INTERNATIONAL BUSINESS

ENVIRONMENT
Introduction to International Business

• After the second world war there was an enormous growth in the volume of international trade.

• This was also the period when significant progress was made towards removing the obstacles to the free flow of
goods and services across nations.

• However, today, the case for and against free trade continues to be debated, international business disputes in
various forms erupt between nations every once in a while, and protectionism is cropping up as a result.

• The fact remains that the rapid economic growth and increasing prosperity in the west and in some parts of Asia
is mostly because of this ever-growing flow of goods and services in search of newer and more remunerative
markets, and the resulting changes in the allocation of resources within and across countries.
Introduction to International Business
• Countries all over the world are/ have undergone a fundamental shift in the way they produce and market
various products and services. The national economies which so far were pursuing the goal of self-
reliance are now becoming increasingly dependent upon others for procuring as well as supplying various
kinds of goods and services. Due to increased cross border trade and investments, countries are no more
isolated.

• Originally, the producers used to export their products to the nearby countries and gradually extended the
exports to far-off countries. Gradually, the companies extended the operations beyond trade.

• The export marketing efforts include creation of demand for Indian products like textiles, electronics,
leather products, tea, coffee etc. arranging for appropriate distribution channels, attractive package,
product development, pricing etc. This process is true not only with India, but also with almost all
developed and developing economies.
Introduction to International Business
• The multinational companies producing the products in their home countries and marketing them in various
foreign countries prior to 1980s, started locating their plants and other manufacturing facilities in foreign/host
countries. Later, producing in one foreign country and marketing in other foreign countries became a regular
feature.
• The new millennium indicated rapid internationalization and globalization, wherein there was a dramatic pace
through which the transition initiated.
• Over a period of time, the international trader reached a position to anticipate and interpret the global, social,
technical, economic, political and natural environmental factors more clearly.
• International or Foreign trade is recognized as the most significant determinants of economic development of a
country, all over the world. The foreign trade of a country consists of inward (import) and outward (export)
movement of goods and services, which results into outflow and inflow of foreign exchange.
Introduction to International Business
• International or external business can, therefore, be defined as;
“Those business activities that take place across the national frontiers. It involves not only the international
movements of goods and services, but also of capital, personnel, technology and intellectual property like patents,
trademarks, know-how and copyrights.”
Importance, Nature and Scope of International Business
• Importance to Businesses;

 Utilization of the organizational surplus resources and increasing profitability of their activities.
 Enhancing their development prospects of business.
 One of the methods for accomplishing development in the business confronting extreme market conditions in the
local market.
 Enhance of the business vision by making businesses more aggressive and diversified.
 Improvement in profits by selling products in the nations where costs are high.
Importance, Nature and Scope of International Business
• Importance to Nation;
 Inflow of foreign exchange that can be utilized to import merchandise from the global market.
 Specialization and competency enhancement of a nation in the production of merchandise which it creates in the
best and affordable way.
 Enhancing the national development prospects and furthermore offers opportunity for employment.
 Facilitates individuals to utilize commodities and services produced in other nations which help in improving their
standard of life.
Importance, Nature and Scope of International Business
• Nature;

 Large quantum of information is required.

 Grants benefits to participating countries.
 Scaled up operations.
 Economies are integrated.
 Developed countries dominate.
 Market is segmented.
 Sensitive and volatile.
 High Risk.
 International Restrictions.
Importance, Nature and Scope of International Business
• Scope;

Scope of international business has substantially expanded. International trade in services such as international travel
and tourism, transportation, communication, banking, warehousing, distribution and advertising has considerably
grown. The other equally important developments are increased foreign investments and overseas production of goods
and services. Companies have started increasingly making investments into foreign countries and undertaking
production of goods and services in foreign countries to come closer to foreign customers and serve them more
effectively at lower costs. All these activities form part of international business. To conclude, we can say that
international business is a much broader term and is comprised of both the trade and production of goods and services
across frontiers.
Modes of Entry
 Businesses use six different modes to enter foreign markets namely exporting, turnkey projects, licensing, franchising,
establishing joint ventures with a host-country firm, or setting up a new wholly owned subsidiary in the host country.

