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ASSIGNMENT

MODULE-1

INTERNATIONAL BUSINESS AND

E-COMMERCE

Submitted By:

DIPANWITA PATRA

(10/MBA/32)

National Institute Of Technology, Durgapur

Department Of Management Studies

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FUNDAMENTAL CONCEPTS OF

INTERNATIONAL BUSINESS

GLOBALIZATION:

Globalization refers to the increasing unification of the world's economic order through

reduction of such barriers to international trade as tariffs, export fees, and import quotas. The

goal is to increase material wealth, goods, and services through an international division oflabour by efficiencies catalyzed by international relations, specialization and competition. It

describes the process by which regional economies, societies, and cultures have become

integrated through communication, transportation, and trade. Globalization is usually

recognized as being driven by a combination of economic, technological, socio-cultural,

political, and biological factors.

The first phase of "modern globalization" began to break down at the beginning of the 20thcentury, with World War I, but resurfaced after World War II. This resurgence was partly theresult of planning by politicians to break down borders hampering trade. Their work led tothe Bretton Woods conference, an agreement by the world's leading politicians to lay downthe framework for international commerce and finance, and the founding of severalinternational institutions intended to oversee the processes of globalization. Globalizationwas also driven by the global expansion of multinational corporations based in the UnitedStates and Europe, and worldwide exchange of new developments in science, technology andproducts, with most significant inventions of this time having their origins in the Westernworld according to Encyclopaedia Britannica. Worldwide export of western culture wentthrough the new mass media: film, radio and television and recorded music. Developmentand growth of international transport and telecommunication played a decisive role in modernglobalization.

These institutions include the International Bank for Reconstruction and Development (theWorld Bank), and the International Monetary Fund. Globalization has been facilitated byadvances in technology which have reduced the costs of trade, and trade negotiation rounds,originally under the auspices of the General Agreement on Tariffs and Trade (GATT), whichled to a series of agreements to remove restrictions on free trade. Since World War II, barriersto international trade have been considerably lowered through international agreementsGATT and its successor, the World Trade Organization (WTO). World exports rose from8.5% in 1970, to 16.2% of total gross world product in 2001.

In the 1990s, the growth of low cost communication networks allowed work done using a

computer to be moved to low wage locations for many job types. This included accounting,software development, and engineering design. In late 2000s, much of the industrialized

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world entered into a deep recession. Some analysts say the world is going through a period ofdeglobalization after years of increasing economic integration.

EFFECTS OF GLOBALIZATION:

Globalization has various aspects which affect the world in several different ways

Industrial

Emergence of worldwide production markets and broader access to a range of foreignproducts for consumers and companies, particularly movement of material and goodsbetween and within national boundaries. International trade in manufactured goods has

increased more than 100 times (from $95 billion to $12 trillion) since 1955.

Financial

Emergence of worldwide financial markets and better access to external financing forborrowers. By the early part of the 21st century more than $1.5 trillion in national currencieswere traded daily to support the expanded levels of trade and investment.

Economic

Globalization resulted realization of a global common market, based on the freedom ofexchange of goods and capital. Workers compete in a global market; wages are lessdependent on the success or failure of individual economies. This has had a major effect onwages and income distribution. Survival in the new global business market calls for improvedproductivity and increased competition. Due to the market becoming worldwide, companiesin various industries have to upgrade their products and use technology skilfully in order toface increased competition.

Political

The development of globalisation has wide-ranging impacts on political developments, which

particularly go along with the decrease of the importance of the state. Through the creation ofsub-state and super-state institutions such as the EU, the WTO, the G8 or the InternationalCriminal Court, the state loses power of policy making and thus sovereignty. However, manysee the relative decline in US power as being based in globalisation, particularly due to itshigh trade imbalance. The consequence of this is a global power shift towards Asian states,particularly China, that has seem tremendous growth rates. In fact, current estimates claimthat China's economy will overtake the one of the United States by 2025.

