executives and personnel including a chief
executive who reports directly to the Managing Director of the company. Company

appoints the key personnel from the home country and the people of the host country fill
all other vacancies.
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3. Regiocentric Approach
The company after operating successfully in a foreign country, thinks of exporting to the
neighboring countries of the host country. At this stage, the foreign subsidiary considers
the regions environment (for example, Asian environment like laws, culture, policies etc.)
for formulating policies and strategies. However, it markets more or less the same
product designed under polycentric approach in other countries of the region, but with
different market strategies.
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4. Geocentric approach
Under this approach, the entire world is just like a single country for the company. They
select the employees from the entire globe and operate with a number of subsidiaries. The
head quarter coordinates the activities of the subsidiaries. Each subsidiary functions like an
independent and autonomous company in formulating policies, strategies, product design,
human resource policies, operations etc.
III.

REASONS FOR GOING INTERNATIONAL

The primary reason for going international is there is money to be made by going abroad.
U.S. giants like Mc Donalds have made massive penetration into foreign markets. With the
recent advent of technological innovation and the emergence of the newly industrialized
countries (NICs), a convergence has occurred among nation in terms of rates and preferences,
financial systems, and organization design.. Their thinking revolves around the following
issues: 1. Where the value-adding activities should be performed?
2. Where are the most cost-effective markets for new capital and labor?
3. Can products be designed in one market and then be sold in other countries without
adding further costs?
Reasons for Going International
Convergence in: Complementary Development
>Tastes and Preferences
>NIC Purchasing Power
>Organization Design
>Developing Countries Ability to Purchase Good Quality Products
>Financial System

Removal of Trade Barriers Resulting in

Meeting Global Consumer Demands

Lower Price
Better Value

Sustainable Competitive Advantage

I. To Achieve Higher Rate of Profits: As we have discussed in various courses/subjects

like Principles and Practice of Management, Managerial Economics and Financial
Management that the basic objective of the business firms is to earn profits. When the
domestic markets do not promise a higher rate of profits, business firms search for
foreign markets, which promise for higher rate of profits.
II. Expanding the Production Capacities beyond the Demand of the Domestic Country:
Some of the domestic companies expanded their production capacities more than the

demand for the product in the domestic countries. These companies, in such cases, are
forced to sell their excess production in foreign developed countries.
III. Growth Opportunities: An important reason for going international is to take advantage
of the opportunities in other countries. MNCs are getting increasingly interested in a
number of developing countries as the income and population are rapidly rising in these
countries. Foreign markets both developed and developing countries provide enormous
growth opportunities for the developing country firms too.
IV. Government Policies and Regulations: Government policies and regulations may also
motivate internationalization. There are both positive and negative factors, which could
cause internationalization. Many governments give a number of incentives and other
positive support to domestic companies to export and invest in foreign countries.
Similarly, several countries give a lot of importance to import development and foreign
investment
V. Monopoly Power: in some cases, international business is a corollary of the monopoly
power, which a firm enjoys internationally. Monopoly power may arise from such factors
as monopolization of certain resources, patent rights, technological advantage, product
differentiation etc. Such monopoly power need not necessarily be an absolute one but
even a dominant position may facilitate internationalization. Similarly, exclusive market
information (which includes knowledge about foreign customers, market places, or
market situations not widely shared by other firms) is another proactive stimulus.
VI. Severe Competition in the Home Country: The countries oriented towards market
economies since 1960s had severe competition from other business firms in the home
countries. The weak companies, which could not meet the competition of the strong
companies in the domestic country, started entering the markets of the developing
countries. Moreover a protected market does not normally motivate companies to seek
business outside the home market. For example Indian economy was a highly protected
market before liberalization in 1991. Not only the domestic producers were protected
from foreign competition but also domestic competition was restricted by several policy
induced entry barriers, operated by such measures as industrial licensing etc. After
liberalization, competition increased from foreign as well as domestic firms. Many Indian
companies are now systematically planning to go international in a big way.
VII. Limited Home Market: When the size of the home market is limited either due to the
smaller size of the population or due to lower purchasing power of the people or both, the
companies internationalize their operations. For example, most of the Japanese
automobile and electronic firms entered US, Europe and even African markets due to the
smaller size of the home market. ITC entered the European market due to the lower