 Each entry mode has its advantages and disadvantages. Managers need to consider these carefully when deciding as
to which mode is to be used.

 Exporting;

Using domestic plant as a production base for exporting goods to foreign markets.
Excellent initial strategy for pursuing international sales.
Exporting is the marketing and direct sale of domestically-produced goods in another country.
Exporting is a traditional and well established method of reaching foreign markets.
Exporting does not require that the goods to be produced in the target country, investment in foreign production
facilities is required.
Most of the costs associated with exporting take the form of marketing expenses.
Modes of Entry
Licensing;

Licensing is preferred when a firm with valuable technical know-how or a unique patented product has neither the
internal organizational capability nor the resources to enter the foreign markets.
Licensing permits a business in the target country to use the property, usually intangibles of the licensor.
The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical
assistance.
Licensing has the potential to provide very large returns.
Licensee produces and markets the product due to which potential returns form manufacturing and marketing
activities may be lost.
Modes of Entry
 Franchising;

 Franchising is a specialized form of licensing in which the franchiser not only sells intangible property to the
franchisee, but also insists that the franchisee agree to abide by strict rules as how it does business.
 The franchiser will assist the franchisee to run the business on an ongoing basis.
 Franchising is often suited to the global expansion efforts of service and retailing.
Modes of Entry
 Contract Manufacturing;

 Businesses enters into a contract with the foreign supplier, which fixes production amounts and delivery times and
allows the supplier to maintain hands-on management of the production process.
 This gives the importer a greater assurance of supply and quality control while capitalizing on lower wage rates
and still limiting the business commitment to the manufacturer and the country of manufacture. This program can
be used either to acquire a lower-cost source of components or for a production base for final assembly of
products.
Modes of Entry
 Turnkey Projects;

 Businesses that specialize in the design, construction, and start-up of turnkey plants are common in some industries.

 In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the
training of operating personnel.

 At completion of the contract, the foreign client is handled the “key” to a plant that is ready for full operation-hence the
term turnkey.

 This is a means of exporting process technology to other countries.

 Turnkey projects are most common in the chemical, pharmaceutical, petroleum refining, and metal refining industries,
all of which use complex, expensive production technologies.
Modes of Entry
 Strategic Alliance

Strategic alliance is a formal relationship between two or more parties to pursue a set of agreed upon
goals or to meet a critical business need while remaining independent organizations.
Strategic alliances are agreements between businesses (partners) to reach objectives of a common
interest.
Contractual arrangement is the form of strategic alliance.
Strategic alliances are arrangements between two or more entities that are created to achieve mutual goals
through collaboration.
Strategic alliances take many forms, such as license agreements, marketing agreements, and development
agreements, minority equity investments, and joint ventures that are operated as separate legal entities (such as

corporations, limited liability companies, or partnerships).

• Strategic alliances share common features such as:

 Defined scope and strategic objectives;

 Interdependent contractual arrangements within the defined scope and to achieve the strategic goals;
 Specifically defined responsibilities and commitments for each party;
 Independence of the parties outside of the defined scope of the alliance;
 Fixed time period in which to achieve the strategic goals.
Modes of Entry
 Joint Ventures
Joint venture is a very common strategy of entering the foreign market.
Any form of association which implies collaboration for more than a transitory period is a joint venture.
It includes many diverse types of joint overseas operations and includes;
Sharing of ownership and management in an enterprise.
Licensing/franchising agreements.
Contract manufacturing.
Management contracts.

 Joint ventures also create synergies and give the companies cost and benefit advantage.
 It is the result of different reasons to enter a new market or geography, to enter into a new business line
altogether.
 There are no separate governing bodies for joint ventures as they decide to enter into a new agreement.
Internationalisation Process

 Internationalization of the firms is a process in which the firms gradually increase their international involvement.

 Internationalization describes designing a product in a way that it may be readily consumed across multiple
countries.

 This process is used by companies looking to expand their global footprint beyond their own domestic market
understanding consumers abroad may have different tastes or habits.

