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MASTERFBUSINESSDMINISTRATISEMESTERII

couRsECODE CC331GLGBALUSIi l IESSNVIRONMF

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ta)(b)

To acquaint with an overview of entire international businessenvironment.To stud5.' -Ile intemational business in the background ofgiobalisation and its implication.

IntroductionGiobal business has to grow and survive according to the tunes. andnecessities of worid economy. The nature and quantum of globalbusiness, in fact, are the indicators of economic development acrossthe countries.A phenomenal increase in the global business is recorded in theiast four decades. lt is increasiig at a rate faster than-rgroilth ofglobal GDP. The recent globaiisation has opened up new avenuesio .cceierate this process. Considering the enure world as corunonmartet piace, and free flow of technoiogr and investment as theL- ,t at gi.s - the global business is about to take off to a newheighr. MJtual competition and efficiencv are the key i-actors oftodarrs globalised economy.ln the background of globalised principies of world economy and inthe perspe&ive of inCreased opportunities of global business - astuO!' of gtoUal business environment is necessan' As a part of this;;;i . J overvie'.^r f global business scenario is presented in thischaoter.1 .1 Nature of international businessinrernational business has undergone drastic changes in the lastdecade. Globat exports have expanded from 331] billion US$ in1990 to 5456 biliion US$ in 1997' Technological improvements incommunlcatlon and information science have made lhe whoie worldall the factors of distance'

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economy as a result of WTO agreement, no country is left beyondthe preview of international business. In fact, most countries areadjusting their national policies to suit to international interests.Efficiencv is the key word of globalisation. Present order of globalbusiness has given an impetus to bring in efficiency in all the sectorsin order to sun'r'e the competition.t.Z Ct.t"tt".U"" "f *".14The polarity in worid econom!' due to dogmatic differences incornmunism and capitalism had indeed divided the worid economyinto bits and pieces.But, the major political developments in USSRand China during 1980's and 1990's have opened up new facets ofworld economv. It synchronised with WTO agreement signed bymore than I25 countries during I994. After 8 years of theagreement, the world economy is aimost in the final touches ofcompletegiobalisation. China and USSR have not or y been a pafiof globalised economy - burying their ideological differences withcapitalistic economies- but are major partners m global business.

Growth of World Exports

Y e a r Value in Exports( in Bi l l ions of US Sl1950 55 . 21960 I 1 3 . 41970 280 .71980 1846.2I 990 3 3 1 . 21 9 9 3442 .2

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Isighth round of muitilateral trade negotiations held by GA'IT inuruguacv, now popuiariy known as UR agreement' led to theconversion of GATT into WTO fWorld trade organlsation) with theelfect tiom 1995. It r.vaspreceded bv rurbulent consultations andnegotiations among member cotlntries liom 1986 to 1993 foilowedby globai agreement to expand the scope ol' international trade -which was siqned during 1994.The emerqence of more powerlll bocly - WTO. rvas necessiatedbecause :E Conflicrs arlsing out of domestic legislation contradicting theprinciples of GATT h:rd to be settled.6fl G,+-mdid not prot'ic'leplatlbrm for trade in sen'ices.while Slobalbusiness needeci nclusion o| se w ccG-il ilE To-rTsphenomenalgrowth.*i) GdfT did not provide platfbrm lbr trade reiared intellectualP_:9:1tY and investmen!- tlgo".$) A statutoryand leqal body was necessary at global level to settietrade reviews etc.rade disputes,

fv) Strengthening of multilatera-l and plurilateral trade agreementsand their operation were llecessarv.

