ibm unit 1

IBM UNIT 1 - INTRODUCTION

1This material is proprietary to KV Institute of Management, a Nationally Ranked B School in Coimbatore and cannot becopied or duplicated for use outside of KV. Violators will face infringement proceedings of copyright laws.

Topics Covered - International Business Definition Internationalizing business-Advantages factors causing globalization of business- international business environment country attractiveness Political, economic and cultural environment Protection Vsliberalization of global business environment.

Table of Contents

1.1 International Business ............................................................................................... 1

1.2 Definition:....................................................................................................................... 2

1.2.1 Nature of International Business.............................................................................. 2

1.2.2 Scope of International Business............................................................................... 2

1.2.3 Need for International Business............................................................................... 2

1.2.4 Reasons for Recent International Business Growth................................................. 3

1.2.5 Problems in International Business.......................................................................... 31.2.6 Methods of International Business........................................................................... 3

1.3 Globalization ............................................................................................................. 61.3.1 Benefits of Globalization ................................................................................... 7

1.3.2 Factors Causing Globalization of Business........................................................ 8

1.4 International Business Environment........................................................................ 10

1.4.1 Country Attractiveness........................................................................................... 11

1.4.2 Country Attractiveness Company Strength Matrix............................................. 12

1.1 International Business

Comprises all commercial transactions (private and governmental, sales, investments,logistics, and transportation) that take place between two or more regions, countriesand nations beyond their political boundaries.

Students majoring in International Business at Saunders College of Business, learnhow to serve customers in international markets.

They also learn how to take a local business global. Immersion in another nation's culture, values, and business practices is the key to

international business success. Students gain an understanding of how people in other countries live and develop

business strategies that meet the needs and wants of customers. Specific courses mayinclude topics in strategic planning, marketing, government relations, and policyanalysis.



A successful product in one country does not guarantee success in another. At Saunders College, we teach our students what it really means to have a global

business. We stress the values of diversity and understanding students graduate with the

ability to take a problem and solve it while also factoring in variables such aslanguage, customs and government policy.

1.2 Definition:

International Business is the process of focusing on the resources of the globe andobjectives of the organisations on global business opportunities and threats.

International business defined as global trade of goods/services or investment. More comprehensive view does not focus on the firm but on the exchange process

Free Trade occurs when a government does not attempt to influence, through quotasor duties, what its citizens can buy from another country or what they can produceand sell to another country.

The Benefits of Trade allow a country to specialize in the manufacture and export ofproducts that can be produced most efficiently in that country.

The Pattern of International Trade displays patterns that are are easy to understand(Saudi Arabia/oil or Mexico/labor intensive goods).

Others are not so easy to understand (Japan and cars).

1.2.1 Nature of International Business1. Accurate Information2. Information not only accurate but should be timely3. The size of the international business should be large4. Market segmentation based on geographic segmentation5. International markets have more potential than domestic markets

1.2.2 Scope of International Business1. International Marketing2. International Finance and Investments3. Global HR4. Foreign Exchange

1.2.3 Need for International Business1. To achieve higher rate of profits2. Expanding the production capacity beyond the demand of the domestic country3. Severe competition in the home country4. Limited home market5. Political conditions6. Availability of technology and managerial competence7. Cost of manpower, transportation8. Nearness to raw material



9. Liberalization, Privatization and Globalization (LPG)10. To increase market share11. Increase in cross border business is due to falling trade barriers (WTO), decreasing

costs in telecommunications and transportation; and freer capital markets

1.2.4 Reasons for Recent International Business Growth1. Expansion of technology2. Business is becoming more global because

Transportation is quicker Communications enable control from afar Transportation and communications costs are more conducive for

international operations3. Liberalization of cross-border movements4. Lower Governmental barriers to the movement of goods, services, and resources

enable Companies to take better advantage of international opportunities

1.2.5 Problems in International Business1. Political factors2. High foreign investments and high cost3. Exchange instability4. Entry requirements5. Tariffs, quota etc.6. Corruption and bureaucracy7. Technological policy

1.2.6 Methods of International Business1. Joint Ventures2. Contract Manufacturing3. Licensing4. Franchising5. Exporting

1. Joint Venture The term Joint Venture applies to those strategic alliances where there is equity

participation from both the foreign entrant and the local collaborator. The equity participation can be of different ratios, ranging from a minority stake,

equal stake to a controlling stake or a more predominant majority stake. From the perspective of the foreign entrant, a joint venture has the following

advantages:o Decrease the capital risk involved.



o Leverage the local companys facilities, in manufacturing, distribution andretailing.

o Leverage the local companys managerial capability in the local environment.o Leverage the local companys contacts with the government to get green

signals. Many companies avoid having joint venture due to the complexity involved in

coordinating policies, decisions and execution with a different company. There are instances when companies which have the ability to take the risk involved

in entering a new market still enter into joint venture. This is often a result of the policies laid out by governments in many emerging

markets. For example, China has a policy wherein foreign companies have to enter joint

collaboration with state owned companies to even set up shop there. As in India, the government has policies which prevent foreign companies from

having full ownership in certain industries. In such cases, foreign companies end uphaving to enter into joint venture to take advantage of the low cost of manufacturingand the large size of the markets.