purchasing power of the Indians with regard to high quality cigarettes. Similarly, the
mere six million population of Switzerland is the reason for Ciba Geigy to
internationalize its operations. In fact, this company was forced to concentrate on global
market and establish manufacturing facilities in foreign countries.
VIII. Political Stability vs. Political Instability: Political stability does not simply mean that
continuation of the same party in power, but it does mean the continuation of the same
policies of the Government for a quite longer period. It is viewed that USA is a politically
stable country. Similarly, UK, France, Germany, Italy and Japan are also politically stable
countries. Most of the African countries and some of the Asian countries like Malaysia,
Indonesia, Pakistan and India are politically instable countries. Business firms prefer to
enter the politically stable countries and are restrained from locating their business
operations in politically instable countries. In fact, business firms shift their operations
from politically instable countries into politically stable countries.
IX. Availability of Technology and Managerial Competence: Availability of advanced
technology and managerial competence in some countries act as pulling factors for
business firms from the home country. The developed countries due to these reasons
attract companies from the developing world. In fact, American companies, in recent
years, depend on Japanese companies for technology and management expertise.
X. High Cost of Transportation: Initially companies enter foreign countries through their
marketing operations. At this stage, the companies realize the challenge from the
domestic companies. Added to this, the home companies enjoy higher profit margins
whereas the foreign firms suffer from lower profit margins. The major factor for this
situation is the cost of transportation of the products. Under such conditions, the foreign
companies are inclined to increase their profit margin by locating -their manufacturing
facilities in foreign countries where there is enough demand either in one country or in a
group of neighboring countries.
XI. Nearness to Raw Materials: The source of highly qualitative raw materials and bulk raw
materials is a major factor for attracting the companies from various foreign countries.
Most of the US based and European based companies located their manufacturing
facilities in Saudi Arabia, Bahrain, Qatar, Oman, Iran and other Middle East countries
due to the availability of petroleum. These companies, thus, reduced the cost of
transportation.
XII. Availability of Quality Human Resources at Less Cost: This is a major factor, in recent
times, for software, high technology and telecommunication companies to locate their
operations in India. India is a major source for high quality and low cost human resources
unlike USA, developed European countries and Japan. Importing human resources from

India by these firms is costly rather than locating their operations in India. Hence these
companies started their operations in India and other similar countries.
XIII. To Avoid Tariffs and Import Quotas: It was quite common before globalization that
governments imposed tariffs or duty on imports to protect the domestic company.
Sometimes Government also fixes import quotas in order to reduce the competition to the
domestic companies from the competent foreign companies. These practices are prevalent
not only in developing countries but also in advanced countries. For example, Japanese
companies are competent competitors to the US companies.
REASONS PART II

IV.

INTERNATIONAL ENTRY MODES

Companies deciding to enter the foreign markets, face the dilemma while deciding the method of
entry into a given overseas location. Analyzing the following decision factors can reduce this
dilemma: -

1. Ownership Advantages: Ownership advantages are those designed by a company by owning

resources. These benefits provide competitive advantage to the company over its competitors.

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

However, the software companies prefer licensing and franchising mode as they have to respond
quickly to the market needs. For example Microsoft and Compaq. Thus, different firms select
different modes based on the nature of the industry.

The entry mode employed should be consistent with the firm's objectives and the choice
will often involve a trade-off among objectives.

The factors which influence the choice of entry mode are:

o

Legal considerations

The nature of the competition

Political factors

Economic risk

The nature of the assets to be employed

The firm's experience.

Firms may use different entry modes in different countries and for different products. As
diversity increases, the task of coordinating the foreign operations becomes more
complex.

Firms usually want complete ownership of foreign operations to guarantee control and
prevent loss of profit. However, host countries usually want a share of the action and the
resources that the MNE will bring into the host country.

Joint ventures are often motivated by the complementary resources firms have at their
disposal, and just as often by governmental preferences.

Turnkey projects usually require high level negotiation skills to deal with host country
government officials.

Management contracts are a means of securing income with little capital outlay. They are
usually used for expropriated properties in LDCs, for new operations, and for facilities
with operating problems. Management contracts involve the sale of technical or
managerial expertise, and one of the responsibilities of the hired manager is to train local
nationals so they will be able to run the business when the contact expires.

Contracting foreign business does not negate management's responsibility to ensure that
company resources are being optimally employed. This involves constantly assessing the
work of the outsiders such as contract managers and evaluating new options for their
employment.

MODES OF ENTRY
I.

EXPORTING
Exporting is the simplest and widely used mode of entering foreign markets. It is the
marketing and selling of domestically produced goods in another country. It is a
traditional and well established method of reaching foreign markets. Since it does not
require that the goods be produced in the target country, no investment in foreign
facilities is required. Most of the costs associated with exporting take form of marketing
expenses.
The advantages of exporting include:
a. Need for Limited Finance : If the company selects a company in the host
country to distribute, the company can enter international market with no or less
financial resources. Alternatively, if the company chooses to distribute on its own,
it needs to invest financial resources, but this amount would be quite less
compared to that would be necessary under other modes.
b. Less Risk: Exporting involves less risk as the company understands the culture,
customer and the market of the host country gradually. The company can enter the
host country on a lull scale, if the product is accepted by the host country's
market. British company selected this mode to export jams to Japan.
c. Motivation for Exporting: Motivations for exporting are proactive and reactive.
Proactive motivations are opportunities available in the host country. San
Antonio's Pace, Inc., producing Tex-Mex food products exported its products to
Mexico as Mexicans relished the taste of its products. Reactive motivations are
those efforts taken by the company to export the product to a foreign country due
to the decline in demand for its product in the home country. Toto Ltd., of Japan
started exporting its products, i.e., Porcelain bathroom fixtures to China when the
Japanese economy started slowing down in 1990s.
FORMS OF EXPORTING
Forms of exporting include: 1. Indirect Exporting: Indirect exporting is exporting the products either in their
original form or in the modified form to a foreign country through another domestic
company. Various publishers ill India including Himalaya Publishing House, sell

