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4 INTERNATIONAL BUSINESS ENVIRONMENT

1. Why do Firms go International? Discuss the Problems Faced by MNC’S in

introducing new Product.
Companies go international for a variety of reasons. In general, companies go international
because they want to grow or expand operations. More specific motives include generating
more revenue, competing for new sales, investment opportunities, diversifying, reducing
costs and recruiting new talent. Going international is a strategy that is influenced by a
variety of factors and is typically implemented over time. Sometimes, governments will
incentivize expansions into global markets.
The various factors which motivates firm to go international may be broadly divided in to
two groups.
a.      Pull factors
b.      Push factors.
The Pull factors:  These are the forces of attraction which pulls the firm to foreign markets. 
In other words, companies are motivated to internationalise because of the attractiveness of
foreign markets.  These attractive factors can be profitabilityand growth prospects.  The
availability of cheap labour can also attracts firm to foreign markets.
The push factors:  These are factors which compels a firm to go global.  Saturation of
domestic market may compel a firm to internationalise.
The most important reasons for going international are described as follows.
1.  Profit advantage:
An important advantage of international business is profit.  International business can be
more profitable than domestic.
2.  The lure of cheap labour:
The best example in this category in China.  Many MNC’s are attracted towards china
because of the availability of cheap labour force.  The labour force in china is not only cheap
but also very efficient.  These factors have made multinational companies like Philips to have
their factories and Rx D units set up in china.  Philips now has 23 factories in china- either
wholly owned or in joint ventures.  The main aim for Phillips is to turn china in to their
global supply base from which the company’s products will be exported around the world.  In
2001, 20% of everything Phillips made world – wide came from china. 
China is now making more than 50% of the cameras sold world - wide, 30% of the air
conditioners and televisions, 25% of washing machines and nearly 20% of refrigerators.
3.  Growth Opportunities:
An important reason for going international is to take advantage of the opportunities in other
countries.  More opportunities means more scope for growth of business in these countries.
4.  Domestic Market Constraints:
Domestic demand constraints drive many companies to expand the market beyond the
national border.  The best example in this category is the saturation of market for consumer
durable items like cars, T.V. sets, washing machines in western markets like United States. 
In some extreme cases, the market for consumer durable item has even started to decline. 
This has made many multinational companies like whirlpool, Samsung, LG and Electoral EX
to switch gears to countries where there is lot of scope for consumer durable items.  In simple
terms, local demand constraints have driven off these companies to go and tap global
markets.
In fact, these companies have turned towards India and China.  Both these countries have
abundant supply of cheap, and efficient labour force. Low manufacturing costs in India as a
result of cheap labour force and lot of untapped market for consumer durable items are the
two key points which has driven these MNCS to have their base in India.
Whirlpool has gone a step further.  Whirlpool in conducting a worldwide study to locate the
most cost-effective manufacturing and R x D facilities.  The company has identified Mexico,
Brazil, India and china as important hubs to carry out the above said activities in future.  It is
firmly believed that they may close some of its units in Europe and North America. 
Whirlpool has already invested around 5million us dollars into Asian R and D centre in Pune,
India.
5.  Competition:
Competition may become a driving force behind internationalization.  The market conditions
in India in completely different before 1991.  Indian Market in highly protected against
foreign investments and companies.  But by the year 1991, trade Liberalization took place in
India.  The Indian market was thrown open to foreign companies.  Many foreign
multinational companies started to establish their offices in India.  This led to a tough
competition for Indian companies from companies abroad. (For e.g.) Nirma is a domestic
detergent company.  After liberalisation, the company started as global competition from
MNCs such as P & G, Colgate Palmolive, Unilever, Henkal etc.
Thus many firms in their own home market face the technological, financial, organisational
and marketing problems from the multi-nationals.  This made many Indian companies to
adopt a counter - competition strategy.  By this strategy they became global.
6.  Government policies and regulations:
Government policies and regulations may also motivate internationalisation.  Many
government offer a number of incentives and other positive support to domestic companies to
export and to invest in foreign countries.
Some companies become global because of government rules and regulations.  The best
example for this is Birla group of companies in India.  The government of India did not give
permission to start a fiber plant in India.  This made Birla group of companies to start fibre
plant in Thailand.  They started to process fibre in their Thailand plant and started exporting
the same to India from Thailand.
7.  Monopoly power:
Some companies like IBM – the software giant formed by Bill Gates may totally enjoy
Monopoly power in their field.  This act as a driving force and propells the company forward
to start its office in various countries and go global.