Still, the disadvantages or hurdles stay which a foreign company has to deal with tomake its venture successful. Some of disadvantages of joint venture are:

o Difference in culture.o Difference in managerial styles.o Differences in the motivation behind the participation. Communication

problems.o Selection of the right partner.

2. Contract Manufacturing Contract manufacturing has a limited role as an entry strategy and is more often used

as a compliment to other entry strategies. It is used in conjunction with strategies like wholly owned subsidiaries or

franchising. Contract Manufacturing is also often used when a company enters a new market and

has an activity that is required but is not a core nor is proprietary in nature, like themanufacturing of clothes, or simple goods like clothing irons and other consumergoods.

In most of the industries where contract manufacturing is resorted to, the coreactivities of the company lie more in marketing and research and development ratherthan in manufacturing.

Below are the lists of advantages and disadvantages in resorting to contractmanufacturing as an entry method.

Advantages:

o Less capital required.o Low managerial risk.



o Focus on core activities.o Less complicated exit problems.o Less complicated division of responsibility.

Disadvantages:

o Chance for a lack of control on certain product parameters.o Differences in quality standards.o Scalability of problems.o Selection of vendors.

3. Licensing Licensing is a common method of international market entry for companies with a

distinctive and legally protected asset, which is a key differentiating element in theirmarketing offer.

It involves a contractual arrangement whereby a company licenses the rights tocertain technological know-how, design, patents, trademarks and intellectual propertyto a foreign company in return for royalties or other kinds of payment.

For example, Disney's mode of entry in Japan had been licensing. Because little investment on the part of the licensor is required, licensing has the

potential to provide a very large ROI. However, because the licensee produces and markets the product, potential returns

from manufacturing and marketing activities may be lost. Here are several conditions where licensing is favorable over other entry methods:

o Import and investment barriers.o Legal protection possible in target environment.o Low sales potential in target country.o Large cultural distance.o Licensee lacks ability to become a competitor.

Licensing offers businesses many advantages, such as rapid entry into foreignmarkets and virtually no capital requirements to establish manufacturing operationsabroad.

Returns are usually realized more quickly than for manufacturing ventures. The other major advantage of licensing is that, despite the low level of local

involvement required of the international licensor, the business is essentially localand is in the shape of the local business that holds the license.

As a result, import barriers such as regulation or tariffs do not apply.

4. Exporting Exporting is one of the methods that organizations can use to enter foreign markets. In this entry method, products produced in one country are marketed in another

country through marketing and distribution channels. Thus, it requires a significant investment in marketing strategies.



In reality, exporting is the most traditional and well-established form of operating inforeign markets.

It can be further categorized into direct or indirect export.

Direct Export:

The organization uses an agent, distributor, or overseas subsidiary, or acts via aGovernment agency.

Usually, companies export through local agents or distributors mainly because theyhave local knowledge that is important in conducting the business; they speak thelanguage, understand the local business, and know who the customers are and how toreach them.

Indirect Export:

Products are exported through trading companies (common for commodities likecotton and cocoa), export management companies, piggybacking and counter-trade.

The main advantage of indirect exporting is that the manufacturer/exporter does notneed too much expertise and can count on trading companies and/or exportmanagement companies knowledge.

In the counter-trade method there are two separate contracts involved, one for thedelivery and payment for the goods supplied and the other for the purchase andpayment for the goods imported.

The seller, in fact, accepts products and services from the importing country in partialor total payment for his exports. This method is suited for situations wherecompetition is low and currency exchange is difficult.

5. Wholly Owned Subsidiaries Many organizations prefer to establish their presence in foreign markets with 100%

ownership through wholly owned subsidiaries. Under this method, organizations obtain greater control over operations and higher

profits since there is no ownership split agreement. However, such entry method requires large investments and faces higher risks,

especially in the political, legal and economical arenas. There are two approaches for the wholly owned subsidiaries entry method; one is

through acquisition and the other through green field investments. Greenfield investment means using funds to build an entirely new facility. Even though such approach entails full control and no risk of cultural conflicts, its

costs are extremely high, and returns on investment are obtained in the long-run dueto the extent of time required to build the facility, start operations, and attaineconomies of scale and the experience-curve.