As envisioned in WTO document, the internat ional businessencomposses merchandise, service and investment transactionsbetween countries. Further, WTO ptays a ieading roie in bilateral'mul t i la tera i and p lu r i la te ra l t rade aqreements and the i rimplementation. The globalised atmosphere created under WTOdeems to decontrol, deregulate and deactivate many restrictions

lnternational business

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vii. Export to support domestic work force ex : Garrnent exportsviii. Improve domestic quality of services er : Foreign banks competinggith Indian banks in lndia.ix. To eerport technologir ex : buiiding and launching of spacesatellites by ISROManv more necessites for import/e;'port of goolis and services canbe envisioned.r .3.1.2 Obligations under WTO

"r*. Tarifl reductions for importsii. LiftIng of non-tariff barriers ex : MFA fN{ultifibre Agreement)iii. lnciusion of agriculture in international rade negotiations,iv. Change in domestic poiicies on subsidies er : subsidy onfertiiizers, petroleum produuctsv. N{FN [Most favoured nation) obiigation*i. Opening up of serrrice sectors to imports ex : Banking anCtnsurancevii. TRIMs (Trade related investment measures) ex : Allowing forei{ndr.rect investments

{iij. TRIPs (Trade related intellectua-l proprier,v*')x : change in IndianPatent Act- jx. Antidumping measures ex : Antidumping duties against Chinesegoods by india

1.3.1.3 Development process and global trade

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However, he fruits of development are not uniformll, distributed.The developmcnt process is erpected to be much accelerated indevelopedcqlxrrtries $'ith l.60zoGDp gro\,th in European Union,0.2o/o US and 0.9olon Japan. 2.So/o rt China. 0.5% in India, 0.60loin South Africa and 0.3ozbn Japan. In absolute terms, however. USgets argestshare of 28-67 billion $, as its share in world.s economvis veq' high.1.3.2 Tr,ends n foreign investmentIn consonancel'it)-acceierated rvorld trade, the investment in foreigntr_ades alsoexpected to rise tremendously once the impiementationof UR package s complete. In most foreign collaborations. theinvestmentand technolog' are combined as one package. Aithoughthey are stronglv associated, it wouid be con'enient ro deal withthem separately.Thenecessiry f investment is obvious. In a globalised and iiberalisedeconomicscenario, the capital should never be deterrent factor fordeveiopmenlFree flight oi capital from one country to others. onesector o otier sector \4ith minimised poiitical and legal constraintsis aimed n future world economv.Cvery sector of economy_inc{udingifuttrcture, a5giculture. ptwer, transport a.rrcl, ven civicfkiRlstatbn - is supposed to be part of worli trade. Hence foreigninvesfunents,n the future world, are not restricted to manulacturiissectoralone.1.3.2.1 Politico - nature of lnvestmentsSjT"qh free flow of capital between countries was envisaged inWTO, he investments from one country to other is governed bvmanycomplicatedpolitico - lega_lssues of respective corinries. Bqth

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1.3.2.2 }Jrl'cs of foreign investmenrs

Wholly Joint Acquisi t ionowned venturesu b sid arv

Portfo io

Investmentby tbreignInsti tu ionalInves o s (FII)

Investme ntsb"vGDRs/. \ D R s / F C C B s

(GDR : Globai Depository ReceiptADRs : American Depository ReceiptsFCCB : Foreign Currency Converlible Bonds)The foreign investments are investments made 1n anyto run a business activity in foreign country. Thev docapital employed in imports and exports. "Of col.s.lnvestments may have a tag for connected imports ormay therefore boost up t}te expot,is or imports.

foreign soilnot includethe foreignexports ancl

Ib{ign Direct Investments are fairly l:rg term in nature, as theinvestments ca_nnotbe easily liquidaied. F'or example, investmentsmade.by polver gaint Enron in India are not yet liquidated eventhough its mother company in f]S I in greai financial misfrap.FDIs are made after a careful study of the ioiiU""t srabiiit_v, l*;

Foreign DirectInvestm e nts {f D I) Inves tme nts FI )