their products, i.e., books to UBS publishers of India, which in turn exports these
books to various foreign countries.
2. Direct Exporting: Direct exporting is selling the products in a foreign country
directly through its distribution arrangements or through a host country's company.
Baskin Robbins initially exported its ice-cream to Russia in 1990 and later opened 74
outlets with Russian partners. Finally in 1995 it established its ice cream plant in
Moscow."
3. Intracorporate Transfers: Intracorporate transfers are selling of products by a
company to its affiliated company in host country (another country). Selling of
products by Hindustan Lever in India to Unilever in USA. This transaction is treated
as exports in India and imports in USA.
FACTORS TO BE CONSIDERED: The company, while exporting, should consider the
following factors:
Government policies like export policies, import policies, export financing, foreign
exchange etc.
Marketing factors like image, distribution networks, responsiveness to the customer,
customer awareness and customer preferences.
Logistical consideration: These factors include physical distribution costs, warehousing
costs, packaging, transporting, inventory carrying costs.
Distribution Issues: These include own distribution networks, networks of host county's
companies. Japanese companies like Sony, Minolta and Hitachi rely On the distribution
networks Of' their subsidiaries in the host country.
Export Intermediaries: Export intermediaries perform a variety of functions and enable tile
small companies to export their goods to foreign countries. Their functions include: handling
transportation, documentation, taking ownership of foreign-bound goods, assuming total
responsibility for exporting and financing. Types of export intermediaries include:
Export management companies act as export department of the exporting firm (its client).
These companies act as commission agents for exports or they take tittle to the goods.
Cooperative Society: The domestic companies desire to export the goods form a cooperative society, which undertakes the exporting operations of its members.
International Trading Company: This company is engaged in directly exporting and
importing. It buys the goods from the domestic companies and exports. Therefore, the
companies can export their goods by selling them to the international trading company.

 Manufacturers' Agents: They work on a commission basis. They solicit domestic orders
for foreign manufacturers.
Manufacturers' Export Agents: These agents also work on a commission basis. They sell
the domestic manufacturers' products in the foreign markets and act as their foreign sales
department.
Export and Import Brokers: The brokers bridge the gap between exporters and importers
and bring these two parties together.
Freight Forwarders: Freight forwarders help the domestic manufacturers in exporting
their goods by performing various functions like physical transportation of goods,
arranging customs documents and arranging transportation services.
II.

LICENSING
In this mode of entry, the domestic manufacturer leases the right to use its intellectual
property, i.e., technology, work methods, patents, copy rights, brand names, trademarks
etc. to a manufacturer in a foreign country for a fee." Here the manufacturer in the
domestic country is called 'licensor' and the manufacturer in the foreign country is called
`licensee.'
Licensing is a popular method of entering foreign markets. The cost of entering foreign
markets through this mode is less costly. The domestic company need not invest any
capital as it has already developed intellectual property. As such, the domestic company
earns revenue without additional investment. Hence, most of the companies prefer this
mode of foreign entry.
The domestic company can choose any international location and enjoy the advantages
without -incurring any obligations and responsibilities of ownership, managerial,
investment etc. Kirin Brewery - Japan's largest beer producer entered Canada by granting
license to Molson and British market by granting license to Charles Wells Brewery.
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BASIC ISSUES IN INTERNATIONAL LICENSING:

Companies should consider various factors in deciding negotiations. Each international

licensing is unique and has to be decided separately. However, there are certain common
factors which affect most of the international licenses. They are: o Boundaries of the Agreements: The companies should clearly define the boundaries
of agreements. They determine which rights and privileges are being conveyed in the
agreement. Pepsi-Cola granted license to Heineken of Netherlands with exclusive
rights of producing and selling Pepsi-Cola in Netherlands. Under this agreement the
boundaries are (i) Heineken should not export Pepsi-Cola to any other country, (ii)
Pepsi supplies concentrated cola syrupand Heineken adds carbonated water to
produce beverage and (iii) Pepsi can grnatclicence , to other companies in
Netherlands to produce other products of' Pepsi like Potatochips.
o Determination of Royalty: The most important factor in deciding the license is the
amount of royalty. It is needless to mention that the licensor expects high rate of
royalty while licensee would be unwilling to par much royalty. However, both the
parties negotiate for a fair royalty for both the sides in order to implement the contract
more
o Determining; Rights, Privileges and Constraints: Another important factor, in
granting license is determining clearly and specifically the rights, privileges and
constraints. For example, if the Indian licensee of Aiwa TV uses interior input in
order to reduce price, boost up sales and profit, the image of the Japanese licensor
would be damaged.
o Dispute Settlement Mechanism: The licensee and licensor should clearly mention the
mechanism to settle the disputes as disputes are hound to crop up. This is because,
settlement of disputes in courts is costly, time consuming and hinders business
interests.
o Agreement Duration: The two parties of the agreement specify the duration of the
agreement. Licensing cannot he a short-term strategy. Hence, the duration of the
licensing should not be of the short-term. It would always be appropriate to have long
duration of the licensing. Tokyo Disneyland demanded on a 100-year licensing
agreement With The Walt Disney Company.
ADVANTAGES AND DISADVANTAGES OF LICENSING
Advantages
Licensing mode carries relatively low investment on the part of licensor
Licensing mode carries low financial risk to the licensor.
Licensor can investigate the foreign market without much efforts on his part.

