INTERNATIONAL BUSINESS

MANAGEMENT

INTRODUCTION TO INTERNATIONAL BUSINESS

Evolution of International Business
International Trade to International Marketing
International Marketing To International Business
International Business Opportunities
1.Wider Scope
2.Inter-country Comparative Study
3.Differences in Government Policies
4.National Security
5.Policies of the Host Countries
6.Language
7.Nationalism and Business Policy
WHY GO INTERNATIONAL
. To achieve Higher Rate of Profits
2. Severe Competition in the Home Country
3. Limited Home Market
4. Political Stability / Political Instability
5. vailability of Technology and Managerial Competence
6. Nearness to Raw Materials
7. Availability of Quality Human Resources at Less Cost
8. To Avoid Tariffs and Import Quotas
9. High Cost of Transportation in Exporting Products from Home
Country
ADVANTAGE S OF INTERNATIONAL BUSINESS
1.High Living Standards
Through enhanced purchasing power and by consuming high quality products.
2. Increased Socio-economic Welfare
Enhances consumption level and economic welfare of the people of the trading
countries.
3. Wider Market
International business widens the market and increases the market size.

4. Reduced Effects of Business Cycles

The stages of business cycles vary from country to country.
5. Reduced Risks
Both commercial and political risks are reduced for the companies engaged in
international business due to spread in different countries.
. Large Scale Economies
Multinational companies due to the wider and larger markets produce larger
quantities.
7. Potential Untapped Markets
International business provides the chance of exploring and exploiting the potential
markets,
8. Provides the Opportunity for and Challenge to Domestic Business
International business firms provide the opportunities like technology, management
expertise, market intelligence, product developments etc to the domestic
companies.
9. Division of Labor and Specialization
International business leads to division of labor and specialization. .
. Economic Growth of the World
Specialization, division of labor, higher productivity, challenges,, innovations to
meet the competition lead to overall economic growth
11. Optimum and Proper Utilization World Resources
International business provides free flow of raw materials/natural resources &
human resources from the counties where they are in excess to those countries,
which are in short,
13. Knitting the World as a “Global Village”
International business ultimately knits the global economies, societies and countries
into a closely interactive and traditional village where one is for all and all are for
one.
12. Cultural Transformation
International business benefits are not purely economical or commercial, they are
even social and cultural.
PROBLEMS IN INTERNATIONAL BUSINESS
Political Factors
Political instability is the major factor that discourages the spread of international
business.
2.Huge Foreign Indebtedness
The developing countries with less purchasing power are lured into a debt trap
3 .Exchange Instability
Currencies of countries are depreciated due to imbalances in the balance of
payments, political instability and foreign indebtedness.
4..Entry Requirements
Domestic governments impose entry requirements to multinationals.
5.Tariffs, Quotas and Trade Barriers
Governments of various countries impose tariffs, import and export quotas and
trade barriers in order to protect domestic business
6. Corruption & Bureaucratic Practices of Government
Corruption & Bureaucratic attitudes & practices of Government delay sanctions,
granting permission and licenses to foreign companies
ROLE OF THE GOVERNMENT IN INTERNATIONAL BUSINESS
The Government has to play very important role as a guiding and controlling force
in Country’s International business.
The Government intervene directly in the economy, via regulation, ownership,
taxation policies or through trade barriers.
It can also affect the factors, which help to determine the underlying economic
make-up, such as education, infrastructure, legal framework, and health-care.
Instruments to control Operations through : 1. Industrial policy
2. Foreign Trade Policy
A small & new entrants in the international trade may find considerable
institutional barriers in the form of administrative rules & regulations, commercial
law, and contract enforcement
TYPES OF GOVERNMENT INTERVENTION
Export incentives
2. Import restrictions
3. Government procurement
4. Public ownership
5. Tax breaks
6. Investment subsidies
7. R&D subsidies
ROLE OF GOVERNMENT AS A FACILITATOR
The role of government is to maintain and shape the efficient working of the
following four factors .
1. Factor Conditions: To improve its factors of production and to allocate them
efficiently.
2. Demand Conditions : Firms, which face active competition & sophisticated
consumers base in home markets will be better prepared to compete internationally
3. Related and Supporting Industries: Timeliness of product and information flows
and general co-operative behaviour are crucial to competitiveness in foreign
markets
4. Firm Strategy & Structure : These are the conditions which determine how firms
operate and the nature of competition.
The Government should provide the conditions for the nation to be competitive,
rather than actively involving itself in the sphere of production
The Government can play an important role in establishing the presence of their
producers in a foreign market. The role of promoting its products is probably most
important in newly opening economies.
When individual Firm lacks capacity due to their scale of operations, it falls to the
Govt. to provide market research, technical support, and promotional activities to
establish its producers & their products in a foreign market.
While the international market provides lots of opportunities but there may be
considerable risks and high costs of capitalizing on those opportunities. Concerning
the risks, economic performance in developing countries is highly variable and
