Unit 4 international business 6th semester bbm notes pdf

INTERNATIONAL BUSINESSBBM – 6th Semester

University of Mysore

SYLLABUS – UNIT 4: Multinational Corporations: Meaning, Mode ofOperations, Foreign Collaborations, Joint Ventures,Franchising and Strategic Alliances. InternationalChannels of Distribution, - Overseas Production, FreeTrade Area.

International Business – Unit 4

MULTI NATIONAL CORPORATIONS (MNCs)

Meaning of Multi National Corporations (MNCs): A Multi

National Corporation (MNC) is a corporation that has its facilities

and other assets in at least one country, other than its home country,

Such Companies have offices in more than one country.

A Multi National Corporation or World Wide Enterprises is an

organization that owns and controls production of goods and

services in one or more countries, other than their home country. It

is also referred as ‘INTERNATIONAL CORPORATION, A

TRANSNATIONAL CORPORATION or a STATELESS

CORPORATION.


Multi National Corporations (MNCs)

One of the first Multi National Business Organizations, the

EAST INDIA COMPANY arose in 1600. After East India

Company, came the DUTCH EAST INDIA COMPANY founded

in Mar 20, 1602, which became the world’s largest company in

the world for nearly 200 years.



Traditional Multi National Corporations and Trans

National Corporations

A Traditional Multi-National Corporation are National

Companies with Foreign Subsidiaries, while a Trans National

Corporation are corporations which spread out their operations

in several countries to sustain high levels of local

responsiveness. Example for Trans National Corporation is

NESTLE, who employ executives from several countries and

tries to make decisions from a Global perspective rather than

from ONE CENTRALIZED HEAD QUARTERS.



Mode of Operations

Usually, the MNCs face the problem of Moral and Legal

Constraints, which is one of the major Global Socio-

Economic problems, to become ‘Stateless Actors’ in the

present century. The MNCs are supported by the “Economic

Liberalization’ and ‘Free Market System’ in the Globalized

International Society.



A Multi National Corporations, are usually large corporations

will the following characteristics:

Manufacture of Goods or Sells Goods (Trader) in various countries,

Importing and Exporting of Goods and Services,

Making significant investments in a foreign country,

Buying and Selling licenses in Foreign Markets,

Engaged in contract manufacturing – Permitting a local

manufacturer in a foreign country to produce their goods,

Opening manufacturing facilities or assembling operations in a

foreign country,


Foreign Collaborations

Foreign Collaboration means an alliance (Union formed for a

mutual benefit of parties) incorporated to carry out the agreed

task collectively with the participation (role) of resident or

non-resident entities.


What is Foreign Collaborations?

Foreign Collaborations is a mutual co-operation between one

or more resident or non-resident entities.,

Foreign Collaborations is a strategic alliance, between one or

more resident or non-resident entities.,

Foreign Collaborations is formed only when one or more non-

resident entities collaborate with one or more resident

entities.,

Foreign Collaborations before initiatives will require an

approval of the Government of the domestic country.,


What is Foreign Collaborations?

Foreign Collaborations, during a process of seeking permission thecollaborating entities prepare a preliminary agreement.,

Foreign Collaborations, after seeking Government’s permission/approval the resident and non-resident entities sign preliminaryagreement and a contract is executed to form a foreigncollaboration.,

Foreign Collaborations, after establishing foreign collaboration,resident and non-resident entity start business together in thedomestic country.,

Foreign Collaborations is ‘Collaborating entities share their profitsas per the profit sharing ratio mentioned in their executes contract.,

Foreign Collaborations are for specific period (Tenure) and ismentioned in the contract.


Examples for Foreign Collaborations are as follows:

ICICI Lombard General Insurance Company Limited is a financialforeign collaboration between ICICI Bank Limited, India andFairfax Financial Holdings Limited, Canada.

ING Vysya Bank Limited is a Financial Foreign Collaboration,formed between ING Group, Netherlands and Vysya Bank, India.

Tata Docomo is a Technical Foreign Collaboration between TATATeleservices, India and NTT Docomo, Inc, Japan.

