UNIT 1Frame work for International Business Kunal Upadhyay

OUTLINE OF UNITGlobalization : Concept & Factors affecting globalization & RestrainingInternational Business : Reasons for expansionConcepts : International Trade, International Marketing, International Investment, International Management & Global BusinessNew Trade Theory : Internal and External Economics of ScaleInternational Political System and Ideologies Types of Govt., Economies System, Political System Principles of International Law Culture Orientation in International Business

GlobalizationIntegration of countriesFree cross-border movement of GoodsServicesCapital InformationPeople

Communication

Transportation

Technologies

CultureWesternizationAmericanizationWalmartizationMcDonaldizationDisneyfication Coca-Colanization

Globalization

GlobalizationFinancial GlobalizationPoliticalGlobalizationCulturalGlobalizationEconomicGlobalization

Factors Influencing GlobalizationEconomic LiberalizationTechnological BreakthroughsManufacturing Technology Transportation TechnologyInformation & Communication TechnologyMultilateral Institutions [GATT, WTO, TRIMS, TRIPS,GATS]International Economic Integrations [in 1957 EEC, in 1995 NAFTA]

Cont..Rising research & development costsGlobal Expansion of Business OperationAdvents in Logistics ManagementEmergence of Global Consumer Segment

Restraining Globalization

Concepts of International Business International TradeRefers to exports and imports of goods and services by firm to foreign-based firm

Cont..International MarketingMarketing practices across border, including market identification and targeting, entry mode selection and marketing mix

Cont..International InvestmentCross-border either be portfolio investment with short-term objective or Capital investment with long-term objective

Cont..International ManagementRefers to application of management concepts and techniques in cross country environment and adaptation to different social, economic, legal political and technological environment

Cont..International BusinessRefers all those business activities that involve cross-border transactions of goods, services, and resources between two or more nations

Cont..Global BusinessRefers to the conduct of business activities in several countries, using a highly co-ordinated and single strategy across the world

Reasons for International Business ExpansionMarket-seeking MotiveOpportunities due to Life CyclesUniqueness of Product or ServicesEconomic MotiveProfitabilityAchieving economies of scaleSpreading R&D costs

Strategic MotivesGrowthRisk spread

New Trade TheoryCountries do not necessarily trade because of their differencesBut they also trade so as to increase their returnsInternational trade increase the output due to its specializationsTrade theory explain when the economies of scale achieve by production of specific product

What is Economies Scale ? ? Economies of scale means Average Cost of production declines as the number of units increases.

Internal scale economies (Helpman & Krugman): AC declines with output of individual firm External scale economies (Markusen & Melvin): AC declines as the size of the industry grows.

Internal Economies ScaleBenefit by when the cost per unit of output depends upon their sizeFirms enhance their internal economies of scale can decrease their price and monopolize the industryInternal economies of scale leads firms to specialized in a narrow product line to produce the volume necessary to achieve cost benefitsIndustries requires massive investment in R&D

External Economies of ScaleIf the cost per unit of output depends upon the size of the industry, not upon the size of an individual firm.Its enables the industry in a country to produce at a lower rate when the size is large compared to the same industry in another country A skilled labour workforce, A good reputations, Specialist market, Improve infrastructure, Special Services

International Political System & Ideologies

Cont..International political and economic systems hardly function independently.The two are mutually interdependent.Political and diplomatic relations political system of a country comprise various stakeholders, such as government, political parties with different ideologies, labor unions, religious organizations, environmental activists and various NGOs.

Cont..Ideology is a set of beliefs or ideas as to how the society or group should be organized, politically, economically or morally

Political ideology is a set of ideas or beliefs that people hold about their political rule and its institutions about their position and role in it.

Cont..Principal political ideologies may be categorized by :-

Economic SystemPolitical SystemGovernance Structure

Types of Government : Economic SystemsCommunismBased on Karl Marxs theory of social change directed at the idea of classless society, all the major factors of production in a country under communism are owned by the government and shared by all the people rather than profit seeking enterprises, for the benefit of the societyThe government controls all the productive resources and industrial enterprises, it uses significant control on determining production, price employment, and practically everything elseThe focus of communism is on human welfare rather than profit making.

