MODULE 1

International Business
• Those business transactions that involve the crossing of national boundaries
• International business consists of transactions that are devised and carried out across
national borders to satisfy the objectives of individuals and organizations.
IB includes
• Product presence in different markets of the world
• Production bases across the globe
• Human Resource to contain high diversity
• Investment in international services like banking, advertising, tourism etc
• Transactions involving intellectual properties such as copyrights, patents, trademarks
etc
Internationalization of business as a four dimensional construct
• Internationalization of market presence
• Internationalization of supply chain
• Internationalization of capital base
• Internationalization of corporate mindset
Developments that facilitate IB
• Demographics are changing
• Emerging countries offer low cost location advantage
• Developing countries have huge markets
• Trade and investment barriers have crumbled
• Advancements in technology
• International business offers huge money
• World bodies and institutions are playing facilitating roles
Need for International Business
• More and more firms around the world are going global, including:
✓ Manufacturing firms
✓ Service companies (i.e. banks, insurance, consulting firms)
✓ Art, film, and music companies
• International business:
✓ causes the flow of ideas, services, and capital across the world
✓ offers consumers new choices
✓ permits the acquisition of a wider variety of products
✓ facilitates the mobility of labor, capital, and technology
✓ provides challenging employment opportunities
✓ reallocates resources, makes preferential choices, and shifts activities to a
global level

Strategies for going International

1. Deciding whether to go global
2. Deciding which markets to enter
3. Deciding when to enter
4. Deciding how to enter the chosen markets

1. Deciding whether to go global

• Entire world is moving in one direction- economic integration
• Any difficulty?
2. Deciding which markets to enter
Involves making decisions on
• Volume of foreign sales
• Number of countries to enter
• Type of countries
3. Deciding when to enter
• Timing of entry involves decision on first mover, early mover and late mover into
foreign markets
 • Merits and demerits involved in each
4. Deciding how to enter the chosen markets
• Trade related mode
• Transfer related modes
• FDI related modes

Trade Related Mode

1. Exporting
2. International subcontracting
3. Counter trade
4. Management contract

1. Exporting
• Most desirable entry mode
• Gradually other modes of entry can be tried
• Helps gain knowledge about host countries
• Minimum risk and easy access
2. International subcontracting
• Is possible when a firm in a host country has surplus manufacturing capacity.
• MNCs use the surplus capacity to manufacture their products
• Local manufacturer is responsible only for processing or assembly in exchange for
processing fee.
• Host manufacturer does not enjoy any right on the raw materials or components
supplied by the MNC
• Example: P&G was using the surplus facility available with Karnataka Soaps and
Detergents Ltd
• Nike uses this as an entry mode in China, Vietnam, Thailand
3. Counter Trade
• Unique way of settling overseas transactions
• Occurs when a firm accepts something other than money as payment for its goods or
services
 4. Management Contract
• Agreements where MNCs for a fee, train local employees and manage foreign
facilities for a prescribed time period
• Such contracts often include setting up of foreign subsidiaries and technical help to
operationalise the plant

Transfer related entry modes

1. International leasing
2. International licensing
3. International Franchising
4. Build Operate Transfer

1. International Leasing
• Occurs when the owner of a property (lessor) leases it out to other party.
• MNC leases out its new or used equipment to the local company
• Lessee needs to pay the fees
2. International licensing
• Under a license agreement, one firm permits another to use its intellectual property for
compensation called royalty
• Licensor and licensee
• Property licensed includes assets such as patents, trademarks, copy rights etc
3. International Franchising
• Granting a right by a company to another to do a business in a specified manner
• Right can be in the in the form of selling the franchisor’s products, using its name,
production and marketing techniques or using business models
4. Build Operate Transfer
• Also called turnkey operations
• A foreign investor assumes responsibility for the design and construction of an entire
operations and upon completion of the project, turns the project over to the purchaser
and hands over management to local personnel whom it has trained
Barriers to cross border economic activity
• Culture
• Administration
• Geography
• Economics
Culture
• Generally, cultural differences between two countries reduce their economic
exchange.
• Culture refers to a people’s norms, common beliefs, and practices.
• Cultural distance refers to differences based in language, norms, national or ethnic
identity, levels of trust, tolerance, respect for entrepreneurship and social networks, or
other country-specific qualities.
Administration
• Bilateral trade flows show that administratively similar countries trade much more
with each other.
• Administrative distance refers to historical governmental ties, such as those between
India and the United Kingdom.
• They have the same sorts of laws, regulations, institutions, and policies.
• Membership in the same trading block is also a key similarity.
• Conversely, the greater the administrative differences between nations, the more
difficult the trading relationship—whether at the national or corporate level.
• It can also refer simply to the level and nature of government involvement in one
industry versus another.
Geography
• Generally, as distance goes up, trade goes down, since distance usually increases the
cost of transportation.
• Geographic differences also include time zones, access to ocean ports, shared borders,
topography, and climate.
Economics
• The most obvious economic difference between countries is size (as compared by
gross domestic product GDP).
• Another is per capita income
• Disassembling a company’s economy reveals other differences, such as labour costs,
capital costs, human capital (e.g., education or skills), land value, cheap natural
 resources, transportation networks, communication infrastructure, and access to
capital.

International Trade
• Trade is the concept of exchanging goods and services between two people or entities.
• International trade is then the concept of this exchange between people or entities in
two different countries.
Benefits
• Enhanced domestic competitiveness
• Access to overseas markets
• Reduced dependence on existing markets
• Overall growth of the economy
Problems
• Modifications in product and packaging to suit overseas markets
• Added costs
• Delay in getting payments
• Tough competition
• Preference for foreign markets at the cost of domestic markets

Quotas
• Refer to numerical limits on the quantity of goods that may be imported into a country
during a specific period
• Mainly fixed on textile products

Administrative barriers
• Regulatory control designed to impair the flow of imports into a country
• Examples
• Mandating stringent product inspection
• Understaffing customs departments to cause undue delays
• Necessitating special licenses

Subsidies
• Government payment to a domestic producer
 • Cash grants, low interest loans, tax breaks etc

Indicators of growth in IB
• Foreign trade
• Trade in services
• Portfolio investments
• Direct investments

FDI
• Means acquiring ownership in an overseas business entity
• Is the movement of capital across national frontiers which gives the investor control
over the assets acquired
• FDI occurs when an investor based in one country acquires an asset in another
country with the intention to manage it
• It is the management dimension that distinguishes FDI from portfolio investment in
foreign stocks and other financial instruments
• The returns of FDI are generally in form of profits, dividends, royalty payments,
management fees etc
• International trade and FDI are the two most important international economic
activities integrating the world economy
• FDI is the largest source of external finance for developing countries
Types
• On the basis of direction of investment
• Types of activity
• Investment objectives
• Entry mode
• Sector
Direction of investment
• Inward FDI: Direct investments made by foreign firms such as Honda, General
Motors etc
• Outward FDI: Domestic firms investing overseas and taking control over foreign
assets. Also known as DIA (direct investment abroad)
• Examples: Tata Motors, Infosys etc
Type of activity
• Horizontal FDI
• Vertical FDI

Horizontal FDI
• When a firm invests in a foreign country in similar production activity as carried out
in home country
• Examples: Samsung, LG etc expanded internationally by way of horizontal FDI
Vertical FDI
• Direct investment in industries abroad so as to either provide inputs for the firm’s
domestic operations or sells its domestic outputs overseas
• Backward vertical FDI
• Forward vertical FDI