Informational

Increase in information flows between geographically remote locations. Arguably this is a

technological change with the advent of fibre optic communications, satellites, and increasedavailability of telephone and Internet.

http://en.wikipedia.org/wiki/Internethttp://en.wikipedia.org/wiki/Internet

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Language

The most spoken first language is Mandarin (845 million speakers) followed by Spanish (329million speakers) and English (328 million speakers).However the most popular secondlanguage is undoubtedly English, the "lingua franca" of globalization:

About 35% of the world's mail, telexes, and cables are in English. Approximately 40% of the world's radio programs are in English. English is the dominant language on the Internet.

Ecological

The advent of global environmental challenges that might be solved with internationalcooperation, such as climate change, cross-boundary water and air pollution, over-fishing ofthe ocean, and the spread of invasive species. Since many factories are built in developingcountries with less environmental regulation, globalism and free trade may increase pollution

and impact on precious fresh water resources (Hoekstra and Chapagain 2008).On the otherhand, economic development historically required a "dirty" industrial stage, and it is arguedthat developing countries should not, via regulation, be prohibited from increasing theirstandard of living.

Cultural

Growth of cross-cultural contacts; advent of new categories of consciousness and identitieswhich embodies cultural diffusion, the desire to increase one's standard of living and enjoyforeign products and ideas, adopt new technology and practices, and participate in a "worldculture". Some bemoan the resulting consumerism and loss of languages Greater internationaltravel and tourism. WHO estimates that up to 500,000 people are on planes at any one time.In 2008, there were over 922 million international tourist arrivals, with a growth of 1.9% ascompared to 2007.

Greater immigration including illegal immigration, the IOM estimates there are more than200 million migrants around the world today. Newly available data show that remittanceflows to developing countries reached $328 billion in 2008.

Spread of local consumer products (e.g., food) to other countries (often adapted to theirculture).Worldwide fads and pop culture such as Pokmon, Sudoku, Numa Numa, Origami,

Idol series, YouTube, Orkut, Facebook, and Myspace; accessible only to those who haveInternet or Television, leaving out a substantial portion of the Earth's population. Worldwidesporting events such as FIFA World Cup and the Olympic Games. Incorporation ofmultinational corporations into new media, as the sponsors of the All-Blacks rugby team,Adidas had created a parallel website with a downloadable interactive rugby game for its fansto play and compete.

Technical

Central aspect of globalisation has been the development of a Global Information System,and greater transborder data flow, using such technologies as the Internet, communication

satellites, submarine fiber optic cable, and wireless telephones, which increased the numberof standards applied globally but also affects Legal/Ethical norms such as the creation of the

http://en.wikipedia.org/wiki/Spanish_languagehttp://en.wikipedia.org/wiki/Immigrationhttp://en.wikipedia.org/wiki/Illegal_immigrationhttp://en.wikipedia.org/wiki/Remittancehttp://en.wikipedia.org/wiki/Pok%C3%A9monhttp://en.wikipedia.org/wiki/Sudokuhttp://en.wikipedia.org/wiki/Numa_Numahttp://en.wikipedia.org/wiki/Origamihttp://en.wikipedia.org/wiki/Idol_serieshttp://en.wikipedia.org/wiki/YouTubehttp://en.wikipedia.org/wiki/Orkuthttp://en.wikipedia.org/wiki/Facebookhttp://en.wikipedia.org/wiki/Myspacehttp://en.wikipedia.org/wiki/FIFA_World_Cuphttp://en.wikipedia.org/wiki/Olympic_Gameshttp://en.wikipedia.org/wiki/All-Blackshttp://en.wikipedia.org/wiki/Internethttp://en.wikipedia.org/wiki/Communication_satelliteshttp://en.wikipedia.org/wiki/Communication_satelliteshttp://en.wikipedia.org/wiki/Submarine_communications_cablehttp://en.wikipedia.org/wiki/Mobile_phonehttp://en.wikipedia.org/wiki/Mobile_phonehttp://en.wikipedia.org/wiki/Submarine_communications_cablehttp://en.wikipedia.org/wiki/Communication_satelliteshttp://en.wikipedia.org/wiki/Communication_satelliteshttp://en.wikipedia.org/wiki/Internethttp://en.wikipedia.org/wiki/All-Blackshttp://en.wikipedia.org/wiki/Olympic_Gameshttp://en.wikipedia.org/wiki/FIFA_World_Cuphttp://en.wikipedia.org/wiki/Myspacehttp://en.wikipedia.org/wiki/Facebookhttp://en.wikipedia.org/wiki/Orkuthttp://en.wikipedia.org/wiki/YouTubehttp://en.wikipedia.org/wiki/Idol_serieshttp://en.wikipedia.org/wiki/Origamihttp://en.wikipedia.org/wiki/Numa_Numahttp://en.wikipedia.org/wiki/Sudokuhttp://en.wikipedia.org/wiki/Pok%C3%A9monhttp://en.wikipedia.org/wiki/Remittancehttp://en.wikipedia.org/wiki/Illegal_immigrationhttp://en.wikipedia.org/wiki/Immigrationhttp://en.wikipedia.org/wiki/Spanish_language

