Unit 2 Introduction to International Business
Contents
2.1 Importance, nature, and scope of international business
2.1.1 Nature of International Business
2.1.2 Scope of International Business
2.1.3 Importance of International Business
2.2 Modes of entry into International Business,
internationalization process
2.2.1 Stages of Internationalization Process
2.2.2 Modes of entries in International Entries
2.3 Multinational corporations (MNC’s) and their
involvement in international business; Issues in foreign investments
2.3.1 Types of Multinational Corporations (MNC’s)
2.3.2 Characteristics of Multinational Corporations:
2.3.3 Involvement of MNCs in International Business
2.3.4 Issues in foreign investments
2.4 Technology transfer, Pricing and regulations and
strategic alliances
2.4.1
The process of Transfer Technology
2.4.2
Pricing Policies and business environment
2.4.3
Government Regulations and their effect on business
2.4.4
Strategic Alliances in business environments
Summary
This chapter focuses on the basic issues related to
international business: its nature and scope, its importance, and how it works
towards economic growth and integration of economies with the rest of the
world. We begin by explaining why international business is important for
economic growth and integration of economies with the rest of the world, among
other reasons, along with various factors that establish it as a dynamic
concept. The entry modes into international markets and processes of internationalization
are followed by strategies that firms adopt to expand in the international
market.
We will also look into how MNCs influence the business
environment at the international level and debate their incredible impact, not
forgetting the problems and issues that accompany foreign investment. To this
end, critical matters such as technology transfer, pricing strategies, and the
regulatory environment shall be considered in showing how strategic alliances
have been utilized in mitigating some of these complexities. It is in this
sense that understanding these elements will help to put into perspective all
intricacies involved in international business operations.
2.1 Introduction
Definition of International
Business
According to Charles
W. L. Hill, “International business refers to the business activities that
involve the transfer of resources, goods, services, knowledge, skills, or
information across national boundaries.”
According to John
D. Daniels and Lee H. Radebaugh, “International business is all commercial
transactions—private and governmental—between two or more countries. Private
companies undertake such transactions for profit; governments may or may not do
the same in their transactions.”
Evolution of
International Business
The beginning of
Universal Commerce goes back to human civilization. Sindh civilization had
numerous follows of having an exchange relationship with the Eastern
civilization. Afterward the concept of Worldwide Commerce – a broader concept
of integration of economies goes back to 19th century.
The to begin
with stage was took with the conclusion of to begin with World War in 1919. The
import of crude materials by colonial nations sovereign from colonies and
trading them wrapped up merchandise once more to the colonies. There is an
increment in the level of worldwide commerce. But after moment world war in
1945, most of the colonial governments denied to trade the crude materials and
consequence wrapped up merchandise for the reason of ensuring the residential
companies.
There is a
diminish in universal commerce. The results of World War II had made the world
nations to feel the require of universal co-operation of worldwide exchange
which driven to the arrangement of different organizations like Worldwide
Financial Finance (IMF) and Worldwide Bank for Recreation and Development (IBRD),
presently called AS World Bank.
1. Export Trade-
the sale and