difficult to forecast.
The Government can reduce the total costs of navigating a foreign institutional
structure providing liaison services, training or consulting through a foreign trade
office.
The Govt. therefore has an ongoing role in providing information about market
demand in foreign countries that is relevant for its producers but comes at a cost
which may be too high for individual Firm
Summary
The correct role of the Government in the economy at large & International
Business in particular is controversial.
There are examples of successful intervention helping to boost economic
development, but there are just as many counter examples of the government
excessively interfering and distorting the market and diverting resources away
from where they can be best used.
There will always be a temptation for governments to
“do something”; self control is needed to make sure that
they do not do too much.
MARKET ENTRY
STRATEGIES
One of the most important strategic decisions in international business is the mode
of entering the foreign markets
A company may or may not use the same entry strategy for all the foreign markets
or for all the products.
The choice of the best suitable alternative is based on the relevant factors related
to the company & the foreign market.
The operating mode may undergo a change as the business environments changes
INTERNATIONAL BUSINESS ANALYSIS
1. Analyse Alternative Foreign Markets
a) Current & Potential of Alternative Markets
b) Level of Competition Existing In These Markets
c) Legal & Political Environments
2. Assessing Cost, Benefits & Risks
a) Direct & Variable Cost
b) High Sales & Profits
c) Lower Acquisition & Manufacturing Cost
d) Access to New Technology & Management Ideas
e) Risks of Exchange Rate Fluctuations
f) Operating Complexity
g) Government Policy
DECISION FACTORS
1. Ownership Advantage
The Benefits derived by the company by Owning Scarce Resources
2. Location Advantages
It offers benefits to the company when manufacturing facilities are
located in the host country.
a) Understand customers’ needs, tastes & preferences
b) Logistics Requirements
c) Comparatively cheap land & labour availability0
d ) Climatic Conditions
3. Internalisation Advantages
It provides benefits by manufacturing goods or rendering services
itself rather than through contract arrangements with the companies
in the host country.
IMPORTANT FOREIGN MARKET ENTRY STRATEGIES
1. EXPORTING
2. ICENSING / FRANCHISING
3. CONTRACT MANUFACTURING
4. MANAGEMENT CONTRACT
5. TURNKEY CONTRACTS
6. FULLY OWNED MANUFACTURING FACILITIES
7. ASSEMBLY OPERATIONS
8. JOINT VENTURES
9. THIRD PARTY LOCATIONS
10.MERGERS AND ACQUISITIONS
EXPORTING Reasons
1. The volume of foreign business is not large enough to justify production in the
foreign markets
2. Cost of production in foreign market is high
3. The foreign market is characterised by production bottlenecks like infra-
structure problems, materials supplies etc
4. There are political or other risks of investment in the foreign country
5. The company has no permanent interest in the foreign market
6. There is no guarantee of market available for a long period
7. Foreign investment is not favoured by the foreign country concerned
8. Licensing or contract manufacturing is not a better alternative
9. Government of the host country provides incentives for exports
10. Availability of un-utilised production capacity
1.Direct Exporting
2.Indirect Exporting
a) Export Houses
b) Merchant Exporters
c) Canalising Agencies
d) Distributors
e) Agents
Problems
1. Policies of some foreign governments discourages or prohibits
imports through tariff & non-tariff barriers
2. Hostility against imports by domestic manufacturers
3. Fierce competition from other international & domestic players
4. Financial & non-financial risks
5. Methods of payment & currency fluctuation
6. Patriotism & pride of using own country’s product
LICENSING & FRANCHISING
Under international licensing, a Firm in one country ( licensor) permits a firm in
another country (licensee) to use its intellectual property
( patents, trade marks, copyrights,technology,technical know how, etc.)
The licensor gets monetary benefits in terms of royalty or licensing fees from
licensee.
Franchising is a form of licensing in which a parent company (franchiser) grants
another independent entity(franchisee)the right to do business in a prescribed
manner.
The right can take the form of selling the franchisor's products, using its name,
production & marketing techniques or general business approach
The major forms of franchising are :
1.manufacturer retailer system( Automobile dealership)
2.manufacturer –wholesaler system( soft drink companies)
3.Service firm –retailer system( fast food outlets)
One of the growing trend recently has been trade mark licensing
(Walt Disney ) which has become a substantial source of worldwide
revenue.
Risks of licensing
The licensor would be a developing potential competitor after the expiry of licensing
agreement, because of their low cost labour which would enable them to compete
with the licensor in his own home market as well as in the foreign markets
Advantages
1.It does not require capital investment or marketing strength in foreign
markets
2.By earning royalty income, it provides an opportunity to exploit
research & development already committed to licensing.
3.It reduces the risk of exposure to government intervention
4.It helps to avoid host country regulations
5.It serve as a stage in the internationalisation of the firm by providing a
means by which foreign markets can be tested without major
investment or capital or management time
6.It serves as a preemptive strategy against competitors by combing
the foreign markets before the competitors can enter.
7.It can be used to harvest firm’s obsolete products in the new markets
8. It provides viable opportunity to enter the new markets where imports
or foreign investments are closed.