On the basis of investment objectives

1. Resource seeking FDI
2. Market seeking FDI

1. Resource seeking FDI

• In order to gain privileged access to resources
• Ensures the MNCs of stability of raw material supply at right prices
• When resource abundant countries lack capital and necessary technical skills such
FDI is favoured
• Such type of MNEs are common in sectors such as oil, agro processing and metals
like steel, copper etc
2. Market seeking FDI
• MNCs invest in countries with sizeable market and growth opportunities
• To protect existing markets, counteract competitors and to preclude rivals or potential
rivals from gaining new markets
• Often favoured by MNCs in a large number of durable and non durable consumer
goods
On the basis of entry modes
1. Greenfield investments
2. Mergers and acquisitions

1. Greenfield investments
• Investing in creation of new facilities or expansion of existing facilities is termed as
Greenfield investments
• Technological skills and production technology are the key
• Investment promotion in host countries aims at investment in new greenfield ventures
2. Mergers and acquisitions
• Increasingly popular mode
• About 70% of FDI is in the form of mergers and acquisitions

Gross domestic product

• Is the total market value of all officially recognized final goods and services produced
in a country within its geographic limits regardless of the producers national identity
in a given year

Capital formation
• Is the enlargement of capital stock
• The process of savings being converted into investment is known as capital formation
• Capital formation refers to the aggregate of additions to the fixed assets and increase
in stock of inventories from time to time
 • Rate of capital formation is the measure of growth of an economy
• Higher the rate of capital formation, higher is the increase in production of goods and
services and hence higher is the economic growth of the economy

Trade/GDP ratio
• The trade-to-GDP ratio is obtained by dividing trade over a period by GDP of same
period.
• It is expressed as percentage of GDP.
• It is also used as a measure of openness of an economy and thus is called trade
openness ratio.
• Trade-GDP Ratio also indicates degree of globalization, which implies that more is
this ratio, more globalized an economy is.
• The trade-GDP Ratio of Singapore is highest in the world and thus, that country can
be said to be most globalized country around the world.

International production
• International production deals with production of goods and services in international
locations and markets

Supply Chain Management

• Evolves around the primary objective to serve its customers through improved cost
economies and efficiencies
• Includes all functional activities in products and materials flow from procurement
through operations to delivery to the final customer

Global supply chain management

• Focuses on managing flow of information, products and services across the network
of customers, enterprises and suppliers on a global scale
• Refers to global integration and management of business processes across the three
sub systems of supply chain namely
✓ Suppliers/sub-contractors
✓ Transformation/manufacturing
✓ Distribution

Global sourcing
• Refers to procurement of inputs for production of goods and delivery of services
globally from the most optimal sources
 • Market forces compel the firm to evolve ways to reduce costs and improve quality to
remain competitive
Global sourcing arrangements
• Import from a foreign manufacturer
• Overseas contract manufacturing
• International joint venture
• Wholly owned subsidiaries
 MODULE 2

Importance of socio-cultural elements in International business

• Managers operating across national boundaries need to appreciate the differences
among cultural behaviours of their business partners and consumers
• International managers need to develop cultural sensitivities in the countries of their
operations and adapt their business strategies accordingly
• Cost of ignoring the cost of customs, traditions, taboos, tastes and preferences of
people could be very high
• Buying and consumption habits of the people, their language, beliefs, values, customs,
traditions, education are all factors that affect business
• Culture represents the collective or group behaviour of people that makes them
different from others
• Various constituents of culture are value system, norms, customs and traditions
Legal environment of IB
• International managers need to develop basic understanding of the types of legal
systems followed in the countries of their operations
• Judicial independence and efficiency
Political-legal environment
• Promoting Environment
• Regulatory Environment
1. Promoting environment includes
• Stimulation of business interest through the provisions of various incentives and
facilities
 • Protecting home products and markets from the influence of foreign competitors
• Taking direct role of promoting business insurance.
In India, Government offers all these facilities in the form of
• Sound infrastructure – transport, electricity, banking and postal and
telecommunication,
• Promoting business abroad
• Promoting business in public and joint sectors
• Concessions and benefits to various types for industries located in specified areas.
2. Regulatory Environment
• Regulatory environment puts certain restrictions on the operations of business
organisations.
• These restrictions are not of arbitrary nature but are based on the nature of a social
system and are the effective means or the instruments of achieving the desirable level
of social welfare in the country.
• In India, the regulatory environment consists of the factors related to the regulation of
business operations by prescribing their freedom to operate in certain areas of
business and the practices that are required to follow in conducting their business.
• These have been stipulated by legislative measures in the form of various statute and
policy formulation.

International legal systems

• Common law
• Civil law
• Socialistic law
• Theocratic law
Common Law
• Based on traditions, past practices and legal precedents set by the courts through
interpretation of statutes, legal legislations and past rulings
• Originated from England; followed in most of the former British colonies such as
India, Australia, New Zealand
Civil Law Jurisdiction
• Law is interpreted and enacted through legislative measures and is written in a formal
manner
• Well articulated in the written form for the knowledge of all
 • Courts have to abide by the civil law jurisdiction
Socialistic Law
• Derived from Marxian socialist system
• Continues to influence legal framework in countries such as China, Cuba, Vietnam
• Traditionally advocates ownership of most property by the State
Theocratic Law
• Based on religious doctrine and beliefs
• A large number of Islamic countries integrate their legal system based on Sharia
• There are scholars who favour religious laws when it comes to establishing code of
conduct in terms of ethics, manners and morals in a society.

Double Taxation Avoidance Agreement

• A DTAA is a tax treaty signed between two or more countries.
• Its key objective is that tax-payers in these countries can avoid being taxed twice for
the same income.
• A DTAA applies in cases where a tax-payer resides in one country and earns income
in another.
• DTAAs can either be comprehensive to cover all sources of income or be limited to
certain areas such as taxing of income from shipping, air transport, inheritance, etc.
• India has DTAAs with more than eighty countries, of which comprehensive
agreements include those with Australia, Canada, Germany, Mauritius, Singapore,
UAE, the UK and US.
• DTAAs are intended to make a country an attractive investment destination by
providing relief on dual taxation.
• Such relief is provided by exempting income earned abroad from tax in the resident
country or providing credit to the extent taxes have already been paid abroad.

Barriers to Trade
• Tariff barriers
• Non tariff barriers
Tariff Barriers
• Include mainly tariff on imports and exports
• Tariff is a tax imposed on goods involved in international trade
 • When taxes are levied on imports, they are called import tariffs
Non Tariff Barriers
• Protectionist measure
• Idea is to protect local manufacturers or reduce imports altogether
• Wage subsidies, export rebate, financing from banks etc
• 400 such protectionist policies have put in place since 2009

Regional Economic Integration

• Regional economic integration has enabled countries to focus on issues that are
relevant to their stage of development as well as encourage trade between neighbours.
• The aim of economic integration is to lessen costs for both consumers and producers,
in addition to increase trade between the countries taking part in the agreement.
Objectives
• Increase of trade
• Allowing consumers to spend more
• Movement of capital
• Economic cooperation
Levels of Integration
• Preferential Trading Agreement
• Free Trade Area
• Customs Union
• Common Market
• Economic Union
Preferential Trading Agreement
• Under this, a group of countries have a formal agreement to allow each other’s goods
and services to be traded on preferential terms.
• This requires that tariffs are reduced between the countries or preferential access for
their products
Free Trade Area
• Usually a permanent arrangement between neighboring countries
• Involves the complete removal of tariffs on goods traded among the members
• Arrangement does not in general apply to agriculture, fishing or services
 • Member countries are free to levy their own external tariff on goods from outside the
free trade area
• Each member thus retains autonomy over trade with external countries
• Example: NAFTA, AFTA
Customs Union
• Members of a customs union remove barriers to trade in goods and services among
themselves
• Establishes a common trade policy with respect to non members
• Typically this takes the form of a common external tariff, whereby imports from non
members are subject to the same tariff when sold to any member country
• Tariff revenues are then shared among the member countries according to a
prescribed formula
• Mercosur Accord, Andean Community are examples