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shares are llilv purchased by a toreign company and rhus rhecompany'sassets liabilities are acquired by it. For exampie ;-ecentlvkrtbsys Technologies of India acquired a US company.furttblio investmenrs are relatively drort term in their:taLLlre.Foreign Institutional lnvestors like hanks. *rsurance compantes areencollraged to iavest in a country for a short term say in :nutualfunds. Similarly, institutions and individuais are allowed ro invesrin fi-red term bonds iike GDRs, ADRs. FCCBs.1.3.2.3 Foreign investment and developmentCapital llow from one country to others is a major entitv io brinqeconomicreforms. Ironically, such capitai flow is of higher magnitudetowards developed countries than underdeveloped countriesalthough latter require drastic economic reforms than fonner. .\rbreign investor. Hke any other investor, lgoks for securit_vanci hiqher*ums for his investment. Obviously, both these features are notguaranteecl n underdeveloped countries.Till the revolutionary UR agreement, most of underdevelopeC anddevelopingcountries depended on world bank or Asian Det'eloomentBank or international aid organisat ions such as AID iNDIACONSOKIIUM etc for different types of assistance. These rvere. intum, dependent on developed countries' contributions. Bur. withencouragement in trade related international investments. theinternational investment is greatly liberalised-opening up nervopporlunities to both investing and receiving countries. As a resuit,balanceof par,rnents of many countries have changed substantiallv.Economrcrelbrms and policy A many developed and deveioplngcountries, declining transport cost and impressive advalces incommunicat ion/ information technologies have all boosted the

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Grow,th n FDI (S bil l ion)

Wor ld Deve)oped Deve lop ingcoun lnes coun l r ies

S tare o fdeve lop ingcoLtn trie s [0/'a

l 83 72 3

) ' e a rt 9 8 5 - 9(lr l an)t 9 9 7t 9 9 9

t 5 9{+t j)48 6 5

1 3 02 7 36 36

2 9t 7 3208

Source : UNCTAD, World investment reporr and IMF surveyMost of these have grea l' acceleratecl he economic growth of ,recountn' receiving the investment _ in terms of increased GDp.improved BOP, enhanced emplor,rnent opportunities. accelerateclt rad inq and i t s re la ted sen , i ces , mproved sen , i ce sec tor andrevolutionised infrastructural development.1.4 TechnologlicalchangesDevelopment of any country is funct ional ly clated to thet*hnological achievements attained in such countr\ / . IJut. abchnoios/ caIl be not be confined to a country of irs origin. lr jsspread to other countries. Every technological achievemenl has alBtenr industrial/ buriness ingredienr in it. The overseas spread ofc. Lechnolog' is through such industnal bustness ingreclient. Wi]enthe f ru i t s o f a techno logy are rea l i sed bV user count ry . thedevelopment process gets accelerated.

Correlation between techn and foreiEn trade'I'echnologicalachievements in an-v ielci ar-rd esulranr benellts in

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technolog' in anr. field has been possible bv research being carriedout in such fielcl n one mode or other. Hence. the counrv processof fo re ign- t rade det 'e lopment as l inked to techno loe ica limprovements is a conlinuous process.

However, the spread of technolog, is not uniform through out theglobe. As the technolog,' is an inseparable pan of foreign trade.lnternational business dealings not onl-y deal *'ith mercha'clise/servi(e but deal with the lechnologY o upgrade its production. Theporver of negotiat ion in mosl international deai ings is in factcapability oI countries tnvolved ro sell or purchase thi technoiog,.Due to this fhe spread of technologr is not of the similar order indeve loped, deve lop ing and underdeve loped count r ies .Underdeveloped countries wil] not get access to iatest technologiesin many fields. due to their poor capacity to negotiate sheerh, inforeign trade fiamsactions. Bur. the exchnnge of technolopv ard itsr.pgradatlon is faster between developed-counrries. Diveiopingountries fall in between these categories and partially benefitted.The entire globe is u/rtnessing poiarization of technologt in man],llelclsof technc.rlo{icalmprovements. Advanced countnes such asUSA,UK, Japan. Germany. France etc not onlv have accessto newerechnolog,, but can aiso afford Lo update ii bv research in suchi lelds.Under continuous cleveloped luntr ies such as Zimbabrve,Sornali:r,Sudan. I3angiadesh.Sriianlia, Guiana, tvory coasr erc canneither inporr such techr-rologies s thel' can ill afford them norhave an-\' infrastructure to update them. Seveloping countries likedndia, China. Mexico, Brazil. Nigeria, Korea have recentiy acquiredsTong position to impon technoiogy or develop technologr sr theirttm and update .it. Irx: 4ndian satellite technolos,, I{oiean Masspoduction