Cont..SocialismIn a socialist form of government , basic and heavy industries are operated by the government, where as small businesses may be privately owned. Basic industries, such as mining, oil exploration, steel, ship building, railways, roads, airlines, etc. are kept under government control. The extent of government control under socialism is lower than communism.

Cont..Countries following socialist system include Sweden ,France, India, Poland etc.

However, the socialist countries too differ from each other in terms of the degrees of public and private ownership.

Cont..Capitalism: In contrast to communism, capitalism is the economic system in which there is a complete freedom of private ownership of productive resources and industries. Thus, there is freedom to both the business enterprises and the consumers that provides for a free market economy.

Cont..Under capitalism, individuals are allowed to produce goods and services under competitive conditions giving rise to a market-oriented system. Market prices are determined by the forces of demand and supply.As individuals are motivated by private gains, it leads to product innovation, quality up gradation, increase in efficiency and lower market prices. For instance, the US is highly capitalistic compared to Japan.

Types of Government : Political System DemocracyTotalitarianism (Autocracy)

- Secular totalitarianism - Fascist totalitarianism - Authoritarian totalitarianism - Communist totalitarianism - Theocratic totalitarianism

Cont..Democracy: The word democracy is derived from demokratia, which means rule of the people or government by the people where citizens are directly involved in decision making. Over a period of time, there has been proliferation (process) of population across the world and societies have become more complex.This has led to decision making by peoples elected representatives in democratic countries

Cont..The most comprehensive definition of democracy is the government of the people, for the people, and by the people.India is the largest democratic country in the world.

Cont..Totalitarianism: It is a autocratic form of centralized government that regulates every aspect of public and private behavior.

Power is centralized in the hands of a dictator who operates through a mixture of cultivating devoted followers and terrorizing those who do not agree with its policies.

Cont..Citizens in totalitarianism state are generally removes of their basic rights of freedom of expression, organizing meetings, free media, tolerance, and elections, which are available under democracy.Secular totalitarianism : In secular totalitarianism, the government uses military power to rule.Fascist totalitarianism: Fascism is a right wing nationalistic political ideology fundamentally opposed to democracy with a totalitarianism & categorized structure.

Cont..Fascist totalitarianism be victorious in Italy under Mussolini, Germany under Hitler, Spain under Franco, and Portugal under Salazar.

Cont..Authoritarian totalitarianism : Authoritarianism aims to control both the minds and souls of people and to convert them to its own faith where as totalitarianism aspires to just rule people.Chile under Pinochet and South Africa prior to apartheid are the examples of such authoritarian totalitarianism.

Cont..Communist totalitarianism : This is the most widespread form of secular totalitarianism which advocates that socialism can be achieved only through totalitarian dictatorship.It is the left wing totalitarianism that believes in equal distribution of wealth and complete government ownership and control on national resources.

Cont..Theocratic totalitarianism : Religious leaders also assume political leadership in theocratic totalitarianismfor example, in the Islamic Republic of Iran.

Types of Government : Governance Structure Parliamentary: the government consults its citizens from time to time and the parliament has power to formulate and execute law. The British parliamentary system is one of the oldest in the worldParliamentary republics the Prime Minister is the executive head of the government & also leader of the legislature. INDIA, SINGAPORE , FINLAND, GERMANY, AUSTRIA, GREECE etc.