 Licensee gets the benefits with less investment on research and development.
Licensee escapes himself from the risk of product failure. For example, Nintendo
game designers have the relatively safety of knowing millions of game system units.
Disadvantages
Licensing agreements reduce the market opportunities for both the licensor and
licensee.
Pepsi-cola cannot enter Netherlands and Heineken cannot sell Coca-cola.
Both the parties have the responsibilities to maintain the product quality and
promoting the product. Therefore, one party can affect the other through their
improper acts.
Costly and tedious litigation may crop up and hurt both the parties and the market.
There is scope for misunderstanding between the parties despite the effectiveness of
the agreement. The best example is Oleg Cassini and Jovan.
There is a problem of leakage of the trade secrets of the licensor.
The licensee may develop his reputation.
The licensee may sell the product outside the agreed territory and after the expiry of
the contract.
III.

FRANCHISING
Franchising is a form of licensing. The franchisor can exercise more control over the
franchised compared to that in licensing. International franchising is growing at a fast
rate. Under franchising, an independent organization called the franchisee operates the
business under the name of another company called the franchisor. Under this agreement
the franchisee pays fee to t e franchisor. The franchisor provides the following services to
the franchisee:
Trade marks
Operating systems
Product reputations
Continuous support systems like advertising, employee training, reservation services,
and quality assurance programmes etc.
BASIC ISSUES IN FRANCHISING
The franchisor has been successful in his home country. McDonnell was successful in
USA due to the popular menu and fast and efficient services.
The factors for the success of the McDonald are later transferred to other countries.

 The franchiser may have the experience in franchising in the home country before
going for international franchising.
Foreign investors should come forward for introducing the product on franchising
basis.
FRANCHISING AGREEMENTS: The franchising agreement should contain important
items as follows: Franchisee has to pay a fixed amount and royalty based on the sales to the franchisor.
Franchisee should agree to adhere to follow the franchisor's requirements like
appearance, financial reporting, operating procedures, customer service etc."
Franchisor helps the franchisee in establishing the manufacturing facilities, services
facilities. provides expertise, advertising, corporate image etc.
Franchisor allows the franchisee some degree of flexibility in order to meet the local
taste-, and preferences. McDonald restaurants in Germany sell beer also and
McDonald restaurants in France sell wine also.
ADVANTAGES AND DISADVANTAGES OF FRANCHISING
ADVANTAGES For franchisors
1. Expansion: Franchising is one of the only means available to access investment capital
without the need to give up control in the process. After their brand and formula are
carefully designed and properly executed, franchisors are able to expand rapidly across
countries and continents using the capital and resources of their franchisees, and can earn
profits commensurate with their contribution to those societies. Additionally, the
franchisor may choose to leverage the franchisee to build a distribution network.
2. Legal considerations: The franchisor is relieved of many of the mundane duties necessary
to start a new outlet, such as obtaining the necessary licenses and permits. In some
jurisdictions, certain permits (especially liquor licenses) are more easily obtained by
locally based, owner-operator type applicants while companies based outside the
jurisdiction (and especially if they originate in another country) find it difficult if not
impossible to get such licenses issued to them directly. For this reason, hotel and
restaurant chains that sell liquor often have no viable option but to franchise if they wish
to expand to another state or province.
3. Operational considerations: Franchisees are said to have a greater incentive than direct
employees to operate their businesses successfully because they have a direct stake in the
operation. The need of franchisors to closely scrutinize the day to day operations of
franchisees (compared to directly-owned outlets) is greatly reduced.

For franchisees
1. Quick start: As practiced in retailing, franchising offers franchisees the advantage of
starting up a new business quickly based on a proven trademark and formula of doing
business, as opposed to having to build a new business and brand from scratch (often in
the face of aggressive competition from franchise operators). A well run franchise would
offer a turnkey business: from site selection to lease negotiation, training, mentoring and
ongoing support as well as statutory requirements and troubleshooting.
2. Expansion: With the help of the expertise provided by the franchisers the franchisees are
able to take their franchise business to that level which they wouldn't have had been able
to without the expert guidance of their franchisors.
3. Training: Franchisors often offer franchisees significant training, which is not available
for free to individuals starting their own business. Although training is not free for
franchisees, it is both supported through the traditional franchise fee that the franchisor
collects and tailored to the business that is being started.
DISADVANTAGES for Franchisors
1. Limited pool of viable franchisees: In any city or region there will be only a limited pool
of people who have both the resources and the desire to set up a franchise in a certain
industry, compared to the pool of individuals who would be able to competently manage
a directly-owned outlet.
2. Control: Successful franchising necessitates a much more careful vetting process when
evaluating the limited number of potential franchisees than would be required to hire a
direct employee. An incompetent manager of a directly-owned outlet can easily be
replaced, while regardless of the local laws and agreements in place removing an
incompetent franchisee is much more difficult. Incompetent franchisees can easily
damage the public's goodwill towards the franchisor's brand by providing inferior goods
and services. If a franchisee is cited for legal violations, she will probably face the legal
consequences alone but the franchisor's reputation could still be damaged.
For franchisees
1. Control: For franchisees, the main disadvantage of franchising is a loss of control. While
they gain the use of a system, trademarks, assistance, training, marketing, the franchisee
is required to follow the system and get approval for changes from the franchisor. For
these reasons, franchisees and entrepreneurs are very different. The United States Office
of Advocacy of the SBA indicates that a franchisee "is merely a temporary business
investment where he may be one of several investors during the lifetime of the franchise.
In other words, he is "renting or leasing" the opportunity, not "buying a business for the