9. Licensing provides a great advantage of entering the markets with a
proven products without having to run the risks of R & D failures.
CONTRACT MANUFACTURING
Under contract manufacturing, a company engaged in international marketing
contracts with the firms in the foreign countries to manufacture / assemble the
products while retaining the responsibility of marketing the product.
Advantages
1.The firm does not have to commit resources for setting up production
facilities
2.It frees company from the risks of investing in foreign countries
3. If idle production capacities are readily available in the foreign
country, it enables the marketer to get started immediately
4 The cost of product obtained is lower than if it were manufactured by
the international firm
5 it is less risky way to start with. If the business does not pick up
sufficiently, dropping it is easy. No liabilities,
6. It enables the international firm to gain national support
Disadvantages
1. In some cases, there may be loss of potential profits from
manufacturing
2. Less control over manufacturing process
3. It has a risk of developing potential competitors
4. It would not be suitable in cases of high-tech products & cases which
involve technical secrets
MANAGEMENT CONTRACTING
Under the management contract, the supplier brings together a package of skills
that will provide an integrated service to the client without incurring the risks &
benefits of ownership.
In other words, the firm providing the management know –how may not have any
equity stake in the enterprise being managed.
Advantages
1. It is a low risk method of getting in to foreign markets & it starts
yielding income right from the beginning
2.It may obtain business of exporting / marketing of the products of the
managed company or supplying the inputs required by the managed
company
3. It enables a firm to commercialise existing know-how that has been
built up with huge investments
4. It helps the clients in acquiring organisational skills not available
locally
Disadvantages
1.The arrangement is not sensible if the company cannot put its scarce
management talent to better use.
2. It may prevent company from setting up its own operations for a
particular period
3. It makes the client over-dependent & may lose control on operations
TURNKEY CONTRACTS
A Turnkey operation is an agreement by the seller to supply a buyer
with a facility fully equipped and ready to be operated by the buyer’s
personnel, who will be trained by the seller
Turnkey contracts are common in international business in the supply,
erecting and commissioning of plants, construction projects and
franchising agreements
Turnkey contractor is free to sub-contract different phases / parts of
the total project under his responsibility.
FULLY OWNED MANUFACTURING FACILITIES
The companies with long term & substantial interest in the foreign markets normally
establishes fully owned / operated manufacturing facilities there.
It is simply not possible to maintain substantial market standing in an important
area unless the company has a physical presence as a producer.
A number of factors like trade barriers, differences in the cost of manufacturing,
government policies etc. encourages the establishment of production facilities in
the foreign market
Advantages
1.It provides the firm with complete control over production quantity &
quality
2.It prevents risk of developing potential competitors
Disadvantages
1.The cost of production may be high
2.There may be the problems such as restriction on type of
technology, non- availability of skilled labour, infra-structural
problems etc.
3.It may not be allowed or favoured in some countries, particularly in
low priority areas
4.It requires financial & managerial resources
ASSEMBLY OPERATIONS
A manufacturer who wants many of the advantages that are associated with
overseas manufacturing facilities & yet does not want to go that far, may find it
desirable to establish overseas assembly facilities in selected markets.
Advantages
1.It is ideal when there are economies of scale in the manufacture of
 parts /components & when assembly operations are cheap in foreign
country.
2. The import duty is normally low on parts than on finished products.
3.As it generates employment ,the foreign government’s attitude is
more favourable than towards import of finished products
4.Investment to be made in foreign country is very small compared to
establishing complete manufacturing facilities.
5.Political risk of foreign investment is not much.
JOINT VENTURES
Any form of association which implies collaboration for more than a transitory
period is a joint venture. It includes :
1.Sharing of ownership & management in an enterprise
2.Licensing & franchising agreements
3.Contract manufacturing
4.Management contracts
The essential feature of joint ownership venture is that the ownership &
management are shared between the foreign firm & a local firm.
A Joint Venture may be brought about by a foreign investor buying an interest in a
local company or local company acquiring an interest in an existing foreign firm or
by both foreign & local entrepreneurs jointly forming a new enterprise.
In a countries where fully foreign owned firms are not allowed / favoured, joint
venture is the best alternative for establishing an enterprise in foreign market
An important advantage of joint venture is that it permits a firm with limited
resources to enter more foreign markets which otherwise may not be possible
Partnership with local firms has certain specific advantages as the local partner
would be in a better position to deal with government & other authorities.
There would not be much public hostility by government or public
The local partner can serve as a cultural bridge between the manufacturer &
market.
Joint ventures present a mixed picture of success & failure.
Joint ventures can succeed only if both the partners have something to offer to the
advantage of the other & reap definite advantages & have mutual trust & respect.