Sikkim Manipal University (SMU), India runs some academicprograms through an Educational Foreign Collaborations withabroad Universities and Institutes, like Liverpool School of TropicalMedicine, United Kingdom (UK), Loma Linda and Louisiana StateUniversities, United States of America (USA), Kuopio University,Finland and University of Adelaide, Australia.


Objectives of Foreign Collaborations:

Improve financial growth of the collaborating entities,

Occupy a major market share for the collaborating entities,

Reduce the higher operating cost of the Non-Resident

Entities,

Make an optimum and effective use of resources of the

resident entity’s country,

Generate Employment in the resident entity’s country.


The Manufacturing Strategies WITHOUT Foreign Direct Investments(FDI) include,

Licensing,

Franchising,

Contract Manufacturing,

Turnkey Operations,

Management Contracts.

The Manufacturing Strategies WITH Foreign Direct Investments (FDI)include,

Joint Ventures,

Strategic Alliances,

Merger,

Acquisitions,

Wholly owned subsidiary,

Assembly Operations.


Joint Ventures

• Joint Venture means when two parties get together to take on

one project. Its seen that in such an situation, both the parties

equally invest in the project in terms of money, time and effort

to build the original concept.

• A joint venture (JV) is a business agreement in which the

parties agree to develop, for a finite time, a new entity and new

assets by contributing equity. They exercise control over the

enterprise and consequently share revenue, expenses, and

assets.


Joint Ventures

Characteristics of Joint Ventures:

• Joint Ventures can also be JV limited by Guarantee,

• Joint Ventures limited by Guarantee by Partners

holding shares.

• Joint Ventures companies are the preferred form of

corporate investment.

• There is no separate law for JV,

• Joint Ventures Companies are treated like the

Domestic Companies


Joint Ventures

4 Basic Reasons for Joint Ventures:

To gain faster entry into a foreign market,

To acquire expertise.

To increase production scale,

To expand business development program, by access to distributors

network,

• Some of the popular Joint Ventures are Sony Ericsson, Penske

Truck Leasing, Dow Corning and Owens Corning.

• Parties getting together on temporary basis of partnerships are

also called Joint Ventures, here they are called as Co-Ventures.


Joint Ventures

Screening the Joint Ventures Partners:

Screening the prospective partners,

Short Listing with ranking based,

Checking the credentials of the firm from other companies,

Availability of appreciated or depreciated property contributed to the

Joint Venture,

The most appropriate structure of structure and invitation/ bid,

Foreign investors buying interest in a local company.


Joint Ventures

• Dissolution of a Joint Venture: A Joint Venture can be dissolved

on the following grounds:

• The objective of the venture is met,

• The objective of the venture is not met,

• Either or Both parties have developed a new goal,

• Either or Both parties no longer agree with the JV aims,

• Time for JV has been expired,

• JV Agreement is no longer appropriate in the present market

conditions,

• One party acquires the other.

• Examples of JV are Maruti-Suzuki, ITC-Imperial Tobacco, Hindustan

Unilever, Bharati Airtel and so on are laid and monitored by the SEBI.


Franchising

• Franchising is the means of marketing of goods and

services in which the franchiser grants the ‘Legal

Right to use the Branding, Trademarks and Products

and the Methods of Operation is transferred to Third

party – the Franchisee – in Return for a Franchisee

Fee. The franchiser provides Assistance, Training and

help with sourcing components and exercises

significant control over the Franchisee’s method of

operations.


Franchising

Advantages for franchising: Franchising is relatively less risky to start the business.,

Franchising helps to get readymade information, without wasting time,

energy and resources to gather all information.,

Franchising too helps to gather readymade information, without using

capital.,

Franchising is advantageous to build greater market coverage.,

Franchising successfully done helps the firm to obtain a steady,

predictable stream of income.


Franchising

Types of franchising: ‘Chan identifies two types of

franchise’:

• Product/ Trade Franchising: These are franchise which are

concerned with the Products or Trade like Car Dealership,

Petrol Service Stations, Soft drink bottlers and so on, where

product and trade is concerned.