purpose of true ownership." Additionally, a franchise purchase consists of both intrinsic

value and time value. A franchise is a wasting asset due to the finite term, unless the
franchisor chooses to contractually obligate itself it is under no obligation to renew the
franchise.
2. Price: Starting and operating a franchise business carries expenses. In choosing to adopt
the standards set by the franchisor, the franchisee often has no further choice as to
signage, shop fitting, uniforms etc. The franchisee may not be allowed to source less
expensive alternatives. Added to that is the franchise fee and ongoing royalties and
advertising contributions. The contract may also bind the franchisee to such alterations as
demanded by the franchisor from time to time. (As required to be disclosed in the state
disclosure document and the franchise agreement under the FTC Franchise Rule)
3. Conflicts: The franchisor/franchisee relationship can easily cause conflict if either side is
incompetent (or acting in bad faith). An incompetent franchisor can destroy its
franchisees by failing to promote the brand properly or by squeezing them too
aggressively for profits. Franchise agreements are unilateral contracts or contracts of
adhesion wherein the contract terms generally are advantageous to the franchisor when
there is conflict in the relationship.
OTHER ADVANTAGES
Franchisor can enter global markets with low investment and low risks.
Franchisor can get the information regarding the markets, culture, customs and
environment of the host country.
Franchisor learns more lessons from the experiences of the franchisees. McDonald
benefited from the world wide learning phenomenon. McDonald is convinced to open
a restaurant in inner-city office building in Japan. This location has become a more
successful one. Based on this lesson, McDonald opened its restaurants in downtown
locations in various countries.
Franchisee can early start a business with low risk as he selects an established and
proven product and operating system,
Franchise gets the benefits of R & D with low cost.
Franchisee escapes form the risk of product failure.
OTHER DISADVANTAGES
International franchising may be more complicated than domestic franchising.
McDonald taught the Russian farmers the methods of growing potatoes to meet its
standards.

 It is difficult to control the international franchisee. As one of the French investor did
not maintain the stores as per the standards, McDonald did revoke the franchise.
Franchising agents reduce the market opportunities for both the franchisor and
franchisee.
Both the parties have the responsibilities to maintain product quality and product
promotion.
There is scope for misunderstanding between the parties.
There is a problem of leakage of trade secrets.
IV.

SPECIAL MODES
Some companies cannot make long-term investments or long-term contracts to enter
markets. Therefore, they may use specialized strategies. These specialized strategies
include: a. Contract Manufacturing
Some companies outsource their part of or entire production and concentrate on
marketing operations. This practice is called the contract manufacturing or
outsourcing.
Nike has contracted with a number of factories in south-east Asia to produce its
athletic footware and it concentrates on marketing. Bata also contracted with a
number of cobblers in India to produce its footware and concentrate on
marketing. Mega Toys - a Los Angeles based company contracts with Chinese
plants to produce Toys and Mega Toys concentrates on marketing.
Advantages
International business can focus on the part of the value chain where it has
distinctive -competence.
It 'reduces the cost of production as the host country's companies with their
relative cost advantage produce at low cost.
Small and medium industrial units in the host country can also develop as most of
the production activities take in these units.
The international company gets the location advantages, generated by the host
country's production.

Disadvantages
Host country's companies may take up the marketing activities also, hindering the
interest of the international company.

 Host county's companies may not strictly adhere to the production design, quality
standards etc. These factors result in quality problems, design problem and other
surprises.
The poor working countries in the host country's companies affect the company's,
image. For example, Nike has suffered a string of blows to its public image,
because of reports of unsafe and harsh working conditions in Vietnamese factories
churning our Nike footware.
b. Management Contracts
The companies with low level technology and managerial expertise may seek tile assistance of a
foreign company. Then the foreign company may agree to provide technical assistance and
managerial expertise. This agreement between these two companies is called the management
contract.
A management contract is an agreement between two companies whereby one company provides
managerial assistance, technical expertise and specialized services to the second company of the
argument

for a certain agreed period in return for monetary compensation. Monetary

Compensation may be in the form of a flat fee or Percentage over sales or Performance bonus
based on profitability, sales growth, production or quality measures.
Management contracts are mostly due to governmental inventions. The Government of the
Kingdom of Saudi Arabia nationalized Armco and requested the former owners to manage the
company. Exxon and other former owners of Armco accepted the offer. Delta, Air France and
KLM often provide technical and managerial assistance to the small airlines companies owned
by the Governments.

Advantages

Foreign company earns additional income without any additional investment, risks and
obligations.
Hilton Hotels provided these seivices to other hotels without additional
investment and earned additional income..
This arrangement and additional income allows the company to enhance its
image in the investors and mobilise the funds for expansion.
Management contract helps the companies to enter other business areas in the
host country.
The companies can act as dealer for the business of, the host countrys
business in the home country.

Disadvantages
Sometimes the companies allow the companies in the host country even to
use their trademarks and brand name. The host country's companies spoil the
brand name, if they do not keep up the quality of the product service.