1.3 Globalization



Globalization implies the opening of local and nationalistic perspectives to a broaderoutlook of an interconnected and interdependent world with free transfer of capital,goods, and services across national frontiers.

1.3.1 Benefits of Globalization1. Free Trade Free trade is a way for countries to exchange goods and resources. This means countries can specialize in producing goods where they have a

comparative advantage (this means they can produce goods at a lower opportunitycost).

When countries specialize there will be several gains from tradeo Lower prices for consumerso Greater choice of goodso Bigger export markets for domestic manufacturerso Economies of scale through being able to specialise in certain goods

2. Free Movement of Labor Increased labor migration gives advantages to both workers and recipient countries. If a country experiences high unemployment, there are increased opportunities to

look for work elsewhere. This process of labor migration also helps reduce geographical inequality. This has been quite effective in the EU, with many Eastern European workers

migrating west. Also, it helps countries with labor shortages fill important posts. For example, the UK needed to recruit nurses from the far east to fill shortages.



3. Increased Economies of Scale. Production is increasingly specialized. Globalization enables goods to be produced in different parts of the world. This greater specialization enables lower average costs and lower prices for

consumers.

4. Greater Competition Domestic monopolies used to be protected by lack of competition. However, globalization means that firms face greater competition from foreign firms.

5. Increased Investment Globalization has also enabled increased levels of investment. It has made it easier for countries to attract short term and long term investment. Investment by multinational companies can play a big role in improving the

economies of developing countries.

1.3.2 Factors Causing Globalization of Business1. Technological Advancement Technological advancement at almost every level, from widespread Internet access to

standardization of transport containers and rapid global transportation, serves as akey driver of globalization.

Standardization of manufacturing processes allows businesses to harness theeconomies of scale that make it feasible to serve a global-sized market, and reliable,worldwide transportation provides the necessary element to build a supply chain toserve that market.

The 24/7 nature of the Internet gives consumers easy access to products from acrossthe world and, in turn, drives a need for globalization in marketing.

2. Global Communication Global communication, aided in large part by online communication channels, such

as social media, aid in the transmission not only of ideas, but of social norms andwants.

In essence, global communication leads to more homogenized tastes in everythingfrom tablet computers to music.

This trend toward global-level interest in products, regardless of origin point, callsfor marketing that deals with brands from a global perspective, rather than a local oreven national level.

Marketers must craft imagery and messages that transcend cultural particulars andreflect universally appealing core ideas.

3. Capital Mobility



Capital now moves across national borders with comparative ease, which makes iteasier for companies to secure financing from a variety of sources.

This ability to secure funding from abroad, should domestic sources prove unwilling,can facilitate domestic growth and foreign expansion.

In order to secure foreign funding, a businesss marketing team must prove capableof demonstrating that, for example, a foreign market exists for the businesssproducts, and that it knows how to address both domestic and foreign markets tocapture share in both.

4. Considerations Globalization presents a conundrum for small business owners. On the one hand, small businesses often find themselves competing with and

marketing in competition with better funded global brands. On the other hand, these same businesses have access to a worldwide consumer base

that can prove a substantial source of income. Choosing between offering service to a worldwide consumer base or focusing on

capturing local and regional business means weighing a number of factors, includinglogistics, expense, and the difficulty inherent in developing global-friendly marketingmaterials.

Although some businesses lend themselves to serving the global market, sellinginformation products for example, many small businesses opt out of globalization.

5. The Reduction and Removal of Trade Barriers Since the end of World War II, the General Agreement on Tariffs and Trade (GATT)

and its successor, the WTO, have reduced tariffs and various non-tariff barriers totrade, enabling more countries to exploit their comparative advantage.

Developing countries continue to drive the global recovery, but their output growth isalso expected to moderate to 6.0 per cent during 2011-2012, down from 7.0 per centin 2010, because of the slowdown in the advanced countries and phasing out ofstimulus measures.

Developing Asia, led by China and India, continues to show the strongest growthperformance, but some moderation (to around 7 per cent) is expected in 2011 and2012.

6. High unemployment is the Achilles heel for the recovery The Uruguay Round of trade negotiations (1986-94) was the real watershed for

global trade. Here, a large package of measures was agreed, which freed up trade in both goods

and in services. As a result, the volume of world trade rose by 50% just in the 6 years following the

conclusion of the Uruguay Round. Equally important is the number of countries taking part in free trade negotiations.



In 1948, when the GATT treaty became effective, there were only 23 ContractingParties to the agreement.