THIRD COUNTRY LOCATION

Third country location is some times used as an entry strategy.
When there is no commercial transactions between two nations because of political
reasons or other reasons, a firm in one of these nations will have to operate from
the third country base.
The third country location may be resorted to reduce cost of production & thereby
to increase price competitiveness to facilitate market entry or for improving /
maintaining the market position
The incentives offered by governments particularly of developing countries ,for
investment & exports encourage such third party location.
MERGERS AND ACQUISITIONS
It is a very important market entry strategy as well as expansion strategy.
Advantages
1.It provides instant access to markets & distribution network
2.It enables the firm to obtain access to new technology or a
patent right
3.It reduces the competition (can’t fight, take over)
4.Less risky than putting green field ventures due to known
revenue streams
Risks
1.Cost of acquisition may be unrealistically high
2.When an enterprise is takeover, all its problems are also
acquired with it.
INTERNATIONAL
LEGAL REQUIREMENTS
One of the distinctive features of International Business is that the parties involved
in the business are situated in different countries & hence have to deal with
different legal systems. This is known as the “Conflict Of Laws”

As the parties are at great geographical distance from each other, many
intermediaries like shipping Companies, Banks, Insurance Companies etc. are
involved & trade terms differ across the countries. Therefore it is advisable to enter
in to written contracts incorporating all the relevant details.
Contractual Contracts
It is one where the existence of contract can be inferred from relevant documents
such as proforma invoice, written messages, letter of credit etc.
Written Contracts
These are private contracts & state does not interfere in the conclusion of such
contracts provided the subject matter is not violating any of the public laws.
EXPORT - IMPORT CONTRACT
The major laws which have to be kept in mid while entering into export / Import
contracts are
1.Foreign Trade Development & Regulation Act,1992
Under the authority of this Act, the office of Director General of Foreign Trade,
brings out foreign Trade Policy & lays down the procedures
2.Foreign Exchange Management Act,1999
Under this Act, the office of Reserve Bank of India, spells out all the rules &
Regulations related to transactions in Foreign Currency, in or out of the country.
3. Pre-shipment Inspection & Quality Control Act
In order to protect the image of the country Government of India under this Act
provided that items which are subject to this Act cannot be exported unless a
designated agency certifies that the quality of product being exported is as per the
standards laid down.
4. Customs Act,1962
Under this Act, the Customs Department is vested with the authority to carry out
physical & Documentary checks on all the export-import consignments
5. International Commercial Practices
Apart from the Indian Laws, there are certain International commercial practices
which also may have a bearing on export-import contracts
Two documents prepared by the International Chamber of Commerce, Paris, are
widely used in the International Business
1. Uniform Customs & Practices for Documentary Credits (UCPDC),1993
This is used by banks in negotiation of export import documents
2.INCO Terms,1990
They define the various trade terms like FOB,C&F,CIF etc & specify the rights &
obligations of the two parties under the various contract terms.
TYPES OF LEGAL ISSUES
The basic legal issues can broadly be classified into
a) Related to export-import contracts
b) Related to relationship between exporter & Agents/Distributors
c) related to products like Trade Marks, Patents, Product Liability & Promotion
) Elements Of Export-Import Contract
The elements of export –import contract vary depending on the nature of the
product being exported. There are, however some elements are universal in their
application
1 Parties To The Contract
2 The Description Of The Product
3 Price
4 Total Value
5 Currency / Mode Of Payment
6Tax / Charges
7 Packing / Marking /Labeling
8 Mode Of Transport
9 Settlement Of Disputes / Jurisdiction
FOB ( Port of Shipment) Contract
CIF (Port of Destination ) Contract
b) Export Agency Agreement
Agency agreement is a legal document which establishes commercial relationship
between the Principal & the Agent. It incorporates the conditions mutually agreed
upon by the concerned parties for the conduct of the business
Components of Agency Agreement
1. Contractual Parties / Contractual Products
2. Contracted Territory / Customers
3. Acceptance / Rejection Of Orders
4. Payment Of Commission
5. Settlement Of Disputes
6. Renewal / Termination Of The Contract
Agency Agreement Vs Distribution Agreement
a) Title Of Goods
b) Business Risks
c) Control On Business
d) Third Party Liabilities
C ) Laws Relating To Products
1. Trade Marks
Trade marks are words or design or combination of both.(XEROX , KODAK etc.)
Trade marks are expected to perform many marketing functions:
a) Enhance & create distinctiveness
b) Identification of the Product
c) Lead to easier recognition of the product
d) Symbolise the quality of the product
e) Stimulate the to buy the product
To protect the trade mark, the manufacturer can apply for registration of his trade
mark to the concerned authority of the country where he is exporting or wants to
export.
2. Product Liability
Product liability is the result of increased consumerism & prevalent as a legal
concept around the world.
It can be defined as the responsibility borne by the manufacturers /distributors
/retailers for any consequential injuries/damages from products they make or sell.
Methods of Dispute Settlement
There are two well-recognised methods for settlement of disputes arising out of
international business, i.e. Litigation & Arbitration
Limitation Of Litigation
1. Process is slow & Time consuming
2. Inconvenience to the parties
3. Adverse Public Image
4. Bitterness & Disruption of trade relationship
5. Different Laws & Procedures in different countries
Advantages Of Arbitration
1. Quick settlement
2. Inexpensiveness
3. Promotes Goodwill
4. Sound & practical decision
5. Preserves Privacy & Trade Secrets
FOREIGN EXCHANGE
International Business Agreements are concerned not only with basic issues like
price, quality & delivery date but also with Currency to be used in the International
Business Transactions.
In International Business, The importing Country pays money to the exporting
country in return of goods in it domestic currency or in hard currency.
This currency which facilitates the payment to complete the transaction is called
Foreign Exchange.
This foreign exchange is the money in one country for money or credit or goods or
services in another country.
Foreign exchange include foreign currency, foreign cheques and foreign drafts.
Foreign exchange is bought & sold in foreign exchange markets, the components of
which include The buyers, the sellers & the intermediaries.
EXCHANGE RATE DETERMINATION
The transactions in the foreign exchange markets like buying & selling of foreign
currency take place at a rate which is called Foreign Exchange Rate.
Exchange Rate is the price paid in the home currency for a unit of foreign currency
The exchange rate can be quoted in two ways
1. Direct Quote: One unit of foreign currency to a number of units of domestic
currency ( US $ = Rs. 50.00)
2. Indirect Quote : A certain number of units of foreign currency to one unit of
domestic currency ( Rs. 1 = US $ 0.02)
Exchange Rate in a free market is determined by the demand for & supply of
exchange of particular country.
The Equilibrium Exchange Rate is at which demand for foreign exchange & supply
of foreign exchange are equal.
DEMAND FACTORS
Demand for foreign exchange is the country’s need of foreign currency for meeting
requirements like :
1. Import of goods & services
2. Investment in foreign countries
3. Other payments involved in international transactions
4. Other types of outflow of foreign capital like giving donations etc.
SUPPLY FACTORS
Supply of foreign exchange indicates the availability of foreign currency of a
particular country & which include :
1.Country’s exports of goods & services to foreign countries
2. Inflow of foreign capital
3. Payments made by foreign governments
4. Other types of inflow of foreign capital like remittances by NRI
Fixed & Flexible Exchange Rates
1. Fixed Exchange Rate
Under this system, The governments fixes the exchange rate & the central bank
operates it by creating exchange stabilisation fund. The central bank of the country
purchases the foreign currency when the exchange rate falls & sells when the
exchange rate increases.
Advantages
1. Ensures certainty & confidence & thereby promotes international business
2. Promotes long term investments by investors across the globe
3. Results in economic stabilisation
4. Reduces foreign exchange risk to a great extent.