The host countrys companies may leak the secrets of technology

c. Turnkey Project
A turnkey project is a contract under which a firm agrees to fully design,
construct and equip a manufacturing/business/service facility and turn the project
over to the purchaser when it is ready for operation for remuneration. The forms
of remuneration include: A fixed price (firm plans to implement the project below this price)
Payment on cost plus basis (i.e., total cost incurred plus profit)
International turnkey projects include nuclear power plants, air ports, oil refinery,
national highways, railway lines etc. Hence, they are large and multiyear
projects. International companies involved in such projects include: Bechtel,
Brown and Root, Hyundai Group, Friedrich Krupp, etc.
The companies normally approach the host country's Governments or
International Finance, Corporation, Export-Import Bank of USA and the like for
financial assistance as the turnkey projects require huge finances.
The recent approach of turnkey projects is Build, Operate and Transfer (B-O-T).
The company builds the manufacturing/services facility, operates it for some time
and then transfers it to the host country's Government. In this approach, the
contractor will not be paid the remuneration.
V.

FOREIGN DIRECT INVESTMENT WITHOUT ALLIANCES (Greenfields

strategy)
Some companies, enter the foreign markets through exporting, licensing, franchising
etc., get the knowledge and awareness of the foreign markets, culture of the country,
customers' preferences, political situation of the country etc., and then establish
manufacturing facilities by ownership in the foreign countries. Baskin-Robbins in Russia
followed this strategy. In contrast, some other companies enter the foreign market
through ownership and control of assets in host countries.
Companies which enter the international markets through foreign direct investment (FDI)
invest their money, establish manufacturing and marketing , facilities through ownership
and control.

Foreign firm needs to control the operations when

It has foreign firm's need to control the operations when it has subsidiaries to
achieve strategic synergies.

The technology, manufacturing expertise, intellectual property rights have

potentialities and their full utilization needs planned exploitation.

ADVANTAGES

Mostly, the customers of the host country prefer to the products produced in their
country like -'Be American, Buy American, 'Be Indian. Buy Indian.'. In such cases FDI
helps the company to gain market through this mode rather than other modes.

Purchase managers of most of the companies prefer to buy local production in order to
ensure certainty of supply, faster services, quality dependability and better
communication with the supplier.

The company can produce based on the local environment and changing preferences of
the cutomers.

Disadvantages
o FDI exposes the company (to a fullest extent) tothe host country's politicaL and
economic risks.
o FDI also exposes the company to the exchange rate fluctuations.
o Some countries discourage the entry of foreign companies through FDI in order to
protect the domestic industry.
o Changing Government policies of the host country may create uncertainties to the
company.
o Host country Governments, sometimes, ban the acquisition of local companies by
foreign companies, impose restrictions on repatriation of dividends and capital. India
has allowed IOO% convertibility.
THE GREENFIELD STRATEGY
The term Greenfield refers to starting with a virgin green site and then building is,
Greenfield strategy is starting of the operations of a company from scratch in a foreign
market. The company conducts the market survey, selects the location, buys or leases
land, creates facilities, erects the machinery, remits or transfers the human resources and
starts the operations and marketing activities. This strategy is followed by Fuji in locating

its manufacturing, facilities in South Carolina, by Mercedes-Benz in locating automobile

assembly plant in Alabama and by Nissan in locating its factory in Sunderland, England."
Disney management faced the problems in building Disneyland in Paris. These problems
include:
Problems in dealing with French construction contractors.
Communication difficulties with painters.
Local contractors demanded $150 million extra at the time of opening , and threatened
the opening.
Local employees resisted the firm's attempt to impose its US work values.

ADVANTAGES
The company selects the best location from all viewpoints.
The company can avail the incentives, rebates and concessions offered by the host
governments including local governments.
The company can have latest models of the buildings, machinery and equipment
technology.
The company can, also have its own policies and styles of human resources
management.
The company can have its gestation period to understand and adjust to the new
culture of the host country. Thus it can avoid the cultural shock.
DISADVANTAGES
This strategy results in a longer gestation period as the successful implementation
takes time and patience.
Some companies may not get the land in the location of its choice.
The company has to follow the rules and regulations imposed by the host country's
Government in case of construction of the factory buildings.
Host country's Government may impose conditions that the company should recruit
local people and train them, if necessary, to meet the companys requirement.
VI.

FOREIGN DIRECT INVESTMENT WITH STRATEGIC ALLIANCES

Innovations, creations, productivity, growth, expansions and diversifications, in the recent
years, are mostly accomplished by the strategic alliances adopted by various companies
like mergers, acquisitions and joint-ventures.

Strategic alliance is a co-operative and collaborative approach to achieve the larger goals.
Strategic

alliance

takes

different

forms

like

licensing,

franchising,

contract

manufacturing, joint ventures etc. Alliance is a strategy to explore a new market which
the companies individually cannot do. For example, Xerox of USA and Fuji of Japan
collaborated to explore new markets in Europe and Pacific Rim.
Two companies join hands in order to align their distinctive and different strengths.
Dunlop and Pirelli - the two tyre making corporations -joined together in order to
synergize the strength of marketing capabilities of Dunlop and R&D capabilities of
Pirelli.
Why Consider Strategic Alliances?
Multiply market entry alternatives and available resources for expansion into choice
international markets. Consider possibility of replicating IJV's in different market areas.
Access dominant or leading foreign technology through local manufacture in the target
market. Domestic markets may also be served trough reverse licensing from the IJV.
Access lucrative but otherwise closed or resistant markets through the efforts of a
foreign partner to maximize value of established relationships. Develop customer service
channels what would be unfeasible otherwise.
Gain cost advantages through scale and locational economies (factor costs).
Employ key managers experienced in cultural norms and business practices of overseas
target markets.
Realize political or legal advantages via relationship with a partner enjoying regional or
national recognition.
Exploit multiple synergies in production, marketing, and finance.
Limit exposure of own corporate assets to those actually contributed to the joint
venture.
MODES OF FOREIGN ENTRY THROUGH ALLIANCES: a. Mergers and Acquisitions
Domestic companies enter international business though mergers and acquisitions.