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international criminal court and international justice movements, crime importation andraising awareness of global crime-fighting efforts and cooperation, the emergence ofGlobaladministrative law.

Religious

It has spread and increased interrelations of various religious groups, ideas, and practices andtheir ideas of the meanings and values of particular spaces.

FOUR DIMENSIONS OF GLOBALIZATION

We do not regard globalization as a purely economic process, revolving around suchproblems as free trade, and the institution of free markets versus national protection, or theproblem of "political economies of scale" whereby states adjust their functions to theexpanding role of industrial and financial markets (Cerny 1995). To do justice to it and alsoto make this large construct more tractable we propose to present that process asmultidimensional, and in fact as a spectrum of four processes,

(1) Building the global economy;

(2) Formation of world opinion;

(3)Democratization or the creation of a global community;

(4) The emergence of global political institutions.

DRIVERS OF GLOBALIZATION

Harmish McRae business main drivers of globalization:

Multinational wants to increase sales, profits and shareholders value. Globalization providesthis opportunity.

The barriers to international business are lower and falling- much easier to expand business tonew territories, if business is providing service then to a more extent.

Government want to encourage domestic business to expand overseas.

INTERNATIONALIZATION

In economics, internationalization has been viewed as a process of increasing involvement

of enterprises in international markets. We can say as any business activity or transaction

http://en.wikipedia.org/wiki/International_criminal_courthttp://en.wikipedia.org/wiki/International_Court_of_Justicehttp://en.wikipedia.org/wiki/Global_administrative_lawhttp://en.wikipedia.org/wiki/Global_administrative_lawhttp://en.wikipedia.org/wiki/Global_administrative_lawhttp://en.wikipedia.org/wiki/Global_administrative_lawhttp://en.wikipedia.org/wiki/International_Court_of_Justicehttp://en.wikipedia.org/wiki/International_criminal_court

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that transcends the national border. There are various drivers of internationalization of a firmdiscussed below:

Profit Advantage:An important incentive for internationalization is the profit advantage. It could

increase the total profit. One of the major motives for foreign investment is to reducecost of production for example by taking the advantage of cheap labour in foreigncountry a firm can cut down its cost of whole manufacturing process.

Growth Opportunities:An important reason for going international is to take advantage of the businessopportunities in other countries. MNCs are getting increasingly interested in a numberof developing countries as the income and population are rapidly increasing in thesecountries.

Domestic Market Constraints:The market for a number of products tends to saturate or decline in the advancedcountries. This often happens when the market potential has been almost tapped.Particularly when the domestic market is very small, internationalization is the onlyway to achieve significant growth.