Just over 60 years later, there are now 153 member states of the WTO who all enjoythe benefits of free trade based on the principle of comparative advantage.

Accordingly, between 1948 and 2008, trade rose from only 5% to a massive >25% ofworld GDP.

This means countries are becoming more and more reliant upon each other for theirexport earnings, income and employment.

This exposes them to the international trade multiplier, where domestic businesscycles become vulnerable to changes in the level of economic activity in the rest ofthe world.

7. Transport Costs Improvements in containerization have drastically lowered freight charges. For example, over the last 25 years, sea transport unit costs have fallen by over 70%,

while air-freight costs have fallen by 3-4% year-on-year. The result has been a boost in trade flows, as transport costs are now less likely to

cancel out the gains from comparative advantage. However the rise in sea and air transport has also caused great concern over the

negative externalities of global trade. Indeed recent estimates that CO2 emissions will rise by >70% by 2020 have led to

calls for green taxes on shipping transport. If these go ahead, they will partially offset the falls in transport costs, hence the

process of globalization will be dampened to some extent.

8. Growth of the Internet The growth of the internet has increased e-commerce, enabling firms of all sizes to

compete more easily in global markets. Essentially, the internet acts as a 24-hour shop front allowing consumers all over the

world to buy products online and around the clock, from whoever happens to beoffering the best deal.

For the firm, it therefore provides cheap marketing with global reach, such that evensmall local businesses can afford to serve customers abroad.

Accordingly, the internet gives all firms - both domestic and MNCs alike - easieraccess to foreign markets.

We now find that international trade is no longer the sole preserve of the larger firm. It can now even be undertaken by, say, a local antiques shop, which can either set up

its own website or sell through an online auction like eBay. The end result is of course that more countries become interdependent and reliant

upon each other for the sale and provision of goods and services.

1.4 International Business Environment



The international business environment can be defined as the environment indifferent sovereign countries, with factors exogenous to the home environment of theorganization that influences decision-making on resource use and capabilities.

This includes the social, political, economic, regulatory, tax, cultural, legal, andtechnological environments.

1.4.1 Country Attractiveness

Country attractiveness is a multidisciplinary concept at the crossroadsof development economics, financial economics, comparative law and politicalscience: it aims at tracking and contrasting the relative appeal of different territoriesand jurisdictions competing for scarce investment inflows, by scoringthem quantitatively and qualitatively across ad hocseries of variables such as GDPgrowth, tax rates, capital repatriation etc.

There are multiple factors determining host country attractiveness in the eyes of largeforeign direct institutional investors, notably pension funds and sovereign wealthfunds. Research conducted by the World Pensions Council (WPC) suggests thatperceived legal/political stability over time and medium-term economic growthdynamics constitute the two main determinants.

Some development economists believe that a sizeable part of Western Europe hasnow fallen behind the most dynamic amongst Asias emerging nations, notablybecause the latter adopted policies more propitious to long-term investments:Successful countries such as Singapore, Indonesia and South Korea still rememberthe harsh adjustment mechanisms imposed abruptly upon them by the IMF andWorld Bank during the 1997-1998 Asian Crisis What they have achieved in thepast 10 years is all the more remarkable: they have quietly abandoned theWashington consensus [the dominant Neoclassical perspective] by investingmassively in infrastructure projects this pragmatic approach proved to be verysuccessful.



1.4.2 Country Attractiveness Company Strength Matrix

(1) Geographically, The country is located in the centre of key trading partner countries. Timber Wolf would be able to expect demand from Paraguayans for its hiking boots

because of the country's rough terrain. Despite severe climate in particular seasons for parts of the region, Paraguay's large

subtropical climate provides a favourable condition to operate a manufacturing plant. The country also offers electricity and hide, major resources for Timber Wolf's shoe

manufacturing operation, at lower costs due to the abundance of hydropower andbeef products.

Taking these factors into consideration, the Physical Geography section receives ascore of 5.

(2) Politically, Paraguay offers many incentives to attract foreign direct investment and has laws

to protect the rights of foreign investors. In addition, the country's MERCOSUR membership would provide Timber Wolf

with many advantages over trade with other member countries. However, the political risks of the country outweigh these opportunities. In fact, Paraguay's transition to democracy has not been completed. The leading political party is split into two oppositional factions, creating an

unstable government. Also, the corrupted judicial system impedes the enforcement of property rights,

and that makes expropriation a possibility.



As a result, the Political Environment section receives a score of 3.

(3) The economic Ideology of Paraguay suggests that the government still plays a major role in the

economy, and the situation does not seem to change in the near future. The country's privatization efforts are still in their infancy. There has been declining annual growth, increased foreign debt, continuous

currency devaluation, and a negative balance of trade. In addition, Paraguay's infrastructure is weak. Taking these factors into consideration, the Economic Environment section

receives a score of 2.