A domestic company selects a foreign company and merges itself with the foreign
company in order to enter international business. Alternatively, the domestic
company may purchase the foreign company and acquires its ownership and
control.
Domestic business selects this mode of entering international business as it
provides immediate access to international manufacturing facilities and marketing,
network. Otherwise, the domestic company faces serious problems in gaining
access to international markets. For example. ('()C Cola entered Indian market
instantly 11V acquiring the Pane and its bottling units. In addition, the domestic
company through this strategy of mergers and acquisition may also get access to
new technology or a patent right.

Though mergers and acquisitions provide easy and instant entry to global
business, it would be very difficult to appraise the cases of acquisitions and
mergers. Some times it Would he cheaper to a domestic company to have a green
field strategy than by acquisitions. Sometimes merg ers and acquisitions also result
in purchasing the problems of a fore
Advantages and Disadvantages of Aquisition strategy

Advantages
The company immediately gets the ownership and control over the acquired
firm's factories, employees, technology, brand names and distribution networks.

The company can formulate international strategy and generate more revenues.

If the industry already reached the stage of optimum capacity level or

overcapacity level in the host country. This strategy helps the economy of the
host country.
Disadvantages

Acquiring a firm in a foreign country is a complex task involving bankers,

lawyers, regulations, mergers and acquisition specialists from the two
distribution networks.

This strategy adds no capacity to the industry.

Sometimes host countries imposed restrictions on acquisition of local

companies by the foreign companies.
Labour problems of the host country's company are also transferred to the
acquired company.

Companies adopt this strategy just as a means of entering foreign markets. Procter
and Gamble entered Mexican tissue products in 1997 by purchasing Loreto Y.
Pena Pobre's manufacturing and marketing systems.
b. Joint Ventures
Two or more firms join together to create a new business entity that is legally
separate and distinct from its parents. Joint ventures are established as
corporations and owned by the funding partners in the predetermined proportions.
American Motor Corporation entered into ajoint venture with Beijing Automotive
Works called Beijing Jeep to enter Chinese market by producing jeeps and other
vehicles. Joint ventures involve shared ownership. Joint Ventures are common in
international business. Various environmental factors like social, technological,
economic and political encourage the formation of Joint ventures. Joint ventures
provide required strengths in terms of required capital, latest technology required
human talent etc. and enable the companies to share the risks in the foreign
markets.
Joint ventures involve the local companies. This act improves the local image in
the host country and also satisfies the governmental requirements regarding joint
ventures. In fact, support of the host country's Government is essential for the
success of the joint venture.
Massey-Ferguson entered into a 51% joint venture in Turkey to produce Tractors.
It planned to produce 50,000 engines per year and called the Government to
provide facilities for an additional production of 30,000 tractors a year. MasseyFerguson failed to understand economic, political and Governmental factors in the
country. The company needed Government support for its successful operation.
The venture is terminated as the Government of Turkey did not provide he
support to the company.

ADVANTAGES
Joint ventures provide large capital funds. Joint ventures are suitable for major
projects.

Joint venture spread the risk between or among, partners.

Different parties to the joint venture bring different kinds of skills like technical
skills, technology, human skills, expertise, marketing skills or marketing
networks.

Joint ventures make large projects and turn key projects feasible and possible.

Joint ventures provide synergy due to combined efforts of varied parties.

DISADVANTAGES

Joint ventures are also potential for conflicts. They result in disputes between
or among parties due to varied interests. For example, the interest of a host
country's company in developing countries would be to get the technology
from its partner while the interest of a partner of an advanced county would be
to get the marketing expertise from the host country's company.

The partners delay tile decision-making once the dispute arises. Then the
operations become unresponsive and inefficient.

Decision-making is normally slowed down in joint ventures due to the

involvement of a number of parties.

Scope for collapse of a joint venture is more due to entry of competitors,

changes in the business environment in the two countries, changes in the
partners' strengths etc.

Life cycle of a joint venture is hindered by many causes of collapse.

LIFE CYCLE OF A JOINT VENTURE

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

STAGES OF INTERNATIONALIZATION ( STRATEGY )

The internationalization process generally includes five stages, viz., domestic

company, international Company, multinational company, global company and transnational

company. Now, we will study stage of internationalization in detail.

Stage 1: Domestic Company

Domestic company limits its operations, mission and vision to the national political boundaries.
These companies focus its view on the domestic market opportunities, domestic suppliers,
domestic financial companies, domestic customers etc. These companies analyze the national
environment of the country, formulate the strategies to exploit the opportunities offered by the
environment. The domestic Companies unconscious motto is that, if its not happening in the
home country, it is not happening. The domestic company never thinks of growing globally. If it
grows, beyond its present capacity, the company selects the diversification strategy of entering
into new domestic markets, new products, technology etc. The domestic company does not select
the strategy of expansion/penetrating into the international markets.