Government Policies and Regulations:Government policies and regulations may also motivate internationalization. Thereare both positive and negative factors which could cause internationalization. Manygovernments offer a number of incentives and other positive support to earn foreignexchange to finance their imports and to invest in other countries. Similarly, severalcountries encourage import development and foreign investment. Sometimescompanies may be obliged to earn foreign exchange to earn their imports and to meetcertain other foreign exchange requirements like payment of royalty, dividend etc.

Monopoly Power:In some cases, international business is a corollary of the monopoly power which afirm enjoys internationally. Monopoly power may arise from such factors asmonopolisation of certain resources, patent rights, technological advantage, productdifferentiation etc.

Spin-off Benefits:International business may help the company to improve its domestic business; bydoing so it helps to improve the image of the company. When domestic customers getto know that the company is selling a significant portion of the production abroad,they will be more inclined to buy from such a company. International business thusbecomes a means of gaining better market share domestically.

Strategic Vision:The systematic and growing internationalization of many companies is essentially apart of their business policy or strategic management. The stimulus for comes from

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the urge to grow, the need to become more competitive, the need to diversify and togain strategic advantages of internationalization.

ORGANIZATIONAL PARTICIPATS IN INTERNATIONAL BUSINESS

FOCAL FIRM:

A focal firm is the initiator of international business transactions and that conceives designs

and produces offerings for customer worldwide.

DISTRIBUTION CHANNEL INTERMEDIARIES:

It is a specialist firm that provides a variety of logistics and marketing services for firms as a part of

international supply chain in home country and abroad.

FACILITATOR:

A facilitator is a firm with special expertise such as legal advice banking, customer clearance

that assist focal firms in international business transactions.

ENVIRONMENT OF INTERNATIONAL BUSINESS:

A brief account of environment of international business is given below:

ECONOMIC ENVIRONMENT:

The economic environment has much to do with scope of business, business prospects and

business strategy.

The nature and level of development in the economy, economic resources, size of the

economy, economic system and economic policies, economic conditions, trends in the GNP

growth and per capita income, nature and trends in foreign trade, domestic supply and

demand conditions are all factors relevant to business.

The differences in levels of development and income have implications for the business. In

developing countries, particularly in low income economies, the demand for many categories

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of goods and services is limited because of low level of income. Even products and services

are limited because of low levels of income. The developed economies are characterised by

high level of income and consumption and business competition. The countries with low

moderate income, scope of charging a price as high as in high income economies is limited.

Different countries and different regions within a country are characterised by dissimilar

economic environment. When economic conditions are different, the type of industries/

business suitable for different regions without be different and would need different

strategies.

SOCIAL-CULTURAL ENVIRONMENT:

The social-cultural environment encompassing the religious aspects; language; customs,

traditions and beliefs; tastes and preferences; social stratification; social institutions; buyingand consumption habits etc. are all important factors business. One of the most important

reasons for the failure to understand the cultural environment of these markets and to suitably

formulate their business strategies.

DEMOGRAPHIC ENVIRONMENT:

Important demographic bases of market segmentation include the following:

Age structure Gender Income distribution Family size Family life cycle Occupation Education Social Class Religion Race Nationality

The demographic factors such as the size of the population, population growth rates, age

composition, ethnic composition, density of population, rural-urban distribution, family size,

nature of the family, income levels etc have very significant implications for business.

POLITICAL ENVIRONMENT:

The political environment including the characteristics and policies of the political parties,

the nature of Constitution and governmental system and the government environment

encompassing the economic and business policies and regulations are among the factors of

utmost importance in the market selection and business strategy formulation. These factorsmay vary very considerably between different nations.

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In fact, the political environment and the economic policy environment are intricately

intertwined. Major economic policy changes often have political underpinnings. Important

economic policies and indeed often political decisions.

They include the following:

Industrial policy Policy towards foreign capital and technology Fiscal policy Export-import policy

Many political decisions have serious economic and business implications. The economic

policy of ruling is very important.