Disadvantages
1. Requires large foreign exchange reserves to buy or sell foreign exchange
2. Unattractive to long term foreign capital investment
3. It does not work when economic & foreign exchange policies of the country
are not co-ordinated
. Flexible Exchange Rates
They are also called as floating or fluctuating exchange rates & determined by
market forces like demand for & supply of foreign exchange.
These market forces work automatically without any interference from government
or monetary authorities.
Under this system if the supply of foreign exchange is more than that of demand for
the same, the exchange rate is determined at low rate & vice versa
Advantages
1. The system is simple to operate. The exchange rate moves automatically & freely
2. Helps in promotion of foreign trade
3. Eliminates the expenditure of maintenance of additional foreign exchange
reserves.
4. Reinforces the effectiveness of monetary policies.
Disadvantages
1. Frequent exchange rate fluctuation increases exchange risks & breeds
uncertainty
2. Speculation adversely influences fluctuations in supply & demand for foreign
exchange
3. Reduction in exchange rates leads to vicious circle of inflation.
FOREIGN EXCHANGE MARKET
Foreign Exchange Market is Physical ,On-line & institutional structure through which
money of one country is exchanged for that of any other country, at the rate
determined by the market forces
Foreign exchange transaction is an agreement between a buyer & a seller that
affixed amount of currency will be delivered for some other currency at a specified
rate & at specified time.
Functions of Foreign Exchange Market
1. Transfer of purchasing power through purchase of products / services by the
buyer
2. Providing Credit for International Business in the form of instruments like
letter of credit, Letter of guarantee, Banker’s acceptance etc
3. Minimises Exchange Rate Risks through the operations of Hedging
CONVERTIBILITY
The term Convertibility of a currency means that it can be freely converted into any
other currency.
It helps in removing quantitative restrictions on trade & payment on current
Account.
Liberalised Exchange Rate Management System (LERMS)
Government of India on 1st march 1992,in order to integrate the Indian economy
with the rest of the world introduced Partial Convertibility of its currency
Under the partial convertibility,40% of the earnings were convertible in rupees at
officially determined exchange rate fixed by the Reserve Bank of India & remaining
60 % at market determined exchange rate.
In march 1993, Government of India introduced a fully unified market determined
exchange rate system. In other words, now the exchange rate is determined based
on demand for & supply of foreign exchange in the market.
Convertibility on Current Account is defined as the freedom to buy or sell foreign
exchange for following International transactions
1. All payments due in connection with foreign trade, other current businesses
like services, short term banking & credit facilities
2. Payment due as interest on loans & income from other investments
Remittances for family living expenses
Implications Of Convertibility
1. Authorised dealers are empowered to release exchange without RBI
permission
2. Exporters find easy to transact the business
3. Many bureaucratic hurdles are eliminated
BALANCE OF TRADE & BALANCE OF PAYMENT
1.Balance of Trade
The Balance of Trade takes in to account only the transactions arising out of the
exports & imports of visible items.
It does not take in to account the exchange of invisible items like services, interest
payments & receipts, dividend receipts & payments etc.
2.Balance of Payment
Balance of Payment takes in to account the export & import of both the visible &
invisible items, Services & payment of salaries, benefits, interests, dividends,
Investments etc.
Disequilibrium In The Balance Of Payments
When the demand for & supply of foreign currency of a country does not match
(surplus or deficit position),it is called disequilibrium in the Balance of Payment.
Causes Of Disequilibrium
1. Economic Factors
a) Development Disequilibrium : Deficit in the balance of Payment ( Inflow &
Outflow of Foreign Exchange)
b) Cyclical Disequilibrium : fluctuations in Import & Exports due to business
 cycles
c) Structural Disequilibrium: Structural changes in economy due to shift from
one priority sector to another , requirement of new resources, development
of substitutes etc. result in additional import / export requirements
2. Political Factors
Political instability, uncertainties, internal disturbances, wars etc. create threatening
situation for industry & investments. Therefore these factors contribute to outflow of
capital, decline in domestic production & imports of goods.
3. Social Factors
Change in the culture, tastes,fashions,preference of people contribute to increase in
import requirements & affecting Balance of Payment situation.
METHODS OF CORRECTION OF DISEQUILIBRIUM
1. Automatic Corrections
The deficit balance of Payment indicate that the demand for foreign exchange is
higher than the supply of the same . This result in devaluation of the domestic
currency in terms of foreign currencies.
The increased exchange rate makes imports costlier & exports cheaper.
The country therefore tries to reduce imports & increase exports which in turn
increases foreign exchange reserves & restores equilibrium position.
2. Deliberate Measures
a) Monetary Measures
Reduction in money supply through increase in bank rate, various reserve
requirement like CRR,SLR. Which leads to decline in income, purchasing power,
demand & consumption.
b) Devaluation
Under this measure, the country deliberately devalues its currency in order to
reduce imports & boost exports.
c) Exchange Control
Government controls outflow of foreign exchange judiciously ( priority Imports only)
3. Trade Measures
a) Export Promotion Measures like abolishing export duties, encouragement to
EOU,SEZ,FTZ, extending financial & non-financial benefits etc.
b) Import Control Measures like levying Import high duties, import licences,
prohibiting / restricting / banning /canalising import of goods
4. Miscellaneous Measures
a) Attracting foreign investments / NRI deposits by offering higher interest rates
& facilities,
b) Development of industries capable of generating inflow of foreign exchange
like tourism etc.
INTERNATIONAL PRODUCTION & LOGISTICS MANAGEMENT
Production Management is a decision making for operation functions which
produces goods & services. It is a process of transformation of inputs into output.
International Operations Management is closely linked with the business strategy of
the company & it includes:
1.Differentiation In The Product Quality
2. Cost Of The Product Manufactured
1.Production Decisions
To decide between Standardisation Vs. Customisation of products
2.Resources Decisions
Acquisition of resources through Procurement / Backward (Vertical) Integration /
Make or Buy / Time Factor
Location Decisions
Location of plant,warehouse,market etc.play important role in determining the
advantages of cost of marketing & availability of the products to the customers in
the different countries.
Trade-off between concentration & dispersion of the manufacturing / marketing
/distribution facilities.
Factors determining location of facilities
Political Environment
Legal Requirements
Cost Of Manufacturing & Distribution
Taxation Structure
Exchange Control Provisions
Availability Of Finance
Availability Of Suitable Manpower
Concentrated Location
Advantages
1 Maximum Efficiency
2 Standardised Production
3 Achieving Economies of scale
4 Uniform Administrative System
Disadvantages
1 High cost of Transportation
2 Longer lead time
3 Risks of Obsolescence ( High Tech products)
Dispersed Location
Advantages
1 Product adaptation possible
2 Political, commercial risks can minimised
Disadvantages
1 Cost per unit is high
2 Less control on product processes & quality
INTERNATIONAL LOGISTICS ISSUES
The mechanism of getting inputs from their sources to the manufacturing centre &
taking the finished products from the manufacturing centre to the customer is
called Logistics System.
it comprises of Supply (Materials)Management & Demand(Distribution )
Management
International Materials Management is different than the Domestic in respect of:
1. Distance Involved In Shipping
2. Modes Of Transportation
3. Transport Regulations Of Different Counties
4. Packaging Requirements
5. Quality Of Inputs Available
6. Payment Terms & Modes
7. Foreign Exchange Regulations
8. Foreign Trade Policies
CONTROLLING & EVALUATION OF INTERNATIONAL BUSINESS
The process of controlling is very essential to ensure for the companies to achieve
their objectives & strategies. It includes