• Business Format Franchising: This type of franchise is

concerned with Business Formats which is growing steadily

across the globe, like Hotels, Convenience Stores,

Restaurants and so on. This is concerned with the BUSINESS

also the APPEARANCE OF THE LOCATION.


Strategic Alliances

• There is no clear or specific definition for Strategic Alliance,

as there is no hard rule or one way to form a strategic alliance.

Strategic Alliance is possible in the field of Sales and

Marketing, Production of goods, Services, Research and

Development and so on.

• In simple terms, “Strategic Alliance can be said as a new

form of market entry (International or Multinational) and

competitive cooperation for both or single party”. The

strategic alliance can be the result of Mergers, Acquisitions,

(one party is benefitted) and Joint Ventures or Licensing

Agreements (Both parties are mutually benefitted)


Two types of Strategic Alliances:

• On the basis of directions of the alliances, (Vertical

Alliances – Improving business from top to bottom, and

Horizontal Alliances are those which take diversification in a

unrelated business)

• On the basis of extent and timescale of collaborations, This is

based on the agreement between the parties which include, a)

Extent of Cooperation Focused and Complex Alliances, b)

Time Scale of the Collaborations, and c) Consortiums

(Consortiums are time bound projects like civil constructions,

or highway contracts and so on)


Advantages and Disadvantages of Strategic Alliances:

• The Advantages include, i) Spread and Reduced Costs,

ii) Specialize in competence, iii) Avoid or Counter

Competition, iv). Secure Vertical and Horizontal Links, v)

Gain Location-Specific Assets, vi) Overcome

Government Constraints, vii) Minimize Minimum Risky

Environment.

• The Disadvantages of Strategic Alliances include, i)

Adverse Selection, ii) Moral Hazards, iii) Access to

information, iv). Distribution of earnings, v) Potential

Loss of Autonomy, vi) Changing Circumstances.


International Channels of Distribution

• International Business involves coordinating the firm’s

marketing activities from one nation to other, where

Distribution plays a vital role in International Business

competing with one another to reduce the cost and maximize

profits. The agents involved in this process are called as

Intermediaries. These agents, institutions stand between the

producers on one hand and the consumption on the other hand.



‘Channel Innovation’ depends upon the economic

level, demographic and geographical factors, social

reforms, Government action and Competition

pressure. A properly designed distribution channel

will help the company to achieve competitive

advantage, where this channel distribution depends on

the customer.



Factors affecting the channel of distribution are:

• Factors relating to the product characteristics, (Value,

Perishable, Delicate, Turnover)

• Factors relating to the company characteristics, (Financial

Strength, Policies, Size, Experience)

• Factors relating to Market and Consumer Characteristics,

(Habits, Preferences, Order size)

• Factors relating to the middlemen Considerations,

(Availability, Attitude, Cost, Services)

• Factors relating to the Environmental Considerations.

(Political, Climate, Competitors, Fiscal)



Channel Members in International or Global

Distribution:

There are two basic channels – Direct Intermediaries

and Indirect Intermediaries.

• Direct Intermediaries: This include when the firm

appoints appropriate agents to take care of their

operations, these include Foreign Distributor, Foreign

Retailer, State Controlled Trading Company, End

user.




Distribution:

• Indirect Intermediaries: This include when the firm depends

on certain channel as stated below:

Domestic Agents: This include, Agents who look after the

interest of the manufacturers (Example: Export Broker, Sales

Representatives, Export Management Company, Cooperative

Exporters, Webb Pomerene,. Association (Webb Pomerene are

when 2 or more firms of the same industry, get together for

Market their goods overseas), Agents who look after the

interest of the buyers (Example: Resident Buyer, State

controlled buying agents, and Buying agents)




Distribution:

There are two basic channels – Direct Intermediaries

and Indirect Intermediaries.

• Domestic Merchants: These include, i) Export

Merchant, ii) Export Drop Shipper (Drops the goods

at the overseas customers), iii) Export Distributors,

iv) Trading Companies.