(4) For the social-cultural environment, Most people in Paraguay have a basic education, making the marketing effort

easier. A large population in Asuncion would provide a sufficient labour pool of

potential employees, and they would also be a target market for Timber Wolf'sshoes.

Labour unions exist, but it would not be difficult to prevent the unionization.Taking these factors into consideration, Paraguay's Social-Cultural environmentreceives a score of 6.

Thus, Paraguay's overall score on country attractiveness is 4.

1.4.3 Political Environment

A political system is basically the system of politics and government in a country.

It governs a complete set of rules, regulations, institutions, and attitudes.

A main differentiator of political systems is each systems philosophy on the rights of

the individual and the group as well as the role of government.

Each political systems philosophy impacts the policies that govern the local

economy and business environment.

There are more than thirteen major types of government, each of which consists ofmultiple variations.

Lets focus on the overarching modern political philosophies.

At one end of the extremes of political philosophies, or ideologies, is anarchism,

which contends that individuals should control political activities and public

government is both unnecessary and unwanted.

At the other extreme is totalitarianism, which contends that every aspect of an

individuals life should be controlled and dictated by a strong central government.



In reality, neither extreme exists in its purest form. Instead, most countries have a

combination of both, the balance of which is often a reflection of the countrys

history, culture, and religion.

This combination is called pluralism, which asserts that both public and private

groups are important in a well-functioning political system.

Although most countries are pluralistic politically, they may lean more to one

extreme than the other.

In some countries, the government controls more aspects of daily life than in others.

While the common usage treats totalitarian and authoritarian as synonyms, there is a

distinct difference.

For the purpose of this discussion, the main relevant difference is in ideology.

Authoritarian governments centralize all control in the hands of one strong leader or

a small group of leaders, who have full authority.

These leaders are not democratically elected and are not politically, economically, or

socially accountable to the people in the country.

Totalitarianism, a more extreme form of authoritarianism, occurs when an

authoritarian leadership is motivated by a distinct ideology, such as communism.

In totalitarianism, the ideology influences or controls the people, not just a person orparty.

Authoritarian leaders tend not to have a guiding philosophy and use more fear and

corruption to maintain control.

Democracy is the most common form of government around the world today.

Democratic governments derive their power from the people of the country, either by

direct referendum (called a direct democracy) or by means of elected representativesof the people (a representative democracy).

Democracy has a number of variations, both in theory and practice, some of which

provide better representation and more freedoms for their citizens than others.

What businesses must focus on is how a countrys political system impacts the

economy as well as the particular firm and industry.

Firms need to assess the balance to determine how local policies, rules, and

regulations will affect their business. Depending on how long a company expects to



operate in a country and how easy it is for it to enter and exit, a firm may also assess

the countrys political risk and stability.

A company may ask several questions regarding a prospective countrys government

to assess possible risks:

o How stable is the government?

o Is it a democracy or a dictatorship?

o If a new party comes into power, will the rules of business change

dramatically?

o Is power concentrated in the hands of a few, or is it clearly outlined in a

constitution or similar national legal document?

o How involved is the government in the private sector?

o Is there a well-established legal environment both to enforce policies and

rules as well as to challenge them?

o How transparent is the governments political, legal, and economic decision-

making process?

While any country can, in theory, pose a risk in all of these factors, some countries

offer a more stable business environment than others.

In fact, political stability is a key part of government efforts to attract foreign

investment to their country.

Businesses need to assess if a country believes in free markets, government control,

or heavy intervention (often to the benefit of a few) in industry. The countrys view on capitalism is also a factor for business consideration.

In the broadest sense, capitalism is an economic system in which the means of

production are owned and controlled privately.

In contrast, a planned economy is one in which the government or state directs and

controls the economy, including the means and decision making for production.

Historically, democratic governments have supported capitalism and authoritarian

regimes have tended to utilize a state-controlled approach to managing the economy.

As you might expect, established democracies, such as those found in the United

States, Canada, Western Europe, Japan, and Australia, offer a high level of political

stability.



While many countries in Asia and Latin America also are functioning democracies,

their stage of development impacts the stability of their economic and trade policy,

which can fluctuate with government changes.

Within reason, in democracies, businesses understand that most rules survive changes

in government.

Any changes are usually a reflection of a changing economic environment, like the

world economic crisis of 2008, and not a change in the government players.

This contrasts with more authoritarian governments, where democracy is either not in

effect or simply a token process.

China is one of the more visible examples, with its strong government and limited

individual rights.