1. Planning
2. Formulating Strategies
3. Implementing
4. Evaluating
5. Corrective Actions
Problems in Control of International Business
1.Distance Between the countries
2. Diversity in different aspects like culture,product,cost,currency etc.
3. Uncontrollable factors like government rules, supplies of inputs etc.
4. Degree of certainty
Role of Information System
Control process heavily depends upon the flow of accurate & timely information
from one subsidiary to another & from there to Head-quarters & vice-versa.
Performance Measurement
Operations of International Business should be planned & then its performance
against the plan should be measured.
Measurement Criteria
1. Organisational Structure : Type / Freedom in decision making /
Degree of de-centralisation

2. Marketing Area : Market share /Trends in customer demand

/customer preference s
3. Production Area : Compatibility of product ingredients & design to
norms of the country / contribution to ecological balance &
environmental protection
4. Human Resources Area: Employment / structuring working
conditions / negotiations with trade unions.
5. Finance Area : Profitability norms / sales volume /Governmental
regulations
6. Social Responsibility & Ethics Area : Maintaining Ethical Standards /
percentage of profits allocated for social responsibility Performance Indicators
1.Financial Indicators : Cash Flow /Profits / Dividend Rates / Availability Of
Capital
2. Human Resources: Level Of General Skills / Specific Skills / Attitude Towards
Foreign Companies Etc
3. Production Resources : Capacity Utilisation / Inventory & Transport
Performance
4. Environmental Indicators : Supply & Cost Changes / Changes In
Demand / Intensity Of Competition
5. Marketing Indicators : Level Of Sales / Growth In Sales Volume /
Increase In Profit
6.Other Indicators : Political & Economic Stability /Level Of Involvement
In Social Activities.
Organisation Structure & Relationship
The Global Companies Structure Their Activities & Operations On Different Types
Like Functional, Product, Geographic, Strategic Business Unit.
1. Network Organisation
Strong long term personal relationship exist among managers of alliance companies
which builds common interest that do not depend on formal controls.
2. Spin-off Organisation
When the new product developed by the companies do not fit in the their existing
competencies, then they create new company with potentialities to produce new
products, by retaining part of the ownership in the new company.
3. Lead Subsidiary Organisation
A global company may not have the competency in producing & selling a product
in its home country. therefore it shifts such division to a foreign country or
subsidiary.
“Control” In The International Business
Following factors determine the degree of control needed in the international
process
1. Level of significance : The most significant foreign operations should be reported
to the highest level in the management & vice versa.
2.Change in Competencies: The Companies acquire skilled & specialised staff for
foreign operations depending upon the relative size of the foreign operations to
total operations
3. Change In The Operating Forms: The modes of entry to foreign markets requires
change in Organisation structure & control systems.
CONTROL MECHANISM
1. Corporate Culture : Every company has certain common values,
traditions, customs & practices
2. Co-coordinating Methods: Building teams with managers from different
subsidiaries / Placing foreign personnel on the board
3. Reports : They are useful to evaluate, regulate & control the operations of the
subsidiaries
4. Visits To Subsidiaries
5. Management Performance Evaluation
6. Cost & Accounting Comparability
LIBERALISATION
Introduction
Liberalisation has been the dominant force in international business in the
developed world over the past three decades.
It is likely to remain important and developing countries will increasingly feel its
effects.
Although the mechanisms and motivations involved can be complex, the
consequences are straightforward –
1. More Competition,
2. More Opportunities For Strong Firms
3. Fewer Places To Hide For Weak Ones.
Spread of Liberalisation
On May 1,1975 US financial markets were subjected to a burst of deregulation
which triggered a price war in the market for financial services.
In the three decades since then, liberalization has spread too many other sectors of
the economy, while the theme crossed the Atlantic into Western Europe and has
since traveled, with increasing speed, across the globe.
In the second half of the 1990s, there are very few countries which impose a higher
degree of regulation on economic activity than was the case three decades
previously.
Some have travelled further down the path than others, but in terms of direction it
has been one-way traffic.
What is Liberalisation?
It is an act of reducing government imposed controls on the behaviour of business
houses in the economy. It is achieved by Privatisation and Deregulations
1. Privatisation