 Internationalization is advantageous as;

 It offers faster growth.
 Impact on enterprise performance.
 Job Creation and meeting needs.
 Attracting investments and new technology.

 Internationalization happens in stages and is spread over a period a period of time. The stages usually involve;
 Direct exportation.
 Indirect exportation.
 Foreign presence.
 Home manufacture and foreign assembly.
Globalization Meaning and Implications
 Globalization Meaning and Implications;

 Globalisation is the growing economic interdependence of countries world wide through increasing volume and
variety of cross border transactions in goods and services and of the resources that are available across the
world including the international capital flows and also through the more rapid and widespread integration of
technology.

 Globalisation has lead to change in the overall markets. The markets have been expanded in scope and the
markets have become more competitive.

 Globalisation has resulted in greater inter-connectedness among markets around the world and increased
communication and awareness of business opportunities in the far corners of the globe. More investors can
access new investment opportunities and study new markets at a greater distance than before. Potential risks
and profit opportunities are within easier reach thanks to improved communications technology.

 Globalization has influenced international investing, making it easier than ever before, historically, for market
participants to invest in companies, industries, or other financial instruments abroad.
Globalization as driver of International Business

 Increases Competitive Strength: Globalisation exposes domestic industry in

developing countries to foreign competition. This puts domestic companies
under pressure to improve efficiency and quality and reduce costs.
Industries loose the urge to improve efficiency and quality.Globalisation
helps to improve the competitive strength and economic growth of
developing nations.

 Access to Advanced Technology: For a developing country, globalization

provides access to new technology; Companies can acquire sophisticated
technology through outright purchase or through joint ventures and other
arrangements.

 Access to Foreign Investment: Globalisation attracts the much needed

foreign capital towards developing countries.

 Reduction in Cost of Production: Companies can procure cheaper sources

of raw materials and labour. Companies may carry out its entire
manufacturing in a foreign country to minimize cost of production.
Globalization as driver of International Business

 Growth and Expansion: Domestic market may not be large enough to

absorb the entire production, domestic companies can expand and grow by
entering foreign markets.

 Higher Volume of Trade: Each country can specialize in the production of

goods and services in which it has a comparative advantage. It can export
its surplus output and import their items freely from other nations. This will
lead not only to a phenomenal increase in the world trade but also to better
allocation and utilization of resources in each country.
The Multinational Corporations (MNCs) – evolution, features and dynamics of the Global Enterprises.

 Firms go abroad for various reason as exporting may not be the best
alternative because of trade barriers, perishability, or a need to produce a
product customized to the local market.

 Investing in a firm by purchasing stock or making loans is one method.

 Firm wants greater control over management, product quality, and patented
processes.

 The only way to get access to needed local resources, especially raw
materials, is to build a local plant.

 Trade barriers or the needs of the local (foreign) market are much more
common reasons for building foreign plants than the attraction of cheap
labour.
The Multinational Corporations (MNCs) – evolution, features and dynamics of the Global Enterprises.

 Companies go international for various reasons;

 MNC`s can sell its products in the vast global market.

 Raise money for its operations throughout the world.
 Establish production facilities in countries where labour cost is low and raw
materials are abundant in supply.
 Global firms have greater access to various natural resources and raw
materials than domestic firms. This enables them to carry on production
most effectively and efficiently.
 MNCs can employ efficient managers by being able to recruit the most
technically qualified and managerially efficient people from the whole world.
The Multinational Corporations (MNCs) – evolution, features and dynamics of the Global Enterprises.

 Features;

 Huge Assets and Turnover;

MNCs have huge physical and financial assets as their operations
are global. The turnover remains high and results in huge sales of
MNCs. In terms of assets and turnover, many MNCs are bigger
than national economies of several countries.

 International Operations via network of branches;

MNCs have production and marketing operations in several
countries; operating through a network of branches, subsidiaries
and affiliates in host countries.

 Unity of Control;
MNCs control business activities of their branches in foreign
countries through head office located in the home country.
Managements of branches operate within the policy framework of
the parent corporation.
The Multinational Corporations (MNCs) – evolution, features and dynamics of the Global Enterprises.