However, in the past two decades, China has pursued a new balance of how much the

state plans and manages the national economy.

While the government still remains the dominant force by controlling more than a

third of the economy, more private businesses have emerged.

China has successfully combined state intervention with private investment to

develop a robust, market-driven economyall within a communist form of

government. This system is commonly referred to as a socialist market economy

with Chinese characteristics.

The Chinese are eager to portray their version of combining an authoritarian form of

government with a market-oriented economy as a better alternative model for

fledging economies, such as those in Africa.

This new combination has also posed more questions for businesses that are

encountering new issuessuch as privacy, individual rights, and intellectual rights

protectionsas they try to do business with China, now the second-largest economy

in the world behind the United States.

The Chinese model of an authoritarian government and a market-oriented economy

has, at times, tilted favour toward companies, usually Chinese, who understand how

to navigate the nuances of this new system.

Chinese government control on the Internet, for example, has helped propel home

grown, Baidu, a Chinese search engine, which earns more than 73 percent of the



Chinese search-engine revenues. Baidu self-censors and, as a result, has seen its

revenues soar after Google limited its operations in the country.

Factors that influence international business

a) Economic System

The type of economic system a country builds is a political choice. Foreign countriesoften will have different economic systems from your domestic market andadjustments often need to be made to take these differences into account.

A country may operate in a market economy where private individuals own most ofthe property and operate most of the businesses. A market economy is usually thebest economic environment for a foreign business because of the protection of privateproperty and contract rights.

Some countries lean more towards a socialist economy where many industries andbusinesses are owned by the state. Operating businesses in this environment will bemore difficult, but products can still be produced and sold as people still pick theirjobs and earn money.

A few countries operate under a communistic economic system where the statepretty much controls all aspects of the economy. Conducting business in thisenvironment ranges for difficult to impossible.

The reality is that all economies are mixed economies that take parts from two ormore of the 'pure' economic systems. For example, you can conduct business incommunist China in Hong Kong and other special areas where a market economy isallowed to operate.

b) Government System Businesses must often contend with different governmental systems.

Examples include democracies, authoritarian governments, and monarchies.

Some governments are easier to work with than others.

Democracies, for example, are answerable to their citizens and the rule of law.Authoritarian regimes are usually answerable to no one, including the law. It is lessrisky to conduct business in democracies and constitutional monarchies (a monarchwith a constitution that protects the public and subjects the monarch to the rule oflaw) than in countries with authoritarian regimes.

c) Trade Agreements Countries often enter into trade agreements to help facilitate trade between them.

If your country has entered into a trade agreement with another country, conductingbusiness in that country will usually be easier and less risky because the tradeagreement will provide some predictability and protection.



One great advantage, for example, is that your products will be subjected to fewertrade barriers that serve as obstacles to exporting your products into the country.

d) Formal Trade Barriers A trade barrier is simply anything that makes it harder for a company to export

products to a foreign country.

Formal trade barriers are enacted by governments for the purpose of restrictingimports to protect a country's domestic industries.

Formal trade barriers include tariffs, which are taxes on imports that helps makedomestic products more competitive, and product quotas that limits the number ofproducts imported into the country.

e) Informal Trade Barriers Governments may impose regulations that aren't primarily promulgated as barriers to

trade but have the same effect.

Examples can include specific product standards and health and safety standards thatbusinesses will be required to meet before the products can be sold.

1.4.4 Economic Environment International management is the management of business operations conducted in

more than one country. The fundamental tasks of business management including the financing production

and distribution of products and services, do not change in any substantive way whena firm is transacting business across international borders.

The basic management functions of planning, organizing, leading and controlling arethe same whether a company operates domestically or internationally.

However, managers will experience greater difficulties and risks when performingthese management functions on an international scale. For example,

1. When US chicken entrepreneur Frank Purdue translated successful advertisingslogan into Spanish it takes a tough man to make a tender chicken came out as Ittakes a virile man to make a chicken affectionate.

2. It took McDonalds more than a year to figure out that Hindus in India do noteat beef. The companys sales took off only after McDonalds started makingburgers sold in India out of lamb.

3. In Africa the labels on bottles show pictures of what is inside so illiterateshoppers can know what theyre buying. When a baby food company showed apicture of an infant on its label, the product didnt sell very well.

4. United Airlines discovered that even colors can doom a product. The airlinehanded out white carnations when its started flying from Hong Kong only todiscover that to many Asians such flowers represent death and bad luck.

The economic environment represents the economic conditions in the country wherethe international organization operates.



This part of the environment includes such factors as economic development,infrastructure, resource and product markets; and exchange rates, each of which isdiscussed in the following sections.