The main objective being the exposure of public sector production process to free
market forces.
The commonly understood meaning is “The sale of government owned enterprises “
to public through dilution of government’s financial stake
2. Deregulation
It is easing of the rules under which an industry operates allowing expansion within
the sector or diversification into other sectors as well as opening the sector to other
entrants.
Fewer restrictions on price is another recurring theme.
There were four main reasons for the direct involvement of the state in a country’s
industrial structure in the past fifty years.
1. Strategic.
Some industries were seen as key to the military strength of a nation. Steel,
transport, communications, energy and aerospace are examples of industries which
were frequently brought under public ownership for reasons of national security.
2. Market Failure.
If the market is not allocating resources efficiently, then there may be a case for the
government to step in. One example of market failure is externalities. In some
sectors profit maximisation.
3. Ideology.
State ownership was firmly embedded in the political ideology of the left wing
parties of many countries. The concept was that the benefits from the efficient
operation of the enterprise would be felt by the whole population and not just the
privileged few.
4. Technology
Many industries were seen as “natural” monopolies and it appeared impractical to
have competition in some sectors.
Utilities such as water, gas and electricity supply & telecommunications are
common examples to prevent abuse of monopoly.
Problems With State Ownership
1. Without the discipline of market forces, nationalized industries were often
inefficient and were a burden on the public purse.
2. Labour militancy and restrictive working practices added to the problems
3. The management which was more bureaucratic than entrepreneurial.
4.The quality of the product or the service provided by a nationalized industry was
frequently poor and as it was often a monopoly supplier the consumer suffered.
5. Heavily regulated industries lacked innovation and dynamism.
6. Projected across the whole economy, heavy state involvement meant slow
growth and stagnant incomes.
7. The objectives of economic efficiency (such as setting prices equal to marginal
costs) were often overridden by political factors such as favoring certain interest
groups or supporting macroeconomic objectives like low inflation.
The Economic Case For Liberalization
The rise of right-of-centre parties in several developed democracies in the 1980s
meant a shift away from left-wing attitudes and towards a stronger belief in the
merits of free markets and a more limited role for the government
By exposing firms to greater competition it was anticipated that stronger, more
productive enterprises would be the result. If the process is a success, the end
result should be that the consumer receives a better service and a wider choice at a
lower price.
Transfer of ownership from the public to the private sector leads to a change in the
objectives of the firm. It will move from acting in a way prescribed by the
government to being primarily governed by the search for profits.
It is this search that brings the benefits to the economy in the form of more efficient
use of resources, improved quality and more innovative behaviour, as firms try to
make better products at lower costs.
Increased competition is usually most apparent in the product market, with
privatised airlines or telecommunications providers more eager to improve service
and cut prices to generate new business
arguments stretch further than just the increased competition in the input and
output markets of the formerly state-owned company.
A private sector firm is also exposed to the competitive forces of the capital
markets.
It also enforces a stronger financial discipline as there is no longer the assumption
that the state will bail out the firm of any financial difficulties.
Apart from the economic argument already discussed, it is possible to identify
three other driving forces behind liberalisation:
1. Ideology
2. Technological Change
3. Competitiveness
1. Ideology.
The liberalisation can be seen as an explicitly political move, with the main
motivation being one of vote-seeking, rather than trying to improve overall
economic efficiency.
2.Technological Change
There are three elements to the advance in technology.
a) It reduces the number of “natural” monopolies, where competition is limited.
b) It reduces the ability of the state to regulate activity in some sectors. c) It has
raised the optimum size for some industries.
3.Competitive Forces
In the past, while there may have been negative side effects of heavy-handed
regulation of industries such as telecommunications or finance, they were limited in
scope. However, with the intensification of competition which is a result of the
globalisation of business in the past few decades, the costs of regulation have
increased
Some of the earlier rationale for state ownership and regulation still applies.
Externalities are still an issue for the government to consider and monopolies still
exist in some areas. Some liberalisation has involved turning a public sector
monopoly into a private sector monopoly and then introducing statutory regulation.
Results of Privatisation
The liberalisation produces a rise in competitiveness is that of the “first mover
advantage”. they were in a strong position to expand globally and to achieve a
dominant industry position.
Many of the efficiency gains come at the expense of the labour force and large
scale job losses are a frequent corollary to privatisation.
There was a social dimension to many of the services provided by the state. If such
services end, with no compensatory benefit elsewhere, then the vulnerable groups
in society will suffer.
Until June 1991,India followed a very restrictive economic policy characterised by
exclusion of private sector from many important industries, monopoly or dominance
of public sector in a number of important industries, entry & growth restrictions on
private, particularly large enterprises & limited role & stringent restrictions on
foreign capital & technology.
The economic liberalisation ushered in June 1991changed the scenario very
substantially.
The salient features of Liberalisation in India are as follows
1. Reduction of the role of public sector & expansion of the scope of private sector
by bringing down the number of industries reserved for the public sector
2. Substantial reduction in the entry & growth restrictions by delicensing all but
limited number of industries & scrapping the MRTP restrictions on growth.
3.Liberalisation Of Foreign Investment
Expansion in the scope of foreign investment through automatic approval for
foreign investment up to 51 % of the total equity in the priority industries.
1996,Government announced automatic approval for foreign equity participation up
to 74% In key infrastructure sector.
4.Import Liberalisation
There has been a substantial liberalisation of imports. The import duties have been
cut across the board.
Quantitative barriers have also been substantially reduced.
5. Reform of Trade Policy
a) Exchange rate adjustment through devaluation of rupee
b) Role of subsidies in export promotion was reduced by abolishing cash
compensatory support & withdrawal of REP licenses
c) Elimination of licensing, quantitative restrictions & other regulatory controls.
d) Full convertibility of the Rupee on trade account
The After-shock Of Liberalisation
The history of liberalization is still young. It is still less than a generation since the
first changes in political opinion began to be felt in the early liberalises