 Features;

 Mighty Economic Power;

MNCs are powerful economic entities. They keep on adding to their
economic power through constant mergers and acquisitions of companies,
in host countries.

 Advanced and Sophisticated Technology;

MNC has at its command advanced and sophisticated technology. It
employs capital intensive technology in manufacturing and marketing.
The Multinational Corporations (MNCs) – evolution, features and dynamics of the Global Enterprises.

 Dynamics;

 MNCs are organizations largely beyond the control of any single

government.
 Their overall goal is worldwide profits without regard for what is best for an
individual country.
 The interests of the country where a subsidiary is established for the
development of export markets are subjected to the market interests of the
parent company.
 Parent companies do not make the most modern technology available to
their subsidiaries.
 MNCs prevent the growth of locally owned enterprises by aggressive and
unfair competition.
The Multinational Corporations (MNCs) – evolution, features and dynamics of the Global Enterprises.

 Dynamics;

 Increase investment, income and employment in host country.

 Transfer technology to developing countries.
 Commendable contribution to inventions and innovations.
Consequences of Economic Globalization

 Wider Markets;
Globalization offers larger markets to domestic manufacturers. Domestic
businesses can export their excess end product. They can understand the
nature of foreign markets through direct and indirect selling channels.

 Rapid Industrialization;
Globalization helps in the free flow of capital and engineering between
states. Global businesses can get finance at lower cost of capital. Free
flows of capital and engineering from advanced states help the developing
states to hike up their industrialization. Industrialization of developing states
leads to equilibrate development of all the states.
Consequences of Economic Globalization

 Greater Specialization;
Globalization enables the domestic houses to specialize in countries where
they enjoy competitory or comparative advantage. Specialization besides
helps to salvage resources and advance exports of the state.

 Competitive Additions;
Globalization adds competition for domestic houses through imports and
transnational corporations. Domestic houses learn about new
merchandises, new engineering’s and new direction systems. They are
under force per unit area to increase efficiency, present inventions and cut

down costs.
Consequences of Economic Globalization

 Higher Production;
Globalization leads to distribute up fabrication installations in different
states. Firms with world-wide contacts can outsource finances, engineering,

distribution and other maps from anyplace in the universe. They can
negotiate farm outing to stay focused on countries of their nucleus
competency.

 Price Stabilization;
Globalization can cut down monetary value differences between states.
Free trade and international competition aid to equalize monetary value
degrees in international markets. States with a high grade of globalization
can pull greater foreign investing which supplements domestic finances,
brings in foreign and improves balance of payments.
Consequences of Economic Globalization

 Employment generation;
Globalization creates occupation chances in developing states and the
incomes of people additions due to increased industrialization.

 Higher Standards of Populating;

Lower monetary values, better quality and higher incomes help to heighten
ingestion and life criterions of people peculiarly in developing states.
Furthermore, increased economic development enables the authorities of
these states to supply better public assistance installations like instruction,
wellness, sanitation, etc. There is all circular addition in public assistance
and prosperity of public.
Consequences of Economic Globalization

 International Economic Cooperation;

Globalization improves economic cooperation between states in the signifier

of trade understandings, international pacts, standardization of commercial

process, turning away of dual revenue enhancement, rational belongings
protection and so on. International cooperation besides helps states to
harmonies their macroeconomic policies for their common benefit.

 World Peace;
Brexit;

 The term “Brexit” is used to refer the withdrawal of the United Kingdom from
the European Union.
 It was the result of the national referendum in 2016, that UK decided to
withdraw.
 Taking back the control to check the immigration status.
 Democratic control over making laws.
 Border protection and check on free movement.
 Fair welfare and ensure that benefits reach the UK citizens.
 No extended contributions domestic use of national assets.
 Supporting the UK businesses.
 More sale of UK goods.
 Benefits to the UK families and citizens.
 Protection of consumers and environment.
 Enhancing animal welfare.
 Making Britain a global and well-regulated economy of the world.
 Searching future opportunities for growth.
Reverse Globalisation;

 Globalization leads to a situation in which units, business, nations become

increasingly integrated over time, that is spread between the periods of
globalization. The contrast or opposite of this is reverse globalisaton.