REGULATORY ENVIRONMENT:

There are wide variations between countries in the policies and regulations regarding conduct

of business. For example, certain trade practices or promotional methods allowed in some

countries may be regarded as unfair by the laws of some other countries. In many countries

there is a lot of restriction on the use of the media. Radio and television, in particular, are

under State monopoly or under strict state control in the number of countries.

NATURAL ENVIRONMENT:The natural environment is often critical, for ultimately is the source and support of

everything used by businessesevery raw material, every energy source, every life-

sustaining factor, even every waste disposal site. The natural environment determines what

can be done in the society and how institutions can function. Resource availability is the

fundamental factor in the development of business in societies.

The geographical and ecological factors such as natural resources endowments, weather and

climate conditions, topographical factors, location aspects in the global context, port

facilities, etc are all relevant to the business.

TECHNOLOGICAL ENVIRONMENT:

Technological developments have been revolutionary the business scene. They facilitate not

only the introduction of new products but also tremendous improvements in the operational

efficiency and exciting changes in the business scenario. Information technology has vastly

transformed the marketing and the financial market scenario and has significantly contributed

to the globalisation process. The technological enhancement is the important determinant of

the success of the firm as well as economic and social development of a nation.

Technology is one of the eight factors considered by the World Economic Forum to evaluate

the global competitiveness of nations.

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RISK AND CHALLLENGES IN INTERNATIONAL BUSINESS

International businesses have to face risks and challenges at many fronts. Some are similar to

the risks and challenges a domestic business confronts and some are unique. Even the

challenges that are similar by definition differ in nature. For example both types of businesses

have to face financial challenges, but an international business will be facing many factors

related to global financial markets that dont affect domestic businesses as much. They are

more of a challenge in nature than risks and most of them can be handled through proper

planning.

The challenge of international planning & strategy:

The first challenge for an international enterprise is to make a global strategy and then

implement it. The managers and those at decision-making positions often find it difficult to

change their thought pattern, which is not used to work in global paradigm. There are many

international businesses but just some of them have truly adopted a proper global strategy.

Though the situation is improving with more and more trained graduates and professionalstaking on the management roles. Nevertheless, international business management requires

extra ordinary management, foreseeing and leadership skills.

Financial and economic challenges:

It starts from arranging the funds to start international business and includes everything such

as fluctuation in exchange rate, global economic crisis (or some economic crises in the host

country), shift in oil prices, global inflation or tariff barriers imposed by the host government,

also the export related policies of your own government.

International Politics:

Political know-how is a must for everybody but it becomes all so important when operating at

international level. If some policies were suitable for your business, a change in ruling party

can bring drastic changes in those policies. Political chaos will bring down the economy and

with that your business. To prevent your business from such negative impacts, you need to

make sound political judgments.

Environment, natural disasters and warfare:

Many multinational businesses have to face serious opposition by some environment friendly

organizations. Citizens are more concerned about air and water pollution these days as it isbecoming a serious threat to their health. Some natural disaster like floods and earthquake, or

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some kind of civil war breaking out in the host country is also in the list of possible

challenges. A new challenge that an international business has to bear now days in some

specific countries is the threat of terrorism.

RISKS:

There are four types of risks involved in doing business .internationally:

Cross-cultural risk Country risk Currency risk Commercial risk

Cross-cultural risk:

The risk associated with the culture, traditions of a particular country. The factors like taste

and preferences of a particular country differ from that of other country. When a firm wants

to expand its business it has to face these risk.

Country risk:

It refers to the risk of investing in a country, dependent on changes in the business

environment that may adversely affect operating profits or the value of assets in a specificcountry. For example, financial factors such as currency controls, devaluation or regulatory

changes, or stability factors such as mass riots, civil war and other potential events contribute

to companies' operational risks. This term is also sometimes referred to as political risk;

however, country risk is a more general term that generally refers only to risks affecting all

companies operating within a particular country.

Currency risk:

Currency risk or exchange rate risk is a form of financial risk that arises from the potential

change in the exchange rate of one currency in relation to another. Investors or businesses

face an exchange rate risk when they have assets or operations across national borders or if

they have loans or borrowings in a foreign currency.

