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International Business Assignment

PRADNYA WADIA
PGDM-B (2015-17)
Roll No- 163
Q1.Explain briefly the Factor Mobility Theory of International Trade and outline its
significance separately for Governments of Countries and for Multinational
Enterprises (MNEs). Also, Illustrate your answer for Information Technology (I. T.)
enabled Services (ITES)/ Business Process Outsourcing (BPO) Industry in Costa
Rica. Explain the rationale for your answer.
Answer: Factor mobility concerns the free movement of factors of production, such
as labor and capital, across national borders. Factor conditions change in both quality
and quantity across countries. This results into a change in the relative capabilities of
countries as well. The changes are important in understanding and predicting changes
in export production and import market locations. At the same time the mobility of
capital, technology and people affect trade and relative competitive positions.
Factors move for:
1) Better reward or remuneration
2) Better Return-Risk combination
Capital, especially short term capital, is the most internationally mobile production
factor. Companies and private individuals primarily transfer capital because of
differences in expected return, i.e. they want good returns with low or medium risk.
Short term capital is more mobile than long term capital. Short term capital operates in a
more active market through which investors can quickly buy foreign holdings and sell
them if they want to transfer capital back home or to another country. However
companies invest in long-term abroad to tap markets and lower operating costs.
Governments give foreign aid and loans. Non profit organizations donate money abroad
as relief funds to economically weak nations. Individuals remit funds to help their
families and friends in foreign countries.
People or labour is also internationally mobile. People move from the area of
abundance to area of scarcity. People who travel to another country as tourists,
students and retirees do not constitute labour mobility unless they work there. People
whether professionals or unskilled workers, largely work in another country for
economic reasons, i.e. because domain knowledge is rewarded in other countries.
People also move for political reasons also like persecution or war dangers. People
move for short term when they are allocated in turnkey onsite projects, or overseas
positions. However people move for long term through migration and take citizenship.
Substitution
If finished goods and production factors were both free to move internationally, the
comparative costs of transferring goods and factors would determine the location of

production. However there are restrictions on factor movements that make them only
partially mobile internationally. The inability to gain sufficient access to foreign
production factors may stimulate efficient methods of substitution, such as development
of alternatives for traditional production methods.
Complementarity
Trade and investments i.e. FDI are complementary. When companies invest abroad, the
investments often stimulate exports from their home countries. Any investment in terms
of trade made by a foreign country leads to:
1) Import of capital
2) Import of critical equipment, components, raw materials or technology
3) Reduction of cost by local players
4) Exports of finished products in the long run.
About a third of world trade (exports) is among controlled entities such as from parent to
subsidiary, subsidiary to parent, subsidiary to subsidiary of the same company. Many of
the exports would not occur if overseas investments did not exist. Another reason might
be domestic operating units may export materials and components to their foreign
facilities for use in a finished product.
Factor movements have the following effects on MNEs and government of
countries home.
1) Government of Countries
When factors move away from home country to other attractive prospects; the
home countrys competitiveness decreases. It results in a brain drain, but they
may gain from the foreign earnings on those factors. Other countries might
become more attractive. MNEs may move away from countries from which
factors like capital, labour and technology are moving away.
Countries receive foreign capital to develop infrastructure and natural resources,
which further altered their competitive structures and international trade.
Immigrants bring human capital with them, thus adding to the base of skills that
enabled countries to be newly competitive. The host country receiving the factors
incurs certain costs of social services and acculturating people to new language
and culture. Training cost for unskilled labour.
2) MNEs
Worldwide market analysis: Involves country evaluation (primary/secondary
sources) and selection. This is followed by country ranking based on potential,
returns and risk.
Industry analysis: Involves analysis of structure, degree of rivalry and competitive
advantage. It tells the firm how to be globally competitive.
Firms strategy: Involves innovation, brand development and channel
management and distribution.
Free trade when coupled with freedom of factor mobility internationally will usually result
in the most efficient allocation of resources.

Factor Movement for Information Technology (I. T.) enabled Services (ITES)/
Business Process Outsourcing (BPO) Industry in Costa Rica
Costa Rica has proved to be a very lucrative prospect for many foreign IT/BPO
companies post its launch of the Strategic Trade Policy in the early 1990s. Its
government carried out an in depth analysis of the FDI market and observed that
developing countries with a highly educated, English speaking workforce (especially the
availability of engineers and technical operators), political and social stability and
relatively high levels of economic freedom, and a quality of life that would appeal to
managers and technical personnels that foreign investors would bring in to work in the
facilities.
As observed from the case Cost Rica and other Latin American countries have the
following favourable points:

Relevant language skills


Time-zone and physical proximity to the United States a major export destination for
IT services
Cultural similarity with the United States.
Cost attractiveness in terms of wages , real estate , telecom and infrastructure and
travel
A young working population

Costa Rica had to improve on certain parameters like protection of intellectual property
rights and English proficiency among technicians and engineers which are highly
essential for the IT/BPO industry to thrive. Costa Rica focused on these parameters to
strengthen its attractiveness by introducing bilingual training for its midlevel technicians
and also set up Spanish language training for the personnel brought in by foreign
investors.
The increasing cost of labour, talent supply crunch in booming service sector,
appreciating rupee, difficulty in retaining night-shift BPO employees etc. in India led to
Indian IT/BPO conglomerates to invest in Costa Rica and other Latin American
countries. This let to factor mobility in form of capital, skilled labour and technology in to
Costa Rica.

Q2. Using the relevant diagram, develop the Porter's Diamond for Costa Rica for
ITES/BPO Industry. Explain any 5 key actions the Government of Costa Rica
should take today for making ITES/BPO industry in Costa Rica globally
competitive? Explain the rationale for your answer.

Answer :

1. Firm structure, strategy, rivalry


The Costa Rica ITES/BPO industry uses the Cost leadership strategy in Latin American
region. Also Costa Rica benefits from a large number of technically trained
professionals. Costa Rican operation services range from basic call routing to global
project management scope functions, which include BPO process, application services
in SAP among others, technical support from Tier 1 to Tier 3 and 4, IT Infrastructure and
HP Networking. They are delivered in English, Spanish, Portuguese, French, Italian and
German. However, the industry experiences high level of rivalry due to well established
companies from India and Philippines.
2. Factor Conditions
Human Resources: Costa Rica has 70% of its population between 15-60 years of age.
The adult literacy rate is 97.7 %. As mentioned in the case Costa Rica lacks the skilled
and technically sound work force but made effort to develop their education system; to
have trained and educated human resource. The population is bilingual i.e. speaks
English as well as Spanish.

Infrastructure: Well developed infrastructure with uninterrupted power supply and


strategically located Industrial and Business parks. Costa Rica has highly advanced
ports and airports with international connectivity. Telecommunication network with high
speed internet connectivity is available.
Location: The most popular near shore location for companies from the U.S as well as
a strategic offshore setting for European companies in the dollar zone. Being in the
same time zone as of US is another advantage of Costa Rica.
3. Related Industries
1. Telecommunication industry is largely developed and acts as important supporting
industry for BPO.
2. Education industry has seen good revolution and it has rated best among Central and
South American nations.
4. Demand Conditions
Local demand for BPO industry is very low so it is not the driver for innovation and
improvements. However, a high demand from USA is observed as Costa Rica serves as
a low cost advantage location. Spanish and English speaking population makes it
suitable for providing services to both Spanish and English speaking countries.
Explain any 5 key actions the Government of Costa Rica should take today for
making ITES/BPO industry in Costa Rica globally competitive? Explain the
rationale for your answer.
Addressing BPO skills sets creating a policy and strategy on ITES-BPO skills
requirements and mainstreaming it into relevant ministries for implementation.
Creating a single ITES-BPO sector and mainstreaming it into the national planning
and operational frameworks.
Addressing the weak legal framework, strengthening existing laws to provide an
enabling legal framework for ITES-BPO in the short-term, while in the medium- to
long-term, and developing separate legislations critical for ITES-BPO sector and
compliant with relevant international laws.
Addressing the lack of standards, developing BPO standards, benchmarking to
international standards and ensuring all key BPO firms adopt these standards.
Developing a BPO incentives framework as an integral part of the law that will
transform EPZs into SEZs. In addition, providing tax, training and set-up incentives
for a specific time period to encourage BPO industry growth, especially in the rural
areas.
Addressing the lack of updated skills database, establishing framework for collection
and up gradation of ITES skills data and task the national body responsible for ITESBPO coordination to be established as recommended under institutional framework
with this responsibility.
Fast-tracking implementation of integration of ITES into education

Q3. State and explain briefly the global market size today of the Global BPO
Industry and identify the top 10 countries in the BPO Sector today with their
share of the global BPO market today.
Rapid transformation is taking place in the global BPO market. It is accompanied by
increased spending in BPO services. Most of the leading business companies of the
world are adopting BPO as a strategic business solution. The BPO industry is very
diverse, with several sub-segments, each displaying its own unique characteristics.
28.5 billion US Dollars in 2014 is the global market size of BPO

India wins hands-down as the top BPO destination in the world. Philippines, South
Africa, Poland, Morocco, Malaysia, Kenya, Sri Lanka, Egypt and Northern Ireland are
the other top Countries in no particular order.