In addition factors such as inflation, interest rates, and economic growth are also partof the international economic environment

Economic Development:

Economic development differs widely among the countries and regions of the world.Countries can be categorized as either developing or developed.

Developing countries are referred to as less developed countries (LDCs). The criterion traditionally used to classify countries as developing is per capita

income, which is the income generated by the nations production of goods andservices divided by total population.

The developing countries have low per capita incomes. LDCs generally are located in Asia, Africa, and South America. Developed countries

are generally located in North America , Europe and Japan. Most international business firms are headquartered in the wealthier, economically

advanced countries, However, smart companies are investing heavily in Asia, Eastern Europe and Latin

America. For example the number of Internet users and the rate of e-commerce in Latin

America is rapidly growing. Computer companies have launched on line stores forLatin American customers to buy computers over the Internet.

American Online sees Latin America as crucial to expanding its global presence,even though Universe Online International (UOL) based in Brazil got a tremendoushead start over AOL.

These companies face risks and challenges today, but they stand to reap huge benefitsin the future.

Infrastructure:

A countrys physical facilities that support economic activities make up itsinfrastructure which includes transportation facilities such as airports highways, andrailroads, energy producing facilities such as utilities and power plants andcommunication facilities such as telephone lines and radio stations.

Companies operating in LDCs must contend with lower levels of technology andperplexing logistical distribution and communication problems.

Undeveloped infrastructures represent opportunities for some firms, such as UnitedTechnologies Corporation based in Hartford, Connecticut whose business include jetengines air conditioning and heating systems and elevators.

Trade



Trade barriers are government-induced restrictions on international trade. Man-madetrade barriers come in several forms, including:

o Tariffso Non-tariff barriers to tradeo Import licenseso Export licenseso Import quotaso Subsidieso Voluntary Export Restraintso Local content requirementso Embargoo Currency devaluation

Trade restriction

Most trade barriers work on the same principlethe imposition of some sort of coston trade that raises the price of the traded products.

If two or more nations repeatedly use trade barriers against each other, then a tradewar results.

Economists generally agree that trade barriers are detrimental and decrease overalleconomic efficiency.

This can be explained by the theory of comparative advantage. In theory, free trade involves the removal of all such barriers, except perhaps those

considered necessary for health or national security. In practice, however, even those countries promoting free trade heavily subsidize

certain industries, such as agriculture and steel. Trade barriers are often criticized for the effect they have on the developing world. Because rich-country players set trade policies, goods, such as agricultural products

that developing countries are best at producing, face high barriers. Trade barriers, such as taxes on food imports or subsidies for farmers in

developed economies, lead to overproduction and dumping on world markets, thuslowering prices and hurting poor-country farmers.

Tariffs also tend to be anti-poor, with low rates for raw commodities and high ratesfor labor-intensive processed goods.

The Commitment to Development Index measures the effect that rich country tradepolicies actually have on the developing world.

Another negative aspect of trade barriers is that it would cause a limited choice ofproducts and, therefore, would force customers to pay higher prices and acceptinferior quality.

In general, for a given level of protection, quota-like restrictions carry agreater potential for reducing welfare than do tariffs.

Tariffs, quotas, and non-tariff barriers lead too few of the economy's resources beingused to produce tradeable goods.



An export subsidy can also be used to give an advantage to a domestic producer overa foreign producer.

Export subsidies tend to have a particularly strong negative effect because in additionto distorting resource allocation, they reduce the economy's terms of trade.

In contrast to tariffs, export subsidies lead to an over allocation of the economy'sresources to the production of tradeable goods.

1.4.5 Cultural Environment Businesses do not exist in a vacuum, and even the most successful business must be

aware of changes in the cultures and societies in which it does business. As society and culture change, businesses must adapt to stay ahead of their

competitors and stay relevant in the minds of their consumers.

Changing Preferences

A major socio-cultural factor influencing businesses and business decisions ischanging consumer preferences.

What was popular and fashionable 20 years ago may not be popular today or 10 yearsdown the road.

Different styles and priorities can undermine long successful products and services.For example, a clothing company must constantly be aware of changing preferenceswhen creating new products or it will quickly become outdated.

Demographics

Changes in demographics are also a significant factor in the business world. As populations age, for example, markets for popular music and fashions may shrink

while markets for luxury goods and health products may increase. Additionally, changes in the proportion of genders and different racial, religious and

ethnic groups within a society may also have a significant impact on the way acompany does business.

Advertising Techniques

Advertising is perhaps the area of business most closely in touch with socio-culturalchanges.

Advertising often seeks to be hip and trendsetting, and to do this, advertisingagencies and departments cannot lose track of the pulse of the societies in which theyengage in business.