An exchange rate risk can result in an exchange gain as well as a loss. To neutralize the risk

of a loss (but at the same time forgoing any potential exchange gain), some businesses hedge

all their foreign exchange exposure or exposure beyond some predetermined comfort level,

which is a way of transferring the risk to another business prepared to carry the risk or has a

reverse risk exposure.

Commercial risk:

Commercial risk, defined as the risk a company takes by offering credit with no collateral, is

a common term in the business world. Commercial risk, explained as the risk a company

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takes with it's customers, is a common risk of doing business. Most companies allow credit

terms. So, almost every company must take on some form of commercial risk. Commercial

risk analysis is often professionally evaluated by companies, like insurance providers, who

must make sense of the commercial risk of a company to do business.

EMERGING MARKETS

Emerging markets are those countries or geographic regions in which a previously untappedpotential for U.S. exports or investment might be anticipated. Nations typically characterizedunder this banner are often developing countries, but they may also be economically

formidable countries with markets that are increasingly open to exports.

These are countries such as Brazil, China, Mexico, India, and Turkey that, in contrast toadvanced economies, are experiencing rapid economic growth, industrialization, andmodernization. Most emerging markets are characterized by a young population and agrowing middle class. While emerging markets represent attractive and low costmanufacturing bases, they also tend to have inadequate commercial infrastructure, evolvinglegal systems, and a high-risk business environment. Despite their drawback, emergingmarkets have begun to produce new global challengers, top firms that are fast becoming keycontenders in world markets. These firms pose competitive challenges to companies from theadvanced economies such as in Europe, Japan, and North America.

These countries are applying business strategies such as using home-country naturalresources, low cost of labour, engineering and managerial talent that sometimes exceed those

of their counterparts in highly industrialized countries. Many of the firm are growing

internationally by taking their establishing brands to global markets.

Some of these emerging market firms have assumed global leadership in specific production

categories, such as Hong Kongs Johnson Electric, the world leader in small electric motors

for automotive and consumer applications.

National Characteristics of Major Country Groups:

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EMERGING MARKETS AS TARGET MARKETS

Emerging markets are attractive to internationalizing firms as target markets, manufacturingbases, and sourcing destinations. Emerging markets have become important for marketing a

wide variety of products and services. The growing middle class in these countries implies

substantial demand for a variety of consumer products such as electronics and automobiles

and services such as health care.

Emerging markets are excellent targets for manufactured products and technology. For

example, the textile machinery industry in India is huge, oil and gas exploration plays a vital

role in Russia, and agriculture is a major sector in China.

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STRATEGIES FOR DOING BUSINESS IN EMERGING MARKETS

Different market conditions abroad compel companies to devise unique approaches:

Partnering with Family Conglomerates:

Family conglomerates are key players in their respective economies and have much capital toinvest in new ventures. Many FCs possess extensive distribution channels throughout theirhome countries. They have a deep understanding of local markets and customers. For foreignfirms that want to do business in emerging markets, FCs can make valuable venture partners.By collaborating with an FC, the foreign firm can:(1) Reduce the risks, time, and capital requirements of entering target markets;(2) Develop helpful relationships with governments and other key, local players;(3) Target market opportunities more rapidly and effectively; (4) overcome infrastructure-related hurdles; and (5) leverage FCs resources and local contacts. There are many examples of successful FC partnering. Ford partnered with Kia to introducethe Sable line of cars in South Korea. Ford benefited from Kias strong distribution and after-

service network.

Marketing to Governments in Emerging Markets:

In emerging markets, as well as in developing economies, government agencies and state-owned enterprises are an important customer group for three reasons: First, governments buyenormous quantities of products (such as computers, furniture, office supplies, and motorvehicles) and services (such as architectural, legal, and consulting services). Second, stateenterprises in areas such as railways, airlines, banking, oil, chemicals, and steel buy goodsand services from foreign companies.Third, the public sector influences the procurement activities of various private or semi-private corporations. For example, in India the government is directly involved in planninghousing projects. Governments in emerging markets as well as developing countries oftenformulate economic development plans and annual programs to build or improve nationalinfrastructure.Bechtel, Siemens, General Electric, Hitachi, and other major vendors regularly participate inbidding for global tenders from emerging market governments.