Common Market
• Common market has no barriers to trade among members
• Has a common external trade policy
• Removes restriction on the movement of factors of production
Economic Union
• Represents full integration of the economies of two or more member countries
• In addition to eliminating internal trade barriers, adopting common external trade
policies, it requires members to coordinate their economic policies so as to blend their
economies into a single entity
• It requires the nations to surrender a larger measure of their national sovereignty
• Formation is extremely difficult
• Example: Belgium –Luxembourg Economic Union in 1922

European Union
• The European Union is a unique economic and political union between 28 EU
countries that together cover much of the continent.
• The predecessor of the EU was created in the aftermath of the Second World War.
 • The first steps were to foster economic cooperation: the idea being that countries that
trade with one another become economically interdependent and so more likely to
avoid conflict.
• The result was the European Economic Community (EEC), created in 1958, and
initially increasing economic cooperation between six countries: Belgium, Germany,
France, Italy, Luxembourg and the Netherlands.
• Since then, 22 other members joined and a huge single market (also known as the
'internal' market) has been created and continues to develop towards its full potential.
• What began as a purely economic union has evolved into an organization
spanning policy areas, from climate, environment and health to external relations and
security, justice and migration.
• A name change from the European Economic Community (EEC) to the European
Union (EU) in 1993 reflected this.
Objectives
• Elimination of customs duties among member states
• Elimination of obstacles to the free flow of import or export of goods and services
among the member nations
• Establishment of common customs duties and united commercial policies
• Free movement of capital and people within the block
• The EU, China and the United States have been the three largest global players for
international trade.

NAFTA
• In 1994, the North American Free Trade Agreement (NAFTA) came into force.
• Since then, NAFTA has systematically eliminated most tariff and non-tariff barriers to
trade and investment between Canada, the United States, and Mexico.
• NAFTA has also helped create the environment of confidence and stability required
for long-term investment.
• NAFTA was preceded by the Canada-U.S. Free Trade Agreement.
NAFTA Institutions
• Free Trade Commission
• NAFTA coordinators
• NAFTA working groups and committees
• NAFTA Secretariat
 • Commission for labour cooperation
• Commission for Environmental cooperation
Important provisions in NAFTA
• Market access for goods
• Protection for foreign investment
• Protection for Intellectual property
• Easier access for business travelers
• Access to government procurement
• Commitment to environment
• Commitment to labour cooperation

SAARC
• South Asian Association for Regional Cooperation
• India, Pakistan, Sri Lanka, Bangladesh, Afghanistan, Nepal, Bhutan, Maldives
• Established on Dec 1985

Objectives
• To promote the welfare of the people of South Asia and to improve their quality of
life
• To accelerate economic growth, social progress and cultural development in the
region and to provide all individuals the opportunity to live in dignity and to realize
their full potentials
• To promote and strengthen collective self-reliance among the countries of South Asia
• To contribute to mutual trust, understanding and appreciation of one another's
problems
• To promote active collaboration and mutual assistance in the economic, social,
cultural, technical and scientific fields

SAFTA
• The South Asian Free Trade Area (SAFTA) is the free trade arrangement of the South
Asian Association for Regional Cooperation (SAARC).
• The agreement came into place in 2006, succeeding the 1993 SAARC Preferential
Trading Arrangement.
 • India, Pakistan and Sri Lanka are categorized as Non-Least Developed Contracting
States (NLDCS)
• Afghanistan, Bangladesh, Bhutan, Maldives and Nepal are categorized as Least
Developed Contracting States (LDCS).
• SAFTA recognizes the need for special and differential treatment for LDCs in its
preamble.
• For instance, LDCs are allowed smaller initial tariff reduction and longer
implementation periods.
• Moreover, LDCs can have a longer list of sensitive products exempted from
liberalization commitments than non-LDC signatories.
• Furthermore, members shall give special regard and provide the opportunity for
consultation before imposing anti-dumping or countervailing measures on imports
from LDCs

ASEAN

• Established on 1967
• Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore,
Thailand, Vietnam
Aims and purposes
• To accelerate the economic growth, social progress and cultural development in the
region through joint endeavours in the spirit of equality and partnership in order to
strengthen the foundation for a prosperous and peaceful community of Southeast
Asian Nations
• To promote regional peace and stability through abiding respect for justice and the
rule of law in the relationship among countries of the region and adherence to the
principles of the United Nations Charter
• To promote active collaboration and mutual assistance on matters of common interest
in the economic, social, cultural, technical, scientific and administrative fields
• To provide assistance to each other in the form of training and research facilities in
the educational, professional, technical and administrative spheres

ASEAN-India Free Trade Area (AIFTA)

• The Framework Agreement on Comprehensive Economic Cooperation between the
Republic of India and the Association of Southeast Asian Nations was signed by the
 Heads of Government/State of the ASEAN Member States and the Republic of India
on 08 October 2003 in Bali, Indonesia
• India and trade agreements India has been promoting free trade and this was the main
reason for it to be one of the founding members of WTO
• India has signed bilateral trade agreements with several countries
1. India- Nepal
2. India- Afghanistan
3. India- Thailand
4. India-Gulf Cooperation Council
5. India- Singapore
6. India-SAFTA
7. India-Bhutan
8. India- South Korea
• EU is a strategic trading partner for India, with nearly one quarter of India’s exports
going to the region
• EU is also a source of supplies for critical imports

India Sri Lanka FTA:

Objectives
• To promote through the expansion of trade the harmonious development of the
economic relations between India and Sri Lanka
• To provide fair conditions of competition for trade between India and Sri Lanka
• In the implementation of the Agreement, the Contracting Parties shall pay due regard
to the principle of reciprocity
• To contribute in this way, by the removal of barriers to trade, to the harmonious
development and expansion of world trade

Global company
• Any company which is having operations and trading in many countries across the
world
• Number of countries would be high ( at least 15-20 countries)
• Mostly have FDI in some or all of the foreign countries they operate in
 • The organization structure and the key decision making functions have a centralized
approach
• Product development processes are generally initiated and completed by the parent
company and then distributed to the subsidiary companies at other countries for
further trading
• Subsidiary companies may be allowed to take part in the idea evolvement phase
• Follow uniform product type across the countries
• Miss local touch
• Examples: Microsoft, Kellogg, Shell etc

International corporation
• Companies who sell its products in foreign countries by exporting it to those countries
and they might also involved in various importing activities
• Do not have any FDI
• Key functions taken from the domestic country
• Example: Wal-Mart, Spencer
• Indian firms exporting textiles, jute, spices, nuts, rice all around the world.