Cont..Semi-presidential system a president and a prime minster co-exist. The president genuine executive authority. But the prime minister is the head of the legislature and also heads the government FRANCE, RUSSIA, PAKISTAN & THE REPUBLIC OF KOREAFully presidential system the president is both head of the state and head of the government in fully presidential system and there is NO prime minister.US, PHILIPPINES, MEXICO, BRAZIL, TANZANIA, INDONESIA

Cont..Commonwealth Countries These countries represent constitutional kingdoms that recognize the British King as state over an independent government. A governor-general to each country other than UK is appointed by the QUEEN as a representative.UK, AUSTRIA, NEW ZELAND, CANADA, JAMAICA

Cont..Monarchies

Constitutional Monarchies a form of government in which a king or queen acts as head of state, while the ability to make and pass legislation exist in with an elected parliament.The constitutional monarch cannot make or pass legislation, and must remain politically natural JAPAN, THAILAND, SPAN, DENMARK, SWEDEN, BELGIUM

Cont..Absolute Monarchies it includes countries that have monarchs as the executive head of government, exercising all powersUAE, SAUDI AREBIA, OMAN, QATAR, BHUTANTheocracy Greek word theokratia, which means THE RULE OF GOD. The civil leader is believed to have a direct personal connections with god in pure theocracy

INTERNATIONAL LAW

IntroductionInternational law is less clear compared to domestic law since it embodies a multiplicity of agreements (bilateral, multilateral, or universal) and conventions (agreements) such as( the Vienna convention on diplomatic security, Geneva convention on human Rights , etc.) besides the laws of individual countries.International Managers need to understand the basic principles that govern the conduct of international law.

Principles of SovereigntyA sovereign state is independent and free from all external control or enjoys complete legal equality with other states.It governs its own territory, has the right to select and implement its own political, economic, and social systems and has the power to enter into bilateral or multilateral agreements with other nations.

Cont..Thus, a sovereign state exercises powers over its own members its own members and in relation to other countries.

International Jurisdiction Under international law, there are three basic types of jurisdictional principles:

- Nationality Principle - Territoriality principle - Protective principle

Cont..Doctrine of Comity As a part of international customs and traditions, there must be mutual respect for the laws, institutions, and the government system of other countries in the matter of jurisdiction over their own citizensAct of state of doctrine this jurisdiction principle of international law, all acts of other governments are considered to be valid by a countrys court, even if such act are not appropriate in the country.

Cont..Treatment & Rights of aliens Nations have the right to impose restriction upon foreign citizens on their rights to travel and stay, their conduct, or area of business operations.

A country may also refuse entry to foreign citizens or restrict their travel.

Cont..Setting of Dispute courts are bound to examine issues, such as place from where evidence must be collected, location of the property under restitutionFor instance after the disaster of union Carbides pesticide plant located at Bhopal in India, the New York court of appeals sent back the case to India for resolution.

Cultural orientation in International Business

Introduction The orientation of its international managers affects the ability of a company to adapt any foreign business environment.

The major types of cultural orientation include parochialism versus simplification and EPRG approach.

Parochialism Belief that views the rest of the world from ones own cultural perceptions.This creates problems in international business situation.The tendency of ones culture to influence thinking and behavior without one being aware of it is generally known as cultural baggage.

Simplification the process of exhibiting the same cultural orientation towards different cultural groupsmanagers behaving in the same manner while doing business with American, Arabian, and Japanese managers, overlooking cultural differences.

EPRG Approach The behavioral attributes of international managers may be portrayed through EPRG approach.Ethnocentric orientationPolycentric orientationRegiocentric orientationGeocentric orientation

Ethnocentric orientationThe belief that considers ones own culture as superior to others is named ethnocentric orientation.

Many a times, a firm or its managers are obsessed with the belief that the business strategy that has worked in the home country would also be suitable in alien cultures.

Polycentric orientationThe approach recognizes cultural difference in the host countries and, therefore, is strongly market oriented.It is based on the belief that substantial differences exist among various countries.Therefore, a single business strategy cannot be effective across the world and customized business strategies needed to be adopted.

isnt it better to be open to other peoples point of view ?? HSBC TrendyTrendyTraditionalTraditional

Regiocentric orientationIn the regiocentric approach, the firm treats the region as a uniform cultural segment and adopts a similar business strategy within the region, but not across the region.

Geocentric orientationThe Geocentric approach considers the whole world a single market and attempts to formulate integrated business strategies.A geocentric form attempts to identify cultural similarities across countries and formulates a uniform business strategy.