Skilfully Challenge Emerging Market Competitors:

As the opening vignette shows, the new global challengers possess various strengths thatmake them formidable competitors in the global marketplace. Advantages such as low-costlabour, skilled workforce, government support, and family conglomerates are fostering the

rise of firms that are capturing market share from incumbent international players.It is critical for managers to analyze the advantages of the emergent firms and how they cantransform the incumbents industry. The next step is to acquire new capabilities that improvethe firms competitive advantages. For example, many incumbents are boosting their R&D toinvent new, superior products. Others are partnering with competitors in order to poolresources against emerging market rivals. Incumbent firms can also match new globalchallengers at their own game by leveraging low-cost labour and skilled workers in locationssuch as China, India, Mexico, and Eastern Europe. Many advanced economy firms partnerwith family conglomerates and others in emerging markets on critical value-chain activitiessuch as R&D, manufacturing, and technical support.

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POTENTIAL OF EMERGING MARKETS

There are three ways to do this:

1.Per-capita Income as an Indicator of Market Potential:When managers evaluate the market potential of individual markets, they often start byexamining aggregate country data, such as gross national income (GNI) or per-capita GDP,expressed in terms of a reference currency, such as the U.S. dollar. Using per-capita GDPfigures adjustedfor price differences. Economists estimate real buying power by calculatingGDP statistics based onpurchasing power parity (PPP).In addition to per-capita GDP,managers should examine other market potential indicators including GDP growth rate,income distribution, commercial infrastructure, the rate of urbanization, consumerexpenditures for discretionary items, and unemployment rate.

2. Middle Class as an Indicator of Market Potential:In every country, the middle class represents the proportion of people in between the wealthyand the poor. The middle class has economic independence and includes people who work inbusinesses, education, government, and hourly jobs. They consume many discretionary items,including electronics, furniture, automobiles, recreation, and education. Middle-classhouseholds make up the largest proportion of households in advanced economies. Inemerging markets, the size and growth rate of the middle class serve as signals of a dynamicmarket economy.

3.Use of a Comprehensive Index to Measure Market Potential:

While a large and growing middle class points to a promising emerging market, with

growing opportunities for internationalizing firms, managers should consider other indicatorsas well. The EMPI(Emerging Market Potential Index) is such approach which comparesemerging market countries using factors that, together, provide managers of western firmswith a realistic measure of export market potential.For emerging markets, the following dimensions serve as comprehensive indicators of marketpotential:Market Size: the countrys population, especially those living in urban areas. Market Growth Rate: the countrys real GDP growth rate.Market Intensity: private consumption and gross national income per capita representdiscretionary expenditures of citizens.Market Consumption Capacity: the percentage share of income held by the countrys

middle class. Commercial Infrastructure: characteristics such as number of mobile phone subscribers,density of telephone lines, number of PCs, density of paved roads, and population per retailoutlet.Economic Freedom: the degree to which government intervenes in business activities.Market Receptivity: the particular emerging markets inclination to trade with the exporterscountry as estimated by the volume of imports. Country Risk: the degree of political risk.

Managers can use the EMPI in several ways. First, they can use the rankings as an objectivebasis for prioritizing emerging markets in the course of planning international expansion.

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Second, online EMPI rankings are interactive, so users can rank markets on the basis on anyof the eight dimensions making up the overall Index.Third, managers can modify theassigned weights to fit the unique characteristics of their own industry. Fourth, managers mayadd additional indicators that are not currently included in the EMPI as a way of refining thetool for greater precision, or they may add additional countries beyond the emerging markets

already represented in the Index.