MNC

• Any company which is having operations and trading in two or more countries across
the globe
• Number of countries would be in the medium range (2-10)
• But it is managed from one country
• May have FDI
• Centralized organization structure and key decision making

Transnational corporation
• Can be considered a mixture of the global, MNC and international companies as it
combines many of the features of these three
• Flexible companies in terms of operating across the globe by adopting local cultures
and consumer behaviour and the ultimate marketing strategy based on it.
• Mostly have FDI
 • Prefer to have a decentralized organization structure and key decision functions
• Each of their international establishments are responsible to take their own key
decisions as suitable for the local region they are in
• Example: Ford, BMW etc

Cultural orientation in International Business

• The orientation of its international managers affects the ability of a company to adapt
any foreign business environment
Types of cultural orientation
• Parochialism and Simplification
• EPRG

1. Parochialism
• Is the belief that views the rest of the world from one’s own cultural perspective
• This creates problems in international business situation
• The sheer gravity of one’s memory of the domestic business experience pulls one
down towards set thinking and set procedures
2. Simplification
• Is the process of exhibiting the same cultural orientation towards different cultural
groups
• A manager behaving in the same manner while doing business with Swedish, Arabian
and Japanese managers, overlooking cultural differences
3. EPRG approach
Ethnocentric orientation
• The belief that considers one’s own culture as superior to others is termed as
ethnocentric orientation
• Ignores the cultural differences across countries
• These companies carry out export business as an extension of domestic business with
minimum effort to adapt the business strategy to the needs of a foreign country
• Such companies attempt to sell their products in countries where either the demand is
similar to that in the domestic market or where indigenous products are acceptable
• Examples: Indian handicraft exporters
• A number of Indian products sold abroad primarily target the ethnic Indian population
Polycentric orientation
• Recognizes cultural differences in the host countries
• Strongly market oriented
• Based on the belief that substantial differences exist among various countries
• Each country is considered unique
• Business decisions in each country are made with the active involvement of local
experts
• Decentralization of business activities is the highest in polycentric orientation
Regiocentric orientation
• The firm treats the region as a uniform cultural segment and adopts a similar business
strategy within the region

Geocentric orientation
• Considers the whole world as a single market and attempts to formulate integrated
business strategies
• Example: Microsoft
 MODULE 3

Exporting
1. Direct export
• The organization produces their product in their home market and then sells them to
customers overseas.
• Example- Tata Steel exports a large number of steel products to the countries like
United States of America, European Union, Jordan, Qatar, Vietnam, Iraq, Afghanistan
and Korea.
Advantages and disadvantages of Direct exporting
Advantages
• Good information feedback from target market
• Better protection of trademarks, patents, goodwill, and other intangible property
• Potentially greater sales than with indirect exporting.
Disadvantages
• Higher start-up costs
• Greater information requirements
• Time Consuming
2. Indirect exporting
• The organizations sells their product to a third party who then sells it on within the
foreign market.
• Example: An Export Management Company (EMC) is a private company that serves
as the export department for several manufacturers, soliciting and transacting export
business on behalf of its clients.

Licensing
• It is an agreement between the licensor and the licensee over a period of time for the
use of brand name, marketing, know-how, copyright, work method and trade mark by
paying a license fee.
 • For example, British American Tobacco Company has given licenses in many
countries for the manufacture of their brand of cigarettes “555”. In India, ITC is the
licensed producer of “555”.
Advantages and disadvantages of licensing
Advantages of licensing
• Obtain extra income for technical know-how and services
• Reach new markets not accessible by export from existing facilities
• Quickly expand without much risk and large capital investment
Disadvantages of Licensing
• It increases opportunities for intellectual properties and products theft.
• Inconsistent product quality may effect product image negatively
• Firms can lose control over the competitive advantage of their technological know-
how.

Franchising
• Franchising is another form of licensing.
• Arrangement where one party (the franchiser) grants another party (the franchisee) the
right to use its trademark or trade-name as well as certain business systems and
processes, to produce and market a good or service according to certain specifications.
• For Example- McDonalds is a popular example of a Franchising option for expanding
in international markets.

Comparison
Licensing
• Is an arrangement in which a company (licensor) sells the right to use intellectual
property or produce a company's product to the licensee, for royalty.
• The licensor has control on the use of intellectual property by the licensee, but has no
control on the licensee's business.
• Involves one time transfer of property or rights.
Franchising
• Is an arrangement in which the franchisor permits franchisee to use business model or
brand name for a fee, to conduct business, as an independent branch of the parent
company (franchisor).
• Franchisor exerts considerable control over franchisee's business and process.
• Needs ongoing assistance of franchiser
Strategic alliances
• It is a cooperative agreements between two or more companies to work together and
share resources to achieve a common business objective.
• For Example- ICICI Bank and Vodafone India are entered into a strategic alliance to
launch a unique mobile money transfer and payment service called 'm-pesa'.
International strategic alliance
• When a firm agrees to cooperate with one or more than one firm overseas, to carry out
a business activity wherein each one contributes its different capabilities and strengths
to the alliance, this is termed as international strategic alliance
• Long term formal relationships for mutual benefit
• Two or more companies develop a common, long term strategy aimed at world
leadership
• Relationship is reciprocal
• Efforts are global
• Technology exchanges, resource pooling etc
• Participating companies retain their national and ideological identities
Example: Philip’s global strategic alliances
Advantages
• Investment cost is shared
• Internationalizing firm gets access to tangible and intangible resources of the alliance
partner
• Reduction in risk
• Promotes cooperation among competitors for mutual benefit
Limitations
• A firm has to share internal resources and information
• Goal incompatibility with alliance partner

Management contracts
• A firm that possesses technical skills or management know-how can expand overseas
by providing its managerial and technical expertise on contractual basis.
• It has widespread acceptance in industries and countries that lack indigenous expertise
to manage their own projects.
• Engineers India Ltd (EIL) got a project management contract for providing project
consultancy for the revamp and up-gradation of the Skikda Refinery in Algeria in
February 2005 and for up-gradation of tank farm area in Abu Dhabi in August 2005.
International contract manufacturing
• In order to take advantage of lower cost of production, a firm may subcontract
manufacturing in a foreign country
• May involve supply of inputs such as raw materials, semi- finished goods,
components and technical know-how to a local manufacturer in a foreign country
• Contract manufacturer limits itself to production activities whereas marketing is taken
care of by the internationalizing firm
• A processing fee is paid
• Overseas based contract manufacturers are often expected to supply the goods directly
to the firm’s clients
• Indian pharma industry players such as Ranbaxy and Lupin are contract
manufacturers for multinational companies, Eli Lilly and Cynamid.
• Nike, the leading international shoe brand, does not own a single production facility
and gets its manufacturing done through contract manufacturing throughout the
world.
Driving forces of international contract manufacturing
• Globalization of business technology
• Increasing pressure on international firms to be globally competitive
• Costs, product offering, speed, quality, customer service
• Contract manufacturing is used as a strategic tool for economic development in a
number of countries such as Korea, Mexico, China etc.
• Taiwan is a world leader in semi-conductor manufacturing
• China produces 30% of air conditioners, 24% of washing machines and 16% of
refrigerators sold in US
• Contract manufacturing provides an excellent opportunity to firms located in
developing countries including India to take advantage of their strategic strength of
low labour cost and ample availability of skilled and semi skilled human resources

Overseas assembly operations

• In order to respond to import restrictions, high tariff and freight charges, assembling
operations overseas is often adopted to expand business
• In international assembly, a manufacturer exports components, parts or machinery in
Completely Knocked Down conditions and assembles these parts at a site in a foreign
country
• Supplies from other suppliers are often sourced at the foreign assembly site
• In the food and pharmaceutical industry, the equivalent of assembly is known as
mixing where in imported ingredients are used at the firm’s overseas facilities
• Assembling is often used to overcome the import restriction
• Japanese automobile manufacturers had to begin assembling in Europe mainly to deal
with import barriers.
• As the local content in these assembly operations was negligible, these were also
termed as ‘screw driving operations’