 The rise in negative sentiment about globalisation is not a common

sentiment as not all countries show high levels of discontent, and the focus
of discontent varies across and within countries, as well as across time.

 The discontent in countries is more amplified by the internet and social

media, though the countries have received enormous benefits of
globalization.

 One theme is that globalization has benefitted a few and left behind many.
Reverse Globalisation;

 Various times and places the discontent has been directed at immigration,
trade imbalances or trade agreements with particular trading partners, ,
inward investment , outward investment, perceived unfairness in the policies
of other countries distorting fair competition, the use of tax-advantageous
jurisdictions for tax evasion and avoidance, growing inequalities and the
power and influence of large multinational enterprises.

 Slowing of trade and increase in protectionism has lead to slowing down of

globalization thereby halting the globalization trajectory.

 To make the benefits of globalization more inclusive there is a need to

Strengthen an open and inclusive trading system, Make use of digital trade
potential and Foster investment facilitation.

 Going backward and undoing globalization may impose more costs than
reap benefits and thus may not be a prudent way forward.
International Business Environment;

 International Business Environment comprises the political, economic,

regulatory, tax, social & cultural, legal, & technological environments.
 Business environments are required for having businesses in the following
forms;
• Import & Export.
• Licensing.
• Franchising.
• Joint venture.
• Foreign Direct Investment.

 It is necessary to have business environment that is suitable, is able to

identify opportunities, utilises the resources to the optimum.
International Business Environment;

 International Business Environment comprises the political, economic,

regulatory, tax, social & cultural, legal, & technological environments.

 For providing, regulating and creating necessary and well balanced

environment for the orderly growth, several acts, legislations, regulations
have been put in place.

 The foreign trade of India is governed by the Foreign Trade (Development &
Regulation) Act, 1992 and the rules and orders issued there under.

 Payments for import and export transactions are governed by Foreign

Exchange Management Act, 1999, Customs Act, 1962 governs the physical
movement of goods and services through various modes of transportation.
International Business Environment;

 International Business Environment comprises the political, economic,

regulatory, tax, social & cultural, legal, & technological environments.

 For providing, regulating and creating necessary and well balanced

environment for the orderly growth, several acts, legislations, regulations
have been put in place.

 The foreign trade of India is governed by the Foreign Trade (Development &
Regulation) Act, 1992 and the rules and orders issued there under.

 Payments for import and export transactions are governed by Foreign

Exchange Management Act, 1999, Customs Act, 1962 governs the physical
movement of goods and services through various modes of transportation.
International Business Environment;

 International business environment can be classified into the following;

 Internal Environment;
The internal capabilities represent its internal environment. It consists of
financial, physical, human and technological resources, value system,
vision mission and objectives, management structure, internal power,
company image and others like the investment in physical assets.

 External Environment;
External environment consists of those factors which provide an opportunity

or pose threats to the business. It includes the factors that provide

opportunities or pose threat to the business.

It is further classified as:

Micro Environment: The immediate factors of the business that has a
continuous and direct impact on it is called micro environment. It includes
suppliers, customers, competitors, market, intermediaries, etc. which are
specific to the business.
International Business Environment;
Macro Environment: Macro Environment, influences the functioning and
performance of every business organization, in general. It comprises of the
demographic, socio-cultural, legal, political, technological, and global
environment.
International Business Environment;
 Political economy of international business;
It refers to the influence exerted by the three political institutions namely
legislature executive and the judiciary in shaping, directing, developing and
controlling business activities. Stable and dynamic political environment is
indispensable for business. The other aspects include regulation and
deregulation, government subsidies, tax rates, monetary and fiscal policies,

trade agreements etc.

 Economic and political system;

The political system has significant influence on the shaping of economic
policies of the nation or territory.
International Business Environment;

 However, the international business environment is associated with the

following elements. These are;
 Its dynamic.
 Involves complexities.
 Includes uncertainties.
 Sensitive to changing patterns.
 Results in far-reaching impact.
 The perception varies from place to place.