1 . 4 . 2 Polarisation of rich countries

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defence, all other technologies say in IT. tiecom, heaqv machines.c*.remical industry, F&armacent ical industr\ . . , ,agr iculture.:management fields, deveioped in one paIt ol' qlobe are easilv andqubkly available to other parr.The entire..vorld s dependent on technoloqy br'its proqress.Scienceand scientilic research are at its peak development and unlike inezr r lv 30s and SOs they a im at cons tan t deve lopment o l ' ne ,uvtechnologl, ' . For example, in medical f ield. the technologicaladvancement like long distance expert advising an operatinq doctoren l ine i s a ra ther th r i l l i ng achrevement . Ia . any t le ic l . thede.veiopment is linked to technolory. Practicallv, evenr ileld is lloocledwith new iechnologies-which have developecl thc concerned lieldeither bv adding new products, or reducing the product cost orimproving the elliciencv of a senrce or improvinq the qualit_vot' aproduce/sen ice. Manv examples can be oited :

*l . Manual nlrewriter - electronic q?e writer - dor matrlx printerwith P.C - diskjet prinrer - laser pnntcr or2. Black and white T.V - coloredT.\r - flat screen T.V ors3. A room srze computer - a large machine q?e computer - microcomputer - desktop computer - laptop computer - simpurerOf course, in technologr saly world. the so called development hasled to some unavoidable wastages. For example : rvith the advent oflaster prinrer/diskjet printer , what is the utilitv of manual Bpewdteror e lec t ron ic typewr i ter ? How the capi t : r l cos t incur red inmanufactured of these items can be recovered ? Similar lv. inca-lculators. alter the inventions of pocket programmabie calculators,bigger electrlcally operated calculators have become obsolete. Intast changing technology in even' field, the ultimate buver hasbeen benelltted. But, such

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investmenr n a package. While deal inq wlth turnkev projec-ts. rcomprehensive ackaqe - to include product. sen ice and technoiog,- is oiTered. ience. ai l imports and exports actual lv cieai rvl t -rt e c h n o l o q i c a l m p o r t / e x p o r t . D e p e n c l i n gu p o n t h e f i n a n c i a lcapabilitiesof importing country, cost of manpo',veravailabie n sucl-rcountrv, an interrtatlonal deal can be for actual manulacture or lbrsale/pr-rrchase f merchandise or sen'ice. Be it a solt',vare tr c-,ollcebe it a CNC machine or CKD kit for a computer. be it establishrnentof a porverplantor offerinq in insurance service all are dealinq *.ithtechnoioqiesor products ot technologies.ln this perspective,UR agreement's vision of.r.vorldde,,'elopmenrslar sichtedund placed n right direct ion.

Developecount r ie

The transf'er of technologv in international business is productorientedn case of underdeveloped countries. In case of developingcount r les p roduc ts / serv ices are t raded wi th or w i t l - rourmanufacturing echnology. In case of developed countries. lessproductsservices are traded but manufacturing technoloqy is dealt.A l l such t ransact ions are guided by f inanc ia l . manpower.infrastrr:ctura development. currencv fluctuation. BOp position aswellas pol i t icalstabi l in'ol inrponing t ounrry. Bur. a lechnoiogical lvrich country has to sell its technolo$/ somer.vhere n some tbrm tosomecountnes to sustain its own industries. For example. u*br,rnrcrich india

Underdeve lopedco u ntr ie s

Deve lop ing coun t r i es

1. Merchandiselproduct package ex : garment, cashew, a TV set

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2. Sen'ice/eervice package ex : software, transcripbon, accounting,{dica1 package/ ^ t -

ezla,urn](eyprojects ex : po\"'erproject, project to manufacture anelectronic device etc

Irrespective of type of business, the international business dealingstake place in number of channeis as depicted belor.r.

Nlarket ing throughinte rm ed artes

Export Brokers M anu accommissior exporthouses a1cn ( : y

Coope a t i vemarke t ing

Piggy pack M arke tingmarke ing comb ina ons

Direct exportI n ^ ' - , . , , . . - - ^ . ,- - . : - : ' " " ' . , ' " - "I dryrs lor1F Overseas sa lesI b anch o r subs rd ia r l 'I Trave ) lng saJesmanII

Foreign basedI dist r ibutors or aFents

@verseasroduc t ion

,Home coun t ry p od u c t i ou

Ind re ct export

L i cen s ing Con t rac t I t lanagem ent [ t Ian u actu r ing A ssent bl t ' Jo in l

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rrProduetion n free areas

EPZs EOUs ?Ps SEZs ITZsBroadlv these channels operate on the piace of manufacture of aproduct/ service. A product/service being exported - may be producedin home countn' or a foreign country or a host of free areas. A freearea is an area created in any country which is free of all domestictaxes. le\ries. restrictions etc. The1,- re specialil' created to promotentemational business. Thel' rnay be export processlng zones (EPZs),1O0/orport oriented units (EOUs), tcehnologv parks [|ps), qecialpnomy zones (SEZs) or ke trade zones (FTZs).While direct and indireci exporting channels are traditionallyfollowed in case u'hen domestic production is sought to be exported,the methods of overseas production offer newer *'ays of internationaltrading. ln overseas production, the production of a product/serviceis done by an erporter in an imporling countrl'. This is possible by(i) Licensing : A licensor companv fin eryorling country) entersinto agreement $ith a licensee companv (importtng countryl to usemanufacturing. processing. trading, patent, technical assistance,marketing advertisemenr rights in exchange of royaltl payabie bylicenseecompanv. Ex : olgate - Palmolie products.[ii) Franchising : A franchlser supp]ies important ingradient/concentrate and franchisee in importing country supplies thefinished product either by processing or repacking it. Ex : Coca-mla products.[iii) Contract rnanufacturing : A compan' in ex?or-tingcountry car

estabi ished domestical l l r rvi th the i-relp ol ' technical/ l inarnr: iai

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are:rssrstirnce of e-xponer. Ex : Diamond cut nq inciustrv.[vi)Assernbly operat ions : ] lanuiactLlrc. cxports most r; i hrsproducts in knocked-t low'n condit ion to overseas lssemblv pi.rnt.rvhere pans are assemblccl to lbrm conrplcrr fhe Droduct iine. E.x :computer i.,it. rvatch manufacturing.{ v i i ) Jo in t ven tu res : 1 - l r cy a re ven popu la r . fhev imp ly thu rcol laborat ions betrveert two t irms from {import ing and c.\port i l ]qctounrry) jolntly agree lo manulacture. traie. invc'sl anci share theproiits. rvhiie know-hor.v is transt'erred. 'fhev can be ot diil-erent tvpes.Ex : Mamrhi Udyog ltd. Hero-llonda hp-lndia itd.1.6 Economic, political and legal systems $ :*rt.**. \ ,Introduction tQi

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internai controllable lactors. uch as product design, product quaiit-v.price,promotional measures. human resources, echnolo4. adopted.llnancial resources and phvsical re:iources of a firm. Some oi thesefactors may be iniluenced by impofis by such tlrm. For c.rample.tinancia-lesourcesof'a firm mav be improved by FDI; the technoioqvcould be updated by joint venture, qual i ty of product mav beimproved o international standards by an imported design erc. Brrt.they are internal and controllable lactors. Other set of lactors suchas set of external en'nironmental actors is an important seqment oi'intemational trade. Sucl-renvironmental tactors include economic.demographic,poiiticai. legal and cultural component of the countriesinvolved.These factors are normally not under the control ot 'e\Torler/importer. Such tactors all-ect imports as well e,xports ol acountw.1 .6 .1 EConOrniC SyStemSlnternational business deals with business carried away bv trvocountries with vanring economic situations. The variations in theleve lso f income. l i v ing s tandards . d is t r ibu t ion of income,occupationalstructure, monetary systems, economic resources etcbetween wo countries rvill decide the success of business. Thecreation of demand. availability of foreign exchange. internationalprice are decided by such economic variations berween countnesinvolved n such busrness.,fu ievel of deveiopment of a country, its GDP, its per capitadstribution of income would deci

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cdmot be sold to a countrSr such as Mynamar wirose economicpnority is certainly not softwares. The requirements of Mexico arenot same as Japan.1.6.2 Polltical svstemsPolit ical differences between countr ies greatly influence theinternational trade. The type of political svsrem a country adopts,the nature of decisions taken in a particular political setup as wellas the level of cooperation between two countries (for various politicalreasons) decide the international trade.

r o n t r c a t r s s u e s+ : L c o n m . l c s s u e sThe political issues of a country influence international economicissues - at the same time being in{Iuenced br. ttrcrn.The military ruie in MushraJls Pakistan, and democratically electedChardrika's Srilanka cannot be expected to take similar decisionsin resDect of international business issues. Similarly, the age old

I hatredness betweenS.KOREAand N.Korea,Taiwan and China, IndiaI a n d P a k i s r a n . s r a e l a n d L e b a n o n . c a n n e v e r r e s u l r i n r o a /rmeanin{ful international business between these countnes due to Itheir stiained political reiatjons.Further, nature of decisions taken on international issues vasth/difl-er in different countries due to their political differences. Forexampie. China's communist policy can never allow any free tradein its countrv and all exports b China should go through governrnentq,ontrol led rade houses. ln contrast, manlr pol i t ical/economicbarners are removed in entire Europe and for practicai deals all theSrropean countries can be considered as olte unit - EEU. !n theentire EEU, there is no governmental control on rrading {eaicept

followed. Few exampies are cited belou' :

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uJiY ln Germarn- and ltail'. pharmaeutical advertising and productcompa_risonare under Government control-J,if) Ex?orters to Libiya must have an Israeli boycott cerLificate..-tlii) Goods mav be conflscated in Canada, if the information doesnot appear in English and French on every product,-lif) In USA. FederalTrade Comrmssion requires a companv to provideevidenceto substantiate the quali[.' of a product

1.6.4 Cultural dimensionsVast cultural differences exist betureen different countries. Theymay alfect international trading. For exampie, hcter and Gambleof..USA stormed into Japanese market with their style of.advertisementand marketing. But they failed in Japanese market,utlt i i they changed their style to suit to Japanese culture.Ecoiogicallyacuve groups in india are opposing he introduction ofgeneticallymodfied crops irl lndia lty multinational company likeMonsanto. Monsanto need to change their marketing strategr.Values and beliefs associated q'ith colour vary significanflv. Blue,consideredeminine and warm in Holland. is a-s.,.'rnol of masculinenature or coid in Srveden. Green colour, sy'rnUolising Isjamism, isassociatedv.ith iliness in Maiavsia. Whlte svrnbolises death and,#ouming (as in China, Korea and in India). But white expresseshrppiness and is coiour of wedding dress of Europeams.Thus, the environmental factors are most important in externaltrade. Most of them are not under the control of

(iii) \Mlat are the ry?es ol- brerqn investments '? Expiain ruith

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examples.(iv)Explain t.he mponance of technoloey in world trade.Summarya. Globalisation of ,.vorlcl conomv is an indespensible eventuaiitvto all countries. Some countries may benefit or lose - but ali

countries are a Part ol' it.b. Globarlisations more an opportunit-v Lhanan eril - if the nationaleconomv is tuned to needs of worid economyc. The whole rvorld is one platlbrm with minimum bzrrriers.

Globalised world economy is characterised bv lree flow ofinvestment and lechnoiogY.d. Mr-rtual competition, continLlous upgradation of or-ralityand tastgrow-ing vorld economy have been the features of'global

business.e. Oualit_vand efficiency are the kev issues of sunival ininternationai business.f. More and more new avenues of international business,technoloqical triinsl-ers, ngernationai investments are added toglobal business.g. Technologicai changes n every field are so fast that they govemthe qualllv of product/service, thev decide the in\-estment rends.

they govem the cost of production and thev govern the growthof slobal buslness itself.