Distribution pattern followed:

• General Pattern: (Middlemen services, Line

Breadth (carried by wholesalers and retailers),

Cost and Margin, Channel Length, Non-Extent

Channel, Power and Competition and so on)

• Retail Pattern: Retail Size Pattern, Direct

Marketing, and Resistance to change.


Overseas Production

• Overseas Production means the firm decides

and manufacturers their goods, other than their

home country. There are various factors for

Overseas Production.


The factors involved in overseas production are:

– Political Factors (The legal policies permit a foreign firm to produce a

product)

– Natural Resources (The availability of resources are abundant)

– Agreement (The agreement between the domestic firm and a foreign

firm or the government)

– Economical Factors (The government can invite firms, into their

nation, to improve economical growth, employment opportunities and

so on)

– Scale of production (This helps to increase the production to reduce

the cost of production)

– Cheaper labor,

– Outsourced production (BPO, KPO offices in India are working for

western countries)


Overseas Production:

• Outsourcing is one of the leading role taken by the

manufacturers across the globe due to several advantages,

these include:

– Lowering costs.

– Skilled Workforce,

– Security,

– Controlled Concerned,

• (All the above points can be used for both advantages and

disadvantages of overseas production, by outsourcing pattern)


Free Trade Area

Free Trade Area is the strategy played by the trade blocs across

the globe.

“A Free Trade Area is the region encompassing a trade bloc

which is the member countries have signed a FREE TRADE

AGREEMENT (FTA) such agreements involve cooperation

between at least two countries to reduce trade barriers –

Import Quotas and Tariffs – and to increase trade of goods

and services with each other”.


Free Trade Area

• “A free trade area can also be said that it is the area where a

group of countries have got together to have a few or no price

control in the form of tariffs or quota between each other”.

• “A geographical area formed by international boundary on

trade and tariffs, which are uniform to all or selected ones”.


Free Trade Area

• Some of the Free Trade Areas, have a common currency

applicable in the area, while certain are fixed to trade and

tariffs, All depends on the agreement between the nations.

• Free trade area benefits the consumers by getting a superior

product at a lower price, while for the firm it is profit, as due

to scale of production it has heavy sales. Producers struggle to

sell their products in the competitive environment.


Free Trade Area

• United States signed free trade agreement with Australia,

Bahrain, Chile, Colombia, Peru, Singapore, Morocco, Oman,

Israel, Jordan and Korea. The US participated in 14 trade areas

in 2014 with the participation of over 20 nations. In addition to

NAFTA, there is a Dominican Republic-Central American

Free Trade Area (DR-CAFTA - 2004). African Union Aims for

Continental Free Trade Area by 2017.


Free Trade Area - List of free trade areas:

– Middle East Free Trade Area (MEFTA)

– South Asian Free Trade Area (SAFTA - 2004)

– Economic and Monetary Union (EU and other countries)

– Economic Union (EU and other countries)

– Customs and Monetary Union ( CEMA/ XAF, UEMOA/

XOF)

– Common Markets,\(European Economic Area EEA –

Switzerland – 1994)


Free Trade Area - List of free trade areas:

– Customs Union,

– Multilateral Free Trade Area (NAFTA, and other unions)

– Pan-Arab Free Trade Area (PAN ARAB)

– South African Development Community (SADC on trade -

2005)

– ASEAN Free Trade Area (1992)

– ASEAN India Free Trade Area (AIFTA - 2010)

– ASEAN China Free Trade Area (ACFTA - 2010)

– Asia Pacific Trade Agreement (APTA – 1975)


Free Trade Area

There are multiple proposal agreements for free trade area:

• China-Japan-South Korea Free Trade Agreement, CJSK –

FTA)

• The Tripartite Free Trade Agreement in Africa (T-FTA)

• Shanghai Cooperation Organization (SCO)

• Community of Sahel-Saharan States,

• Free Trade Area of the Americans (FTAA)

International Business Environment

Please revert with your valuable suggestions, and most

important is also complaints therefore the same can be

delivered even better,:

SANJEEV KUMAR SINGH

+91 91640 76660

[email protected]

Unit 4 international business 6th semester bbm notes pdf

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