8.  Spin – off (Incidental benefit) of international business:
A company going global may get a spin off too.  It may help the company to improve its
domestic business and the image of the company may get a face lift as it runs business on
multinational scale.
The consumers may prefer to buy products from a company which exports its majority of its
products to foreign countries and this factor adds to the good will of the company.
9.  Strategic vision:
Some companies may keep globalisation of its products as part of their business policy or
strategic management.
Domestic companies constantly look for opportunities to add customers and revenue streams.
When growth strategies are used up on the national level, the next path is to seek out
international growth. Distributing your products in additional countries increases your
customer base. As you offer compelling solutions and build loyalty across international
markets, revenue strengthens and escalates as well.
There are also significant cost savings that can be associated with going international. A
company may want to reduce costs by relocating closer to a supplier or benefit from lower
production costs by expanding operations to another country. Doing business internationally
may open up new investment opportunities. Further, a lower cost of acquiring customers may
be another compelling reason to expand internationally.
Closely connected to the goal of improved profit margins is the desire to increase sales. Even
if company operators generally are satisfied with revenue levels, international expansion can
further improve overall revenues. The race to expand internationally is often about gaining a
presence in foreign markets. Being the first to arrive in a new market can provide significant
advantages.
If you don't enter a ripe market with your solution, competitors do. Not only do you miss the
revenue source, but you lose out on other valuable assets that you could use to promote your
company at home and abroad. In some cases, a strong domestic company gets overrun by a
lesser player that succeeds globally and grows big through global synergy.
The international expansion allows a company to diversify its business in a couple of key
ways. First, you spread the risk of slowing demand across multiple countries. If one market
never gains or losses interest in your offerings, you can pick up the slack with success in
other countries. In addition, you can connect with suppliers in international markets and take
advantage of raw materials and resources unavailable in domestic markets.
Also, companies often enhance innovation and develop additional variations of their solutions
when they operate in multiple countries. Product diversification similarly insulates you from
the risks of declining interest in a particular item.
For example, Xiaomi, one of the most popular smartphone manufacturers in China, seeks to
expand in India over the next few years. In addition to mobile devices, the company is
planning to sell electric folding bikes, self-balancing scooters, fitness bands and other
products. This will allow it to reach a wider audience and diversify its operations.
Huawei wants to expand its services outside China by 2020. Honor, one of its top-selling
brands, is going to be launched on the Russian, Indonesian and Indian markets.
New Product Development
A company must establish a series of successful products over time if it wants to maintain a
consistent stream of sales, or grow sales over time. New product generation involves multiple
stages and a high level of financial investment, and has no guarantee of success. When a new
product is introduced, companies must still convince buyers to adopt them into their routines,
in order for sales to be consistent. Innovation may be ‘continuous’ or ‘discontinuous’ – the
former occurring in established markets, while the latter has the potential to create new
markets or consumer behaviors.
Historically, a company creates a product to fill a need or want in its immediate marketing
area. As the company grows, it expands the marketing area until the product is marketed
nationally. After a product reaches national distribution, the company typically decides to
either expand internationally or develop other products and remain a national distributor.
With the growth of the global economy in recent years, even start-ups now build eventual
international distribution into their initial business plans. Companies now need to consider
the challenges of international distribution in the initial product development process.
Social Challenges
Products are developed to meet a specific need or want. Just because we have a need or want
in the U.S., doesn’t mean that need or want is universal. Different countries are at different
stages of economic development, and the need or want we have might not have developed in
enough other countries to create a viable target market. Other countries have different
cultures and different food preferences, grooming habits, living quarters, recreational
opportunities, lifestyles and clothes. English speakers might be few. Brand names may not
translate appropriately. Countries may have no interest in a particular good or service that is
selling well in America.
Technical Challenges
American companies have done a good job of standardizing technology, but so have other
countries, and those standards don’t always match. Standard electrical voltage differs from
country to country, so products must be designed to run on different voltages, and they need
different plugs to fit different receptacles. Local water pressure might be different. Lettering
on dials, knobs, levers or buttons might need to be in different languages. Some use
Fahrenheit systems to measure temperature while others use Celsius. Some use metric
measurements, while some use other measurement systems. Raw materials readily available
in America might not be available in other countries. Phone, radio, television and ISP signals
might be totally different from country to country.
Legal and Regulatory Challenges
Some countries prohibit the importation of certain items to protect domestic industries.
Others might require government approval to operate or require you work with local partners.
Trademark, copyright and patent protection laws might be nonexistent. Different
environmental regulations might have to be observed. Certain products might be banned for
political or religious reasons. Permits or licenses might be needed to perform basic activities.