Changes in morals, values and fashions must all be considered when creatingoutward facing advertising.

Internal Environment

In addition to a company's interactions with the market and its customers, socio-cultural factors also impact a company's internal decision-making process.



For example, changing gender roles and increasing emphasis on family life have ledto increased respect for maternity and even paternity leave with organizations.

Additionally, attitudes towards racial discrimination and sexual harassment havechanged drastically over the years as a result of socio-cultural change.

Religion and Custom

Religion and custom are two of the most important factors impacting a business. Every organization has to adapt itself to the prevalent customs and traditions in a

region. A uniform business policy cannot be implemented throughout the world, as

allowances need to be made for the religious sensibilities of the local population. Let us understand the concept in detail with the help of an example.

o McDonald's, one of the largest restaurant chains in the world, started its Indiaoperations in 1996.

o Although McDonald's had been in business for roughly 40 years, duringwhich it had expanded to different parts of the world, its foray into the Indiansector was met with skepticism.

o The prime reason why many people didn't give McDonald's a chance in Indiawas because most of the McDonald's restaurants around the world served beefin their burgers.

o India, with its Hindu majority population, considers cow as sacred, andvegetarianism is taken so seriously that many vegetarians avoid sitting withsomeone having a non-vegetarian meal.

o The marketing heads at McDonald's were also aware of the vast diversity inIndian food habits, and they had to come up with a menu that would appeal tosuch a large number of people.

o To succeed in a country where frugality was an inherent characteristic,McDonald's also had to work towards keeping the price of its products undercheck, without compromising on the hygiene and quality factors.

o To succeed in such a behemoth and diverse market, McDonald's had to payattention to all these socio-cultural factors.

Change in Preferences

One of the most important socio-cultural trends which has an impact on a business isthe constantly changing preferences of customers.

A business may build a brand name for itself and model its core strategies in a certainmanner, but if it fails to recognize and adapt to the changing preferences of thecustomers, it is doomed to fail.

The example given below will analyze this in detail.o Nokia was one of the biggest mobile handset manufacturers until recently.



o In 2007, Apple launched the iPhone, which completely changed the rules inthe smartphone market.

o iPhone was a bold statement by Apple on what a phone could achieve.o The launch of iPhone, and its subsequent critical and commercial acclaim,

was a clear indicator to all handset manufacturers that customers expectedquality experience while browsing the internet, listening to songs, watchingvideos, etc. iPhone's unprecedented sales, despite the fact that it came with ahigher contract cost, was a testimony to the fact that the customers wereappreciative of innovation and technology, and didn't mind paying extra toget the best thing in the market.

Change in Demographics

Demographics is another socio-cultural factor that has an impact on the fortunes of abusiness.

The number of people living in a region, their ethnicity, age, gender, race, sex, etc.are important factors to consider for any business organization.

An understanding of the demographics of the customer base can provide a businesswith invaluable pointers towards launching new products, pricing, marketingstrategies, etc.

The following example will illustrate how demographics lead to a change in strategy.o Harley Davidson, the iconic US-based motorcycle manufacturer, has

established itself as one of the premier bike makers in the world.o Most of the customer base of Harley Davidson comprises Baby Boomers,

over the age of 35. After the World War II ended, America emerged as one ofthe most powerful nations of the world.

o The period after the war was filled with optimism and exhilaration.o The Baby Boomer generation grew up in a period marked with added

emphasis on individuality and adventure.o Motorcycling had emerged as an alternate lifestyle, with most motorcyclists

preferring the heavy, cruiser bikes of Harley Davidson.

Marketing

Socio-cultural factors play a major role in the marketing strategy of a business. In fact, the whole idea of marketing is to connect with the existing customers, and to

reach out to potential customers. The way a society is composed, and the manner in which it views itself culturally,

plays an important role in the development of a robust marketing strategy. The marketing strategies vary from one country to another, and the factors that

influence the strategy are literacy levels of the population, its core beliefs, itssensitivities, willingness to change, etc.

In the following example, we will take a look at how Nestl had to change itsmarketing policy to prevent itself from being in the center of a controversy.



o Nestl, one of the largest food-processing brands in the world, was involved ina controversy in the 1970s, when it was accused of causing deaths andmalnutrition in infants in sub-Saharan Africa.

o The center of the controversy was Nestl's breastfeeding substitute - a babymilk powder.

o The substitute was marketed aggressively all around the world, but in severalAfrican countries, where literacy levels were low, people failed to realize thatthe product was aimed to act as a substitute for those children, whose motherswere unable to breastfeed them.

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Documents

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business practices

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saunders college of

international markets

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benefits of globalization

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