Q4. Using the diagram for Country Attractiveness/Competitive Strength matrix,


evaluate and choose between Chile and Costa Rica as location for Global
Delivery Centers of an Indian company like INFOSYS. State clearly your
assumptions and indicate separately your analysis of Country Attractiveness
parameters for Chile and Costa Rica for the ITES Industry. Explain your rationale.

CHILE
POLITICAL STABILITY - Chile's income per capita has grown strongly in recent years,
while poverty has fallen significantly from 23 percent in 2000 to just 9.9 percent in
2011.Also,Chile has a higher GDP per capitadue to its stable political environment
over the past couple of decades, strong financial institutions, high-quality international
trade facilities, and commitment to poverty reduction.
ECONOMIC FLEXIBILITY - Chile ranks 44th on the HDI. It has the strongest sovereign
bond rating in South America, and its central bank holds foreign exchange reserves
worth $40.5 billion, enabling the government to cushion currency fluctuations during a
crisis.
LABOUR - A shortage of highly skilled and educated labour & lack of industry
diversification in the mineral-dependent economy are some of the bottlenecks in the
progress of Chile.

INFRASTRUCTURE A fairly well-developed infrastructure exists in Chile, particularly


compared to that of its neighbours. It ranks 49 th out of 144 countries in overall
infrastructure according to the World Economic Forum's 2014 Global Competitiveness
Index
COSTA RICA:
POLITICAL STABILITY- Costa Rica has stood out for its stability and has benefited from
the most developed welfare system in the region for decades. The citizens enjoy one of
the highest life expectancy levels in the Western hemisphere, and better living
standards than most of Central America.
ECONOMIC FLEXIBILITY- Prior to the global economic crisis, Costa Rica enjoyed stable
economic growth. While the traditional agricultural exports of bananas, coffee, sugar,
and beef are still the backbone of commodity export trade, a variety of industrial and
specialized agricultural products have broadened export trade in recent years. High
value added goods and services, including microchips, have further bolstered exports.
The economy contracted 0.7% in 2009 financial crisis, but resumed growth at more than
3% in 2010. It ranks 68th on the HDI.
LABOUR - Total labour force comprises people ages 15 and older who meet the
International Labour Organization definition of the economically active population: all
people who supply labour for the production of goods and services during a specified
period. Also the workforce is educated as well as bilingual giving it an edge above other
Latin American countries.
INFRASTRUCTURE The telecommunication industry of Costa Rica is well developed
and the most modern of Central America. And have the highest penetration of mobile
devices in Latin America at 151%, higher than the US. With over $155 million invested,
the expansion and modernization of the two main international airports have greatly
improved efficiency.
A major pre-requisite for the BPO industry is a well-educated population, infrastructure
and proficiency in English. As can be observed from the given case Costa Rica scores
higher on these parameters as against Chile and hence comes across as a better
prospect for investment as against Chile. The Costa Rica country attractiveness scores
are higher as against Chile.

Q5. Outline briefly your learning about International Business from your Case
Analysis.
Learnings from the case:

The minimal government interference, liberal trade policies helps trade flourish
and countries gain absolute advantage.
Trade Blocs/arrangements, which allow goods produced in any member country
to enter market of other members freely, like Central American Common Market
(CACM), help companies inside trade blocs to be in a position to not only serve a
country market but also to a large market which involves the member nations.
Thus trade blocs thus help to bolster companies which are located in the trade
bloc.
Factor mobility, ease of movement of goods, capital and people plays a crucial
role for International Business to flourish as factor mobility leads to economies of
scale that help in achieving high efficiency for a firm.
Companies should source/set up production units where factors of productions
are less expensive and sell their products to countries where the currency and
markets are stronger than producing market.
Companies should look at International Markets when their home markets reach
a saturation point and growth stagnates. This involves a step by step process of
evaluating country attractiveness for business, exports to desirable markets and
eventually setting up of manufacturing unit at last.
Countries participate in strategic trade policies; which involves targeting and
identifying industries that have high growth potential and try to set up conducive
investment policies in order to attract the companies of these sectors.
Trade theories helps managers and government policy makers to understand
which products should be actually imported/exported, with whom the businesses
should be conducted with etc.
While looking at effective destinations for sourcing the production from different
countries it is generally recommended to check for factors like low labour cost,
well developed infrastructural facilities and universal language proficiency as for
a business to succeed effective communication is necessary.
In case of the services industry it is favourable to locate point of service near the
major market to enable quick and economical access to customers as we
learned in case where for the Indian IT companies the major market being United
States, off shoring operations to Latin American countries provided a strategic
advantage.

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