You may not be able to overcome some of these challenges, so it is important to understand
them before you invest resources.
Distribution Challenges
In America, if you can get Wal-Mart and Target to carry your product, you have instant
national distribution. Most other countries don’t have that type of national distribution
available to them. You have to work with dozens of regional chains, distributors and
independent stores. Many countries, such as India, have large outlying areas that are served
by thousands of small mom-and-pop stores or retail trucks. It can be a real challenge to get
your product from the import docks to a place where a customer can buy it.
Promotional Challenges
In America, we have a variety of effective methods to promote a product and communicate
with our customers. We can use television, radio, direct mail, magazines, social media,
billboards, telemarketing and product placement in movies. Many other countries just don’t
have these promotional methods, certainly not to the extent we have here. You may have to
use a grass roots approach, which is much harder. In addition, there may be cultural
limitations. Our promotions tend to have a sexual orientation. The beautiful model as
spokesperson, shot in revealing swimwear or with plunging neckline might be taboo in many
companies. You may find you have to use methods with which you have no experience. You
might have to completely redo packaging or promotional materials at considerable expense.

2. Do you think that study of international business environment is relevant for the
manager? If yes (or) No, Justify your views and Discuss the economic and financial
environment of international business.
Ans:

One of the most dramatic and significant world trends in the past two decades has been the
rapid, sustained growth of international business. Markets have become truly global for most
goods, many services, and especially for financial instruments of all types. World product
trade has expanded by more than 6 percent a year since 1950, which is more than 50 percent
faster than growth of output the most dramatic increase in globalization, has occurred in
financial markets. In the global forex markets, billions of dollars are transacted each day, of
which more than 90 percent represent financial transactions unrelated to trade or investment.
Much of this activity takes place in the so-called Euromarkets, markets outside the country
whose currency is used.
This pervasive growth in market interpenetration makes it increasingly difficult for any
country to avoid substantial external impacts on its economy. In particular massive capital
flows can push exchange rates away from levels that accurately reflect competitive
relationships among nations if national economic policies or performances diverse in short
run. The rapid dissemination rate of new technologies speeds the pace at which countries
must adjust to external
events. Smaller, more open countries, long ago gave up illusion of domestic policy
autonomy. But even the largest and most apparently self-contained economies, including the
US, are now significantly affected by the global economy. Global integration in trade,
investment, and factor flows, technology, and communication has been tying economies
together.
International business includes any type of business activity that crosses national borders.
Though a number of definitions in the business literature can be found but no simple or
universally accepted definition exists for the term international business. At one end of the
definitional spectrum, international business is defined as organization that buys and/or sells
goods and services across two or more national boundaries, even if management is located in
a single country. At the other end of the spectrum, international business is equated only with
those big enterprises, which have operating units outside their own country. In the middle are
institutional arrangements that provide for some managerial direction of economic activity
taking place abroad but stop short of controlling ownership of the business carrying on the
activity, for example joint ventures with locally owned business or with foreign governments.
In its traditional form of international trade and finance as well as its newest form of
multinational business operations, international business has become massive in scale and has
come to exercise a major influence over political, economic and social from many types of
comparative business studies and from a knowledge of many aspects of foreign business
operations. In fact, sometimes the foreign operations and the comparative business are used
as synonymous for international business. Foreign business refers to domestic operations
within a foreign country. Comparative business focuses on similarities and differences among
countries and business systems for focuses on similarities and differences among countries
and business operations and comparative business as fields of enquiry do not have as their
major point of interest the special problems that arise when business activities cross national
boundaries. For example, the vital question of potential conflicts between the nation-state and
the multinational firm, which receives major attention is international business, is not like to
be centered or even peripheral in foreign operations and comparative business.
The study of international business focus on the particular problems and opportunities that
emerge because a firm is operating in more than one country. In a very real sense,
international business involves the broadest and most generalized study of the field of
business, adapted to a fairly unique across the border environment. Many of the parameters
and environmental variables that are very important in international business (such as foreign
legal systems, foreign exchange markets, cultural differences, and different rates of inflation)
are either largely irrelevant to domestic business or are so reduced in range and complexity as
to be of greatly diminished significance. Thus, it might be said that domestic business is a
special limited case of international business.
The distinguishing feature of international business is that international firms operate in
environments that are highly uncertain and where the rules of the game are often ambiguous,
contradictory, and subject to rapid change, as compared to the domestic environment. In fact,
conducting international business is really not like playing a whole new ball game, however,
it is like playing in a different ballpark, where international managers have to learn the factors
unique to the playing field. Managers who are astute in identifying new ways of doing
business that satisfy the changing priorities of foreign governments have an obvious and
major competitive advantage over their competitors who cannot or will not adapt to these
changing priorities.