Joint ownership ventures

• International joint ventures offer equity investment opportunities in foreign countries
• Sharing of resources and risks with partner firms
• Serves as an effective strategy to expand in countries with investment restrictions
• A firm shares equity and other resources with partner firms to form a new company in
the target country
Joint venture
• Is created when two or more independent companies cooperate to create an entirely
new entity
• New entity totally different from the parent companies
• Formed for exploiting market opportunities
• Each of the participating companies will bring some expertise
• Synergy
• Competitive advantage
Features of Joint Venture
• Is an agreement for polling of capital and business abilities
• Members also known as co-ventures
• Temporary business activity
• Profit/losses shared in agreed proportion
• At the end of venture, all the assets are liquidated and liabilities paid off
• If necessary assets and liabilities could be shared by co-ventures
Steps to form a JV
• Market Analysis & viability study
• SW analysis
• Negotiations
• MOU – defining principal terms & conditions
• Legal documentation
• Approvals & permissions
• Launching
Examples
• Indian Oil Petronas Pvt Ltd:Petronas & IOCL
• Indian Synthetic Rubber Pvt Ltd: Trimurthi holding corporation, Marubeni & TSRC
Taiwan
• Volvo and Uber have announced that they would form a joint venture to produce self-
driving cars.
• Mahindra & Mahindra has recently entered in to a joint venture with Renault to
manufacture cars.
Wholly owned subsidiaries
• A firm expands internationally to have complete control over its overseas operations
by way of 100 percent ownership in the new equity, known as wholly owned
subsidiary
• Besides ownership and control, wholly owned subsidiaries help internationalizing
firm protect its technology and skills from external sharing
Benefits
• The firm exerts complete control over its foreign operations
• Trade secrets, proprietary technology, and other firm specific advantages retains
within the company
• A popular example of a wholly owned subsidiary is Volkswagen AG which wholly
owns Volkswagen Group of America, Inc. and its distinguished brands: Audi,
Bentley, Bugatti, Lamborghini and Volkswagen.
• Marvel Entertainment and EDL Holding Company LLC are wholly owned
subsidiaries of The Walt Disney Company.
• Coffee giant Starbucks Japan is a wholly owned subsidiary of Starbucks Corp
Problems/limitations
• Completely owned operations are generally not allowed in vital and sensitive
industrial sectors such as defence, nuclear energy, media etc
• Since virtually there is little control over wholly owned subsidiary, the host country’s
governments generally sets stricter scrutiny and operational norms such as pollution
control, foreign exchange administration etc
• There exist high vulnerability to criticism by various social activists, NGOs, political
parties and other interest groups in the host country

Mergers and Acquisition

• In cross border mergers, a new legal entity emerges by way of merging assets and
operations of firms from more than one country
• Cross border acquisitions involves transferring management control of assets and
operations of a domestic company to a foreign firm
Acquisition
• Is a process in which a company buys or procures a large portion, if not all, ownership
stakes of the targeted company
• In order to undertake control of the company
• One time activity with specific objective in mind
 • Done with the intention of making it a subsidiary business or merging with one of the
existing businesses of the acquiring company
• Another growth strategy
• Process of acquisition is a case of dominance of one company over the other
• Bigger company will take over the shares and assets of the smaller company and
either run it under the bigger company’s name or might run under a combined name
Types of acquisitions
1. Friendly takeovers
2. Hostile takeovers
1) Friendly Takeovers
• Acquiring company notifies the target company’s board of directors of their bid
• Board decides
• In case shareholders decide to sell the company, then board of directors already has
the instructions to accept the friendly bid request
2) Hostile takeovers
• Acquiring company tries to acquire the target company in the face of severe
opposition from the target company
Hostile takeover methods
• Tender offer
• Proxy fight
a) Tender offer
• The acquirer offers to buy shares directly from shareholders at a price above that
available on the open market.
• The premium placed on the tender offer acts as an incentive to induce shareholders to
sell to the acquirer.
b) Proxy fight
• The acquirer persuades the shareholders to vote out the current board of directors and
vote in those who are more receptive to the acquirer's offer.
Importance of acquisition
• Assets acquisition
• Excite the shareholder
• Reduce costs and overheads
• New development
Merger
• A transaction where two firms agree to integrate their operations on a relatively co-
equal basis because they have resources and capabilities that together may create a
stronger competitive advantage.
Features of Merger
• Formation of a new unit
• Similar shareholders
• New stocks are issued
• Similar aims and objectives
• Both companies hold control over the administrative power and services
Types of Mergers
1. Horizontal
2. Vertical
3. Conglomerate mergers
1. Horizontal Merger
• Occurs between two companies which are operating in the same industry and in the
same market space
• Objective is to create a greater organization
• Synergy is created
2. Vertical Mergers
• Occurs when two companies which were earlier engaging as customers or sellers
merge with one another
• Bring in greater efficiency in management or reduction in costs
• Forward integration: Firm merging with a customer
• Backward integration: Firm merging with a supplier
3. Conglomerate mergers
• Conglomeration mergers occur where the merging companies continue to operate in
different sectors and industries.
• Conglomeration can be a useful approach in spreading business risk across a range of
different areas.
International marketing
• It focuses on the firm level marketing practices across the border
• Includes market identification and targeting, entry mode selection, marketing mix and
strategic decisions to compete in international markets
Deciding which market to enter
• This involves making decisions on volume of foreign sales, number of countries to
enter, and the type of countries to make a foray into.
Choosing a mode of entry
a) Country specific factors
b) Industry specific factors
c) Firm specific factors
a) Country specific factors
• Host country factors determine selection of an entry mode
• Ceilings or restrictions on FDI imposed by host country tend to limit the choice
• Infrastructural facilities
• Political risks in a host country
• Cultural distance
b) Industry specific factors
• Entry barriers
• Industrial uncertainty and complexity
c) Firm specific factors
• Resource position
• Chances of pirating technology
• International experience
Marketing strategy and expansion mode
• When a firm focuses itself on a select few countries, it adopts a market penetration
strategy
• Whereas when a firm either simultaneously or in quick succession enters a large
number of countries, it adopts a market skimming strategy
• A firm expanding its business in a large number of countries simultaneously using
market skimming strategy with low complexity of business environment generally
prefers trade related expansion mode (export, counter trade) due to low resource
commitment, low risk and low exit costs
• If the business environment is highly complex and the firm is adopting a market
skimming strategy, contractual expansion (strategic alliance, contract manufacturing,
management contract) mode is preferred
• Expanding business into a select few countries calls for deep market penetration.
• An internationalizing firm generally prefers the contractual expansion mode in case
the complexity of the business environment is less whereas investment mode of
expansion is preferred if the level of business complexity is high
 MODULE 4