Stage 2: International Company

Some of the domestic companies, which grow beyond their production and/or domestic
marketing capacities, think of internationalizing their operations. Those companies who decide to
exploit the opportunities outside the domestic country are the stage two companies. These
companies remain ethnocentric or domestic country oriented. These companies believe that the
practices adopted in domestic business, the people and products of domestic business are
superior to those of other countries. The focus of these companies is domestic but extends the
wings to the foreign countries. Markets and extend the same domestic operations into foreign
markets. In other words, these companies extend the domestic product, domestic price,
promotion and other business practices to the foreign markets. The international company holds
the marketing mix constant and extends the operations to new countries. Thus the international
company extends the domestic country marketing mix and business model and practices to
foreign countries.

Stage: 3 Multinational Company

Sooner or later, the international companies learn that the extension strategy (i.e., extending the
domestic product, price and promotion to foreign markets) will not work.
This statue of multinational company is also referred to as multi-domestic. Multi-domestic
company formulates different strategies for different markets; thus, the orientation shifts from
ethnocentric to polycentric. Under polycentric orientation the offices /branches/subsidiaries of a
multinational company work like domestic company in each country where they operate with
distinct policies and strategies suitable to that country concerned. Thus they operate like a

domestic company of the country concerned in each of their markets.

Stage 4: Global Company

A global company is the one, which has either global marketing strategy or a global strategy.
Global company either produces in home country or in a single country and focuses on
marketing these products globally, or produces the products globally and focuses on marketing
these products domestically. .

Stage 5:Transnational Company

Transnational company produces, markets, invests and operates across the world. It is an
integrated global enterprise, which links global resources with global markets at profit. There is
no pure transnational corporation. However, most of the transnational companies satisfy many of
the characteristics of a global corporation.

Characteristics of a Transnational Company

(i)Geocentric Orientation: A transnational company is geocentric in its orientation. This
company thinks globally and acts locally. This company adopts global strategy but allows value
addition to the customer of a domestic country. This company allows adaptation to add value to
its global offer. The assets of a transnational company are distributed throughout the world,
independent and specialized. The R & D facilities of a transnational company are spread in many
countries, but specialized in each Country based on the local needs and integrated in world R &
D project. Similarly, the production facilities are spread but specialized and integrated
(ii) Scanning or information Acquisition: Transnational companies collect the data and
information worldwide. These companies scan the environmental information regarding
economic environment, political environment, social and cultural environment and technological
environment. These companies collect and scan the information regardless geographical and
national boundaries.
(iii) Vision and Aspirations: The vision and aspiration of transnational companies are global,
global markets, global customers and grow ahead of other global/transnational companies.
(iv)Geographic Scope: The transnational companies scan the global data and information. By
doing so, they analyze the global opportunities regarding the availability of resources, customers,
markets, technology, research and development etc. Similarly, they also analyze the global
challenge and threats like competition from the other global companies, local companies of host
countries, political uncertainties and the like. They formulate global strategy. Thus the
geographic scope of a transnational company is not limited to certain countries in analyzing
opportunities, threats and formulating strategies.

(v) Operating Style: Key operations of a transnational are globalize. The transnational companies
globalize the functions like R & D, product development, placing key human resources,
Procurement of high valued material etc. For example, the R &D activity of Proctor & Gamble,
and key human resource activity of Colgate are the joint and shared activity of the units of these
companies in various countries.
(vi) Adaptation: Global and transnational companies adapt their products, marketing strategic
and other functional strategies to the environmental factors of the market concerned, For
example, Mercedes Benz is a super luxury car in North America, luxury automobile in Germany,
standard taxi in Europe.
(vii) Extensions: Some products do not require any change when they are marketed in other
countries. Their market is just extension. For example, Casio calculators of Japan.
(viii) Creation through Extension: Transnational companies create the global brand through
extending the product to the new market. Rothmans Cigarette extended its product to many
European countries and African countries and created it as global and national basis.
(ix) Human Resource Management Policy: The transnational companys human resource policy
is not restricted by national political or legal constraints. It selects the best human resources and
develops them regardless of nationality, ethnic group etc. But the international company reserves
the top and key positions for nationals.
(x) Purchasing: Transnational Company procures world-class material from the best source
across the globe.

BASIC MODELS FOR ORG DESIGN IN CONTEXT OF GLOBAL DIMENSIONS

(BOOK)

ENTRY BARRIERS (BOOK)

GLOBAL COMPETITIVENESS OF INDIAN ORG ?

THE ENVIRONMENT OF IB

The international business environment can be defined as the environment in different

sovereign countries, with factors exogenous to the home environment of the organization,
influencing decision-making on resource use and capabilities.
The political environment in a country influences the legislation and government rules and
regulations under which a foreign firm operates.
The technological environment comprises factors related to the materials and machines used
in manufacturing goods and services.
Economic factors exert huge impacts on firms working in an international business
environment. The economic environment relates to all the factors that contribute to a
country's attractiveness for foreign businesses, such as monetary systems, inflation,

and interest rates.