The guiding principles of a firm engaged in (or commencing) international business activities
should incorporate a global perspective. A firm‘s guiding principles can be defined in terms
of three board categories products offered/market served, capabilities, and results. However,
their perspective of the international business is critical to understand the full meaning of
international business. That is, the firm‘s senior management should explicitly define the
firm‘s guiding principles in terms of an international mandate rather than allow the firm‘s
guiding principles in terms as an incidental adjunct to its domestic activities. Incorporating an
international outlook into the firm‘s basic statement of purpose will help focus the attention
of managers (at all levels of the organization) on the opportunities (and hazards) outside the
domestic economy.
It must be stressed that the impacts of the dynamic factors unique to the playing field for
international business are felt in all relevant stages of evolving and implementing business
plans. The first broad stage of the process is to formulate corporate guiding principles. As
outlined below the first step in formulating and implementing a set of business plans is to
define the firm‘s guiding principles in the market place. The guiding principles should,
among other things, provide a long-term view of what the firm is striving to become and
provide direction to divisional and subsidiary managers vehicle, some firms use ―the
decision circle‖ which is simply an interrelated set of strategic choices forced upon any firm
faced with the internationalization of its markets. These choices have to do with marketing,
sourcing, labor, management, ownership, finance, law, control, and public affairs. Here the
first two marketing and sourcing-constitute the basic strategies that encompass a firm‘s initial
considerations. Essentially, management is answering two questions: to whom are we going
to sell what, and from where and how will we supply that market? We then have a series of
input strategies-labor, management, ownership, and financial. They are in their efforts to
develop their own business plans. As an obligation addressed essentially to the query, with
what resources are we going to implement the basic strategies? That is, where will we find
the right people, willingness to carry the risk, and the necessary funds? A third set of
strategies-legal and control-respond to the problem of how the firm is to structure itself of
implement the basic strategies, given the resources it can muster. A final strategic area, public
affairs, is shown as a basic strategy simply because it places a restraint on all other strategy
choices.
Each strategy area contains a number of subsidiary strategy options. The decision process that
normally starts in the marketing strategy area is an iterative one. As the decision maker
proceeds around the decision circle, previous selected strategies must be readjusted. Only a
portion of the possible feedback adjustment loops is shown here.
Although these strategy areas are shown separately but they obviously do not stand-alone.
There must be constant reiteration as one moves around the decision circle. The sourcing
obviously influences marketing strategy, as well as the reverse. The target market may enjoy
certain preferential relationships with other markets. That is, everything influences everything
else. Inasmuch as the number of options a firm faces is multiplied as it moves into
international market, decision-making becomes increasingly complex the deeper the firm
becomes involved internationally. One is dealing with multiple currency, legal, marketing,
economic, political, and cultural systems. Geographic and demographic factors differ widely.
In fact, as one moves geographically, virtually everything becomes a variable: there are few
fixed factors.
For our purposes here, a strategy is defined as an element in a consciously devised overall
plan of corporate development that, once made and implemented, is difficult (i.e. costly) to
change in the short run. By way of contrast, an operational or tactical decision is one that sets
up little or no institutionalized resistance to making a different decision in the near future.
Some theorists have differentiated among strategic, tactical, and operational, with the first
being defined as those decisions, that imply multi-year commitments; a tactical decision, one
that can be shifted in roughly a year‘s time; an operational decision, one subject to change in
less that a year. In the international context, we suggest that the tactical decision, as the
phrase is used here, is elevated to the strategic level because of the rigidities in the
international environment not present in the purely domestic-for example, work force
planning and overall distribution decisions. Changes may be implemented domestically in a
few months, but if one is operating internationally, law, contract, and custom may intervene
to render change difficult unless implemented over several years.
International business is a necessity in today‘s world. The gains for greater awareness and
knowledge of international business fare immense for nations, multi-national enterprises,
trading companies, exporters and even individuals. To go global, the first step would be to
understand the international business environment. International business in nothing but
extending the areas of activities of business across the boundaries.
ECONOMIC & FINANCIAL ENVIRONMENT
Economic conditions, economic policies and the economic system are the important external
factors that constitute the economic environment of a business. The economic conditions of a
country-for example, the nature of the economy, the stage of development of the economy,
economic resources, the level of income, the distribution of income and assets, etc- are
among the very important determinants of business strategies.
In a developing country, the low income may be the reason for the very low demand for a
product. The sale of a product for which the demand is income-elastic naturally increases
with an increase in income. But a firm is unable to increase the purchasing power of the
people to generate a higher demand for its product. Hence, it may have to reduce the price of
the product to increase the sales. The reduction in the cost of production may have to be
effected to facilitate price reduction. It may even be necessary to invent or develop a new
low-cost product to suit the low-income market. Thus Colgate designed a simple, hand-
driven, inexpensive ($10) washing machine for low-income buyers in less developed
countries. Similarly, the National Cash Register Company took an innovative step backward
by developing a crank-operated cash register that would sell at half the cost of a modern cash
register and this was well received in a number of developing countries.
In countries where investment and income are steadily and rapidly rising, business prospects
are generally bright, and further investments are encouraged. There are a number of
economists and businessmen who feel that the developed countries are no longer worthwhile
propositions for investment because these economies have reached more or less saturation
levels in certain respects.
In developed economies, replacement demand accounts for a considerable part of the total
demand for many consumer durables whereas the replacement demand is negligible in the
developing economies.
The economic policy of the government, needless to say, has a very great impact on business.
Some types or categories of business are favorably affected by government policy, some
adversely affected, while it is neutral in respect of others. For example, a restrictive import
policy, or a policy of protecting the home industries, may greatly help the import-competing
industries.
Similarly, an industry that falls within the priority sector in terms of the government policy
may get a number of incentives and other positive support from the government, whereas
those industries which are regarded as inessential may have the odds against them.
In India, the government‘s concern about the concentration of economic power restricted the
role of the large industrial houses and foreign concerns to the core sector, the heavy
investment sector, the export sector and backward regions.
The monetary and fiscal policies, by the incentives and disincentives they offer and by their
neutrality, also affect the business in different ways.
An industrial undertaking may be able to take advantage of external economies by locating
itself in a large city; but the Government of India‘s policy was to discourage industrial
location in such places and constrain or persuade industries undertaking, a backward area
location may have many disadvantages. However, the incentives available for units located in
these backward areas many compensate them for these disadvantages, at least to some extent.
According to the industrial policy of the Government of India until July 1991, the
development of 17 of the most important industries were reserved for the state. In the
development of another 12 major industries, the state was to play a dominant role. In the
remaining industries, co-operative enterprises, joint sector enterprises and small scale units
were to get preferential treatment over large entrepreneurs in the private sector. The
government policy, thus limited the scope of private business. However, the new policy
ushered in since July 1991 has wide opened many of the industries for the private sector.
The scope of international business depends, to a large extent, on the economic system. At
one end, there are the free market economies or capitalist economies, and at the other end are
the centrally planned economies or communist countries. In between these two are the mixed
economies. Within the mixed economic system itself, there are wide variations.
The freedom of private enterprise is the greatest in the free market economy, which is
characterized by the following assumptions:
(i) The factors of production (labor, land, capital) are privately owned, and production occurs
at the initiative of the private enterprise.
(ii) Income is received in monetary form by the sale of services of the factors of production
and from the profits of the private enterprise.

(iii) Members of the free market economy have freedom of choice in so far as consumption,
occupation, savings and investment are concerned.

(iv) The free market economy is not planned controlled or regulated by the government. The
government satisfies community or collective wants, but does not compete with private firms,
nor does it tell the people where to work or what to produce.

The completely free market economy, however, is an abstract system rather than a real one.
Today, even the so-called market economies are subject to a number of government
regulations. Countries like the United States, Japan, Australia, Canada and member countries
of the EEC are regarded as market economies.
The communist countries have, by and large, a centrally planned economic system. Under the
rule of a communist or authoritarian socialist government, the state owns all the means of
production, determines the goals of production and controls the economy according to a
central master plan. There is hardly any consumer sovereignty in a centrally planned
economy, unlike in the free market economy. The consumption pattern in a centrally planned
economy is dictated by the state.
China, East Germany Soviet Union, Czechoslovakia, Hungary, Poland etc., had centrally
planned economies. However, recently several of these countries have discarded communist
system and have moved towards the market economy.
In between the capitalist system and the centrally planned system falls the system of the
mixed economy, under which both the public and private sectors co-exist, as in India. The
extent of state participation varies widely between the mixed economies. However, in many
mixed economies, the strategic and other nationally very important industries are fully owned
or dominated by the state.
The economic system, thus, is a very important determinant of the scope of private business.
The economic system and policy are, therefore, very important external constraints on
business.