Merchandise Trade
• It covers all types of inward and outward movement of goods through a country or
territory including movements through customs warehouses and free zones
• Goods include all merchandise that either add to or subtract from the stock of material
resources of a country or territory by entering (imports) or leaving (exports) the
country’s economic territory.
Composition of merchandise trade
1. Primary products
2. Manufactures
3. Other products: commodities and transactions not classified elsewhere (including
gold, arms and ammunition)
4. Intermediate products include all parts and accessories as well as industrial primary
and processed intermediate products.
Primary products
• Agricultural products
• Food and live animals
• Beverages and tobacco
• Animal and vegetable oils, fats and waxes
• Oil seeds and oleaginous fruits
• Fish
• Other food products and live animals etc..
Manufactures
• Iron and steel
• Chemicals of which, - Pharmaceuticals
• - Other chemicals of which
 • Organic chemicals
• Inorganic chemicals
• Dyeing, tanning and colouring materials
• Essential oils and perfume materials;
• Toilet, polishing and cleaning preparations
• Fertilizers
• Plastics in primary forms
• Plastics in non-primary forms
Analysis of India’s merchandise trade
• Exports and imports have both shown an increase from 2014 to 2018 along with trade
deficit as imports have always grown faster than exports for this period.
• India’s imports are showing slight increase in consumer goods and intermediate
goods.
• The export basket is shifting from agricultural to non-agricultural commodities and
bending towards capital and intermediate goods.
• During 2014-18, exports have increased to USA, Singapore and China and declined
with UAE and Hong Kong.
• India’s imports have increased to China, USA and Iraq with decline in UAE and
Saudi Arabia.
• Saudi Arabia and Iraq are the main countries from which India is importing oil i.e.
raw material product group , whereas, India is dependent on China for electrical and
machinery and organic chemicals.
• India’s exports have increased from US$ 13.87 billion in 1988 to US$ 323.06 billion
in 2018.
• On the other hand, imports have increased from US$ 19.35 billion in 1988 to US$
507.58 billion in 2018.
• Due to the higher increase in imports, India’s trade deficit increased from US$ 5.48
billion in 1988 to US$ 184.52 billion in 2018.
• India’s share in world exports has hovered around 1.65% over a period of 5 years and
stood at 1.68% in 2018.
• On the other hand, India’s share in imports has increased from 2.42% in 2014 to
2.59% in 2018.
• The top five products exported are mineral fuels and oils, natural or cultured pearls,
machinery and mechanical appliances and vehicles and organic chemicals.
 • The main export markets are USA, UAE, China, Hong Kong, Singapore, Netherlands,
Germany, Mexico and Bangladesh.
• The major import products of India are mineral fuels and oils, electrical machinery
and equipment, organic chemicals, machinery and mechanical appliances.
• The major source countries for India’s imports are China, US, Saudi Arabia, UAE,
Iraq, Iran, Switzerland, Belgium, Hong Kong
Roadmap for India’s trade
• Should focus on sectors such as electrical manufacturing and equipment,
pharmaceuticals, iron and steel, vehicles and other parts , edible fruits and vegetables.
• There should be special initiatives taken to boost agro- exports with emphasis on
dairy, fish, livestock, fruits and vegetables because India is one of the largest
producers of these products and its export share in world exports is quite low.
• Should also focus on diversifying export markets by including more EU countries
such as France, Germany, Netherlands, Poland, and Belgium among others.
• Canada is also a top importer in the international market, which could be a potential
market to tap for India.
• India should try to boost exports with countries from where India imports oil such as
Iran, Iraq and Saudi Arabia
• India should curtail its imports in consumer goods by substituting with domestic
produce as India’s import in consumer goods

India’s services trade

• India’s services trade has been a major driver of its exports over the past two decades.
• This sector has not only attracted significant foreign investment flows but also
contributed significantly to exports as well as provided large-scale employment.
• India’s services sector covers a wide variety of activities such as trade, hotels and
restaurants, transport, storage and communication, financing, insurance, real estate,
business services, community, social and personal services.
• India’s services exports are majorly destined to USA, UK and Japan.

World trade in commercial services

• World trade in commercial services US$ 5.898 trillion
• World trade in commercial services increased by 2.1 per cent in 2019, slowing
substantially from its 8.4 per cent rise in 2018.
• World exports of commercial services exports remain very concentrated. The top ten
exporters accounted for 54.2 per cent of global exports in 2019.
Commercial services exports

Least developed countries

• LDCs’ merchandise trade amounted to US$ 226 billion in 2019, a 2 per cent decrease
from 2018, while LDC commercial services trade totalled US$ 43 billion, increasing
by 10 per cent.
• Exporters of manufactured goods and oil accounted for 65 per cent of LDC
merchandise exports.
• In services, travel receipts were the largest source of export earnings for LDCs.
• The value of LDC merchandise exports in 2019 is 23 per cent higher than its value in
2015.
• The value of commercial services exports of LDCs is 30 per cent higher than its value
in 2015.
World’s leading traders
• The top traders of goods and commercial services in 2019 were mainly economies in
North America, Asia and Europe.
• United States of America is the leading services trader
• China has become the second largest global trader since 2010, with trade growing on
average 5.8% a year from 2010 to 2019.
• Germany, with its manufacturing-focused economy, continues to be a top trader.
• Russian Federation is a top global trader with large hydrocarbon exports.
• Philippines, with average annual trade growth of nearly 9% from 2010 to 2019, is
now the world's 38th largest trader, with particular strength in other business services
exports.
• Canada and Mexico are the 13th and 14th largest global traders, benefiting from
membership of NAFTA and its supply chain network with the United States
• United Arab Emirates is a key services trader with strong transportation service trade
and growing regional tourism.
 • Among the top 50 merchandise traders, Viet Nam recorded the biggest increase in
world ranking, improving its position from 39th place in 2009 to 23rd in 2019.
• Qatar had the largest increase in world services trade ranking in 2019, rising from
74th place in 2009 to 41st in 2019.
• India improved its rank from 18 in 2009 to 15 in 2019 in merchandise trade
• India improved its rank from 12 in 2009 to 10 in 2019 in commercial service trade
• World merchandise trade volume declined by 0.1 per cent in 2019, the first
contraction since the global financial crisis of 2008-09.
• Trade was weighed down by persistent trade tensions as well as by weaker global
GDP growth, which slowed to 2.3 per cent in 2019 from 2.9 per cent in 2018.
• In April 2020, WTO economists estimated that world trade would fall between 13 per
cent and 32 per cent in 2020 as the COVID-19 pandemic disrupted normal economic
activity and life around the world.

South -South trade

• Trade between developing countries is known as south-south trade
• In the last decade, South-South trade has outperformed both world trade and South-
North trade.
• South–South trade expanded rapidly and its share in developing countries’ total
exports increased significantly.
• The value of South–South merchandise trade increased almost seven-fold, from
US$0.6 trillion in 1995 to US$5 trillion in 2017
• Its share in developing countries’ total exports rose from 42 per cent to 57 per cent
• Research also shows that South–South trade fosters trade in non-traditional exports,
including higher value added and technology intensive manufactured goods
• The bulk of South–South trade is still intra-Asian and revolves mainly around China
• Interregional South–South trade cooperation linking different developing regions –
Asia, Africa and Latin America and the Caribbean – can be significant in enhancing
the South–South trade landscape
GSTP
• The Global System of Trade Preferences among Developing Countries was
established in 1989
• The Global System of Trade Preferences provides a framework for preferential tariff
reductions among its parties and for the pursuit of other related measures of
cooperation to stimulate trade between them
Analysis of foreign trade in India
• Total export from India (Merchandise and Services) stood at US$ 528.45 billion in
2019–20, while total import was estimated at US$ 598.61 billion according to data
from the Ministry of Commerce and Industry.
• Merchandise export stood at US$ 314.31 billion in 2019–20, while merchandise
import touched US$ 467.19 billion in the same period.
• The estimated value of services export and import for 2019–20 stood at US$ 214.14
billion and US$ 131.41 billion, respectively.
India’s foreign trade
• India’s overall exports (Merchandise and Services combined) in April-September
2020-21 are estimated to be USD 221.86 Billion, exhibiting a negative growth of (-)
16.66 per cent over the same period last year.
• Overall imports in April-September 2020-21 are estimated to be USD 204.12 Billion,
exhibiting a negative growth of (-) 35.43 per cent over the same period last year
• The share of exports of goods and services in India’s GDP has improved steadily from
7.05% to a peak of 25.43% in 2013.
• However, the share has kept dropping since that year to reach a low of 18.8% in 2017
before rising to 19.7% in 2018 .
• India’s merchandise exports have grown at a CAGR of just 1% between 2014 and
2018 to reach US$ 323 billion by 2018.
• Services exports have performed considerably better with a CAGR of 6.8% since
2014 to reach US$ 205.1 billion in 2018.
• Foreign reserves stood at US$ 461.2 billion as on 10th January 2020.
• India’s top five trading partners continue to be USA, China, UAE, Saudi Arabia and
Hong Kong.
• India improved its ranking from 143 in 2016 to 68 in 2019 under the indicator,
“Trading across Borders”, monitored by World Bank in its Ease of Doing Business
Report.
• Net FDI inflows continued to be buoyant in 2019-20 attracting US$ 24.4 billion in the
first eight months, higher than the corresponding period of 2018-19.
• Net FPI in the first eight months of 2019-20 stood at US$ 12.6 billion.
India’s foreign trade policy
• India’s Foreign Trade Policy provides the basic framework of policy and strategy for
promoting exports and trade.
• It is periodically reviewed to adapt to the changing domestic and international
scenario.
 • The current Foreign Trade Policy (2015-20) focusses on improving India’s market
share in existing markets and products as well as exploring new products and new
markets.
• The Foreign Trade Policy 2015-20 has formulated a number of incentive schemes for
Indian exporters.
• The major schemes announced for exporters are Merchandise Exports from India
Scheme (MEIS) and Services Exports from India Scheme (SEIS).