As with any deep rooted structural change, the full effects are not apparent
immediately.
Some indirect effects are not easy to attribute directly to the real causes, while the
debate is distorted by different parties political agendas.
Rather than just focusing on the benefits of liberalisation, in terms of better
services, more prosperity, lower prices and the range of positive results of less state
control, it is also worth considering the views of dissenting voices.
Unemployment Aftershock
Disadvantaged elements of society have suffered, while monopolies have abused
their positions. One area where this is apparent is in structural unemployment,
where some regions (or even entire countries such as Spain) suffer from up to one
in five of the labour force being out of work.
Government Failure
Loss of legitimacy is a problem for many governments in developed economies. As
they have liberalized and opened their economies, they have also lost control over
the destiny of their population and in doing so have seen their legitimacy
threatened.
The broadcasting and Internet revolution further undermines national control. India
finds it increasingly difficult to give preference to television programmers, which
reflect Indian culture rather than that of the Foreign.
Conclusion
International business needs to be aware of the consequences of the liberalisation
of the past two to three decades.
The direct result is that the way in which firms go about their business is changing,
with ethical and social factors more important that in the past.
Indirectly, governments are facing a loss of control, not just over markets, but also
over other aspects of society. This might result in a general re-examination of the
role of the government or if not it might lead a slide towards anarchy.
MULTI-NATIONAL CORPORATIONS
The multinational corporations, also known as international corporations,
transnational corporations, global corporations - a major driving force of
globalization, often occupies the central place in the international business
dynamics.
Definition
Multinational Corporations (popularly known as MNC’s) are defined as organisations
doing business in more than one country.
These companies respond to the specific needs of the different country markets
regarding product, price & promotion. Thus MNC operates in more than one country
but operates like a domestic company in the country concerned.
The MNCs account for a significant share of the world’s industrial investment,
production, employment and trade.
Characteristics of MNC’s
1. It operates on the basis of internationally owned assets
2. It is concerned with international transfer of distinct but complimentary inputs-
not merely equity capital-like knowledge, entrepreneurship & goods / services of
varied kind
Increasing Role of MNC’s
Traditionally it has been a vehicle for the transfer of private foreign investment but
after the IInd world War, their investments & production activities have increased
rapidly due to
1. Liberalisation by most of industrialised countries
2.Invitation by most of the developing countries for investing private foreign capital
for stimulating the industrial development process
Why Companies Become MNC’s
1. To protect themselves from the uncertainties & risks of business
cycles, political policies & social uncertainties of the home country
2. To tap growing global markets for goods & services
3. To increase market share by expanding operations in many countries
4. To reduce cost of transportation, warehousing etc
5. To overcome tariff barriers
6. To have technological advantage by producing goods directly in
foreign countries
Factors Contributed To The Growth Of MNC’s
1.Expansion of market territory due to rise in standard of living
2. Market superiorities over the domestic companies
3. Financial Superiorities through huge financial resources at their disposal
4.Technological superiorities on account of advanced technology through their
continuous R & D efforts
5.Product innovation by virtue of their widespread operations & better
understanding customer’s tastes & preferences

Benefits of MNC’s
1.Promote capital formation on a world wide basis
2.Strengthen competition & reduce monopolistic influences, thus leading to greater
operational & economic efficiency
3.Make substantial contribution to the growth of developing countries through
mobilisation of money, labours & technology needed for production & marketing
4.Lead to increase in production, employment, exports & imports of required inputs
& in turn government revenues.
5.Availability of better & updated technology
6.Provide better opportunity to the labour to acquire additional knowledge & skills,
through formal & on-the-job training
7.Provide better products at lowest cost to consumers in developing countries
8.Their investment improves balance of payment position by increasing exports &
providing excess to required inputs
Strength of MNC’s in Export Activities
1. MNC’s possess infra-structure facilities along with product image & good
knowledge (complete information) of the market.
2. They are able to get good agents/distributors through their parent office or
subsidiaries.
3.In many cases they shape the character & composition of the international
markets.
4.They enhance the export competitiveness of developing countries through not
only higher export volume but by diversifying the export basket, sustaining higher
rates of export growth over time and expanding the base of domestic firms to
enable them to compete globally.
The potential benefits of MNC’s export activities are still far from fully exploited.
Negative Effects of MNC’s
1. Chances of exploitation of local labours & resources by paying relatively lower
prices while obtaining huge profits that are largely repatriated
2.They employ transfer prices in transfers of goods / services between subsidiaries
that minimise total taxes & increase their global profits
3.Use of scarce local capital for running the operations of their subsidiaries, putting
pressure on host country’s scarce resources
4. It often results in lack of development of local R & D, transfer of outdated
technology, introducing capital intensive technology replacing huge labour force
resulting into mass unemployment
6.Undercutting the prices in the host country kills the competitors & competition
which results in to over dependence on MNC’s & imports from their parent country.
Controls on MNC’s Operations
1. By applying restriction at entry point by assessing prospective
impact on overall economy of host country
2.Majority shareholding allowed in the industrial sectors only where it
is absolutely necessary
3. Repatriation of capital & remittances of the profits are regulated
through foreign exchange rules to minimise their impact on Balance
of Payment position
4. Imposing restrictions exports & other marketing activities
5. In the worst cases, by adopting route of Nationalisation of Industry
Indian Scenario
There is no distinction between an MNC & domestic company in India as the policy
for MNC is same as for foreign private capital.

MNC’s are specifically covered under the provisions of FEMA.

Main Objectives of MNC’s to Enter in India:
1 Profit Maximisation
2. International network of Marketing
3. Diversification in more profitable areas
4. Concentration in consumer goods
5. Producing high quality products at lowest price through modern
technology
6.Increase scope of business activities
7. Replacing culture of the country to improve demand for new products
Problems Faced By MNC’s In India
1.High Cost & Inferior Quality Of Local Inputs
2.Lack Of Relevant Infra-structural Facilities
3.Lack Of Suitable Manpower
4. Poor Transport Facilities
5.Excessive Bureaucracy
6.Stringent Government Rules & Regulations
However, in recent years, many MNC’s have gone in for exports from India mainly
because of following reasons:
1.Availing Export Incentives
2.Export Obligation Imposed By The Government
3.India’s Trade Relations With Many Countries Across The Globe.
4.Goverment Liberalised Industrial & Foreign Trade Policy
5.Appropriateness Of Indian Products & Technology For Use In
Developing Countries
6. India’s Image For Certain Products Particularly From Labour-
oriented Industry
7. Less Cost Of Labour & Availability Of Skilled & Hardworking
Personnel
Perspective
Future holds out an enormous scope for the growth of MNCs.
The changes in the economic environment in a large number of countries indicate
that due to increased number of bilateral treaties that promote and/or protect
Foreign Direct Investment.
The other reasons are :
1. Increasing emphasis on market forces and a growing role for
the private sector in nearly all developing countries.
2. Rapidly changing technologies that are transforming the nature of
organisation and location of international production.
3. The globalization of firms and industries
4. The rise of services to constitute the largest single sector in the
World economy
5. Regional economic integration, which involve both the World’s
largest economies as well as selected developing countries