Trade promotion
• Trade promotion is an umbrella term for economic policies, development
interventions and private initiatives aimed at improving the trade performance of the
country or a region within a country, or a group of countries involved in an economic
trade area (NAFTA, SAFTA, ASEAN, EU, etc).
• The trade policies are formulated and announced by the Commerce ministry of India
and it is governed by the Foreign Trade Development and Regulation Act, 1992.
• Foreign trade policy is managed and implemented by a specific government body
known as DGFT (Directorate General of Foreign Trade).
Starting the import-export business
• First and foremost, one must have a business setup.
• It is recommended to open a sole proprietorship in the initial stage by taking a Service
Tax registration or a VAT registration with an attractive name and logo.
• Obtain a PAN card for the business
• Opening a current account with any commercial bank is the next step after receiving
the business registration and PAN card
• The next step is to get the Import Export Code (IEC) issued
• Import Export Code (IEC) registration can be obtained by applying online at the
DGFT website.
• Membership of Export Promotion Council (EPC) or Commodity board (CB) should
be obtained by Exporters
• After obtaining the IEC, one needs to obtain a registration cum membership
certificate (RCMC), granted by the concerned Export Promotion Councils to get
authorization to import and export, or for any other benefit.
• After getting the IEC and RCMC issued, one can set up its import and export business
from India.
Major foreign trade promotion schemes
• Duty drawback scheme
• Export manufacturing under bond scheme
 1. Duty drawback scheme
• It enables exporter to obtain a refund of custom duty and excise duty that are
chargeable on imported material used in the manufacturing of exported goods by
showing a proof of exports of these goods to the concerned authorities.
• It is done for improving competitiveness of exports.
Example
• The Union Ministry of Commerce raised the duty drawback rates across all varieties
of textile and apparel by up to 70 per cent recently.
• The revised duty drawback rates will lead to increase exports of textiles and other
products in the value chain.
2. Export manufacturing under bond scheme
• This facility entitles firms to produce goods without payment of excise and other
duties
• The firms desirous of availing such facility have to give an undertaking (i.e., bond)
that they are manufacturing goods for export purposes.
 MODULE 5

Foreign investment
• Happens in two ways
• Foreign Direct Investment and Foreign Portfolio Investment
• FPI refers to holding securities such as stocks and bonds of companies in countries
outside one’s own but does not entail the active management of foreign assets
• FPI is foreign indirect investment
• For statistical purposes, UN defines FDI as an equity stake in of 10% or more in a
foreign based enterprise
• A lower percentage invested in a foreign firm is considered FPI
Foreign Portfolio Investment
• FPI is defined as an investment by individuals, firms or a public body in foreign
financial instruments
• Equity stake in the foreign business entity is not significant to exert any management
control
• Passive holding of securities and other financial assets by a foreign firm
• High rate of returns and mitigation of risks due to geographical diversification
positively influence FPI
• Return in the case of FPI are generally in the form of dividends or interest payments

Theories of foreign investment

• Capital Arbitrage theory
• Market Imperfection theory
• Internationalization theory
• Monopolistic Advantage theory
Capital Arbitrage Theory
• Earlier theories were based on the belief that FDI takes place due to differences in the
rates of return on capital across countries
 • Capital is likely to be attracted to markets that offer higher returns as long as there are
differences in interest rates or prices between markets
• Based on assumption that markets were perfectly competitive and firms invest
overseas as a form of factor movement to benefit from differential profits
• Scope of theory is limited to providing a broad explanation of FDI
Market Imperfection theory
• Factors that inhibit markets from working perfectly are known as market
imperfections
• Government policies including import restrictions and quotas, incentives on exports
and FDI, tax regimes, restrictions on FDI and government participation in trade are
some of the examples of government intervention that create market imperfections
• Factors that inhibit markets from working perfectly are known as market
imperfections
• Government policies including import restrictions and quotas, incentives on exports
and FDI, tax regimes, restrictions on FDI and government participation in trade are
some of the examples of government intervention that create market imperfections
Internationalization theory
• A firm expands internationally in order to exploit its specific advantage or cost
competence in foreign markets
• When the know-how, technology, skills or trade secrets available with the firm are
crucial to a firm’s competitive advantage, it needs to protect such knowledge base
within the organization
Monopolistic Advantage theory
• An MNC is believed to possess monopolistic advantage, which enables it to operate
overseas more profitably and compete with local firms
• The benefit possessed by the firm that maintains its monopolistic power in the market
is termed as monopolistic advantage

A firm attempts to internationalize its operations:

• To protect its proprietary knowledge from competitors
• To create and maintain monopolistic or oligopolistic power in the market
• To protect itself against market uncertainties
Components of FDI flows FDI is mainly financed by MNEs through
• Equity capital: the foreign direct investor’s purchase of share of an enterprise in a
country other than its own
• Intra-company loans: short or long term borrowings and lending of funds between
direct investors, i.e., parent enterprises and affiliate enterprises
• Reinvested earnings: the direct investor’s share (in proportion to direct equity
participation) of earnings not distributed as dividends by affiliates or earnings not
directly remitted to the direct investor
• Such retained profits by affiliates are reinvested

Factors affecting international investment

1. Supply factors
2. Demand factors
3. Government factors

1. Supply factors
• Production costs
• Resource availability
• Access to technology
• Logistics
Production costs
• Firms seek competitive advantage through low production cost
• MNCs locate production facilities in low wage countries
• Example: investment by Ford and Hyundai in Chennai
Logistics
• MNCs seek to invest in subsidiaries in foreign markets if the cost of shipping raw
materials is high
Natural Resources
• MNCs tend to utilize FDI to access natural resources that are critical to them
• To access cheap energy resources used in manufacturing, Japanese firms are
relocating production in China, Mexico and Vietnam where energy cost is lower
Access to technology
• Motive behind FDI is to get access to technology
• Many of the Swiss Pharmaceutical companies have invested in US biogenetics
companies in order to gain cutting edge technology

2. Demand factors
• Customer access
• Follow clients
• Exploitation of competitive advantage
• Follow rivals
Customer access
• Certain MNCs need to be physically present in foreign markets to serve customers
better
Competitive advantage
• A company enjoying great reputation may seek to establish subsidiaries in overseas
countries to encash on its popularity
• Valuable brand name or trade mark may choose to operate in an foreign country
Follow the clients
• Clients of a company attract FDI
• If one of the clients build a foreign facility, the company may decide to locate a new
factory of its own nearby
Follow the rivals
• Competitor analysis indicate geographic strength and weakness of individual rivals
• From such analysis, firm can select markets for investments

3. Government factors
• Economic development incentives
• Avoidance of trade barriers
• Economic priorities
UNCTAD
• United Nations Conference on Trade and Development
• Is a permanent intergovernmental body established by the United Nations General
Assembly in 1964.
• Headquarters in Geneva, Switzerland
• 194 member countries
• Support developing countries to access the benefits of a globalized economy more
fairly and effectively.
• Equip developing countries to deal with the potential drawbacks of greater economic
integration.
• Provide analysis, facilitate consensus-building, and offer technical assistance.
• This helps them to use trade, investment, finance, and technology as vehicles for
inclusive and sustainable development.

FDI Trends: Overview of UNCTAD’s World Investment Report 2019

• According to the most recent UNCTAD’s World Investment Report issued in June of
2019, estimated global FDI flows were $1.3 trillion in 2018, which is 13% decline
compared to the previous year.
• This is the third consecutive drop in FDI flows.
• The decline is largely concentrated in the developed part of the world, where FDI
inflows dropped by 27% .
• This is the lowest number since 2004. In the case of developing countries there is
slight increase of 2% compared to the last year.
• When it comes to the regional FDI distribution, Europe experienced staggering 55%
decline in FDI inflows compared to the last year.
• The biggest economy of Europe, i.e. Germany, faced with 30% decline in FDI inflows
attracting $26 billion of overseas investments.
• Decline also occurred in the North America and Latin America and the Caribbean
where inflows dropped by 4% and 6% respectively.
• FDI inflows to USA, the largest world economy, declined by 9% to $252 billion. In
Latin America, FDI inflows to Brazil, the largest host country in the region, decline
by 9% to $61 billion.
• Developing Asia and Africa experienced slight increase of 4% and 11% respectively.
 • In the Asia flows are mainly concentrated in East and South-East Asia where China,
the largest FDI recipient among developing economies, attracted overseas investments
worth of almost $139 billion.
• In the South East Asia, Singapore is leading FDI host country ($78 billion) followed
by Indonesia ($22 billion) and Thailand ($10 billion).
• In South and West Asia, two leading host countries, India and Turkey, attracted $42
and $13 billion overseas investments respectively.
• When it comes to Africa, the largest FDI host country is Egypt ($7 billion) followed
by South Africa ($5 billion).

Negative FDI trends

• Policy factor
• Economic factor
• Structural changes in the way international business is conducted

Policy Factor
• Tax reforms in the United States evoked repatriation of retained earnings by USA’s
MNCs resulting in the negative FDI inflows in many economies
• Uncertainty regarding the trade relations also contributed to the FDI slide
Economic Factor
• Average rates of return on FDI declined from 8.1% in 2012 to 6.7% in 2017
Structural changes in the way international business is conducted
• In today’s digital world, reaching global markets does not requires investments that
include heavy assets.
• International production is shifting towards intangibles, i.e. royalties and licensing
fees, and light forms of assets.

Foreign investment by Indian companies

• There has been a perceptible shift in Overseas Investment Destination (OID) in last
decade.
• While in the first half, overseas investments were directed to resource rich countries
such as Australia, UAE, and Sudan, in the latter half, OID was channeled into
countries providing higher tax benefits such as Mauritius, Singapore and the
Netherlands.
 • Indian firms invest in foreign shores primarily through Mergers and Acquisition
(M&A) transactions.
• According to the data provided by Reserve Bank of India (RBI), India’s outward
Foreign Direct Investment (OFDI) in equity, loan and guaranteed issue stood at US$
784.28 million in the month of February 2018.
• Indian IT services provider Tech Mahindra is going to invest Rs 5.1 billion (US$
78.54 million) in Canada over the next five years for setting up of a centre of
excellence which will operate on major technologies such as block chain application
and Artificial Intelligence.
• Indian firms have employed a total of 113,423 people and made investments over
US$ 17.9 billion in the US
• During 2016, Indian companies in Germany employed a total workforce of 27,400,
while their combined revenue reached Rs 87,506 crore (US$ 13.65 billion).
• Sterlite Power has won a 1,800 km power transmission project worth US$ 800 million
in Brazil, the company's third project in Brazil and the largest ever project won by an
Indian company in Latin America
• India’s third largest software services firm Wipro will be spending US$ 500 million to
acquire US-based cloud services firm Appirio.
• Sun Pharmaceutical Industries Ltd, India's largest drug maker, has entered into an
agreement with Switzerland-based Novartis AG, to acquire the latter’s branded cancer
drug Odomzo for around US$ 175 million

Government Initiatives
• The RBI, encouraged by adequate forex reserves, has relaxed the norms for domestic
companies investing abroad by doing away with the ceiling for raising funds through
pledge of shares, domestic and overseas assets.
• The RBI also liberalized/ rationalized guidelines for foreign investments abroad by
Indian companies.
• It raised the annual overseas investment ceiling to US$ 125,000 from US$ 75,000 to
establish JV and wholly owned subsidiaries.
• The government's supportive policy regime complemented by India Inc.’s
experimental outlook could lead to an upward trend in OFDI in future

Technology
• Systematic application of scientific or other organized knowledge to practical tasks
Features
• Change and then more change
 • Effects are widespread
• Technology makes more technology possible
• It is a complete set of knowledge, ideas and methods and it is likely to be the result of
a variety of activities
Classification of Technology
• State of the art technology: Technologies that equal or surpass the competitors
• Proprietary technology: Technology protected by patents that provide a measurable
competitive advantage
• Known technology: may be common to many organizations
• Leveraging technology: technology that support several products, product lines
• Supporting technology: Technology that supports core technology
• Emerging technology: technology that are currently under consideration for future
products or process

Impact of technology
• Social implications
• Economic implications
• Plant level changes

Technology Transfer
• Covers various activities including the internal transfer of technology from the R&D
or Engineering department to the manufacturing department of a firm based in a
country
• It also includes the same transfer of technology from a laboratory or operations of an
MNC in one country to another
• It also includes transfer of technology from a research consortium supported by many
firms to one of its members
• Is a process that permits flow of technology from a source to receiver
• Source is the owner or holder of the knowledge and it can be individual or a company

Technology is transferred through

• Published material
• Purchase and sale of machinery, equipment, transfer of data and personnel
 • Interpersonal communication

Technological environment of IB
• Technological progress is the main source of economic growth
• But it is also the main source of labour market change.
• Technology can increase the demand for labour, as well as decrease it
• Technological change also affects the relative earnings of workers with different skills
• The upcoming wave of technological advances, in particular artificial intelligence and
robotics, raises a number of issues, including their impact on the future of jobs.

International technology transfers

• Flows from developed to developing nations
• Among developed nations
• Technology transfer is more needed in developing countries
• When an invention is made in some part of the globe, it is desirable that others borrow
or buy the same instead of wasting their efforts on repeating the whole life history of
the new technology
• Three basic elements in international technology transfer are the home country, host
country and the transaction

Home country’s reaction to technology transfers

• Express apprehensions about the export of their technology
• They argue that establishment of production facilities by MNCs in subsidiaries abroad
decreases their export potential
• Volume of imports in the country can increase as some of the MNCs import from the
subsidiaries
• Balance of trade tends to be adverse to the home country
• Tends to adversely affect the competitive advantage of home country
• Labour unions also oppose tech transfers

Host country’s reaction to technology transfers

• Subject of technology transfer is highly sensitive, often evoking strong reservations
against it from the host country citizens
 • Criticisms are based on economic and social factors

Economic implications
• Payment of fee, royalty, dividends, interests and salaries to foreign citizens and tax
concessions resulting in loss to the national exchequer
• Might prove expensive to the host country
• Issues like overpricing, tie up purchases etc

Social implications
• Along with the transfer of technology, there is transmission of culture from the
exporting countries
• Social problems like pollution, urbanization, congestion etc

Strategies before the host countries

• Government might limit certain sectors to domestic ownership and throw open other
sectors for overseas technology
• Government might limit the amount of inward investment
• Government could discourage restrictive clauses on technology transfer
• Government might encourage indigenous technological development
• Government might encourage cross border collaborative R&D

Technology acquisition routes

• Seizing tacit knowledge
• Internal R&D with Networking
• Reverse Brain drain
• Contract R&D
• Licensing
• Strategic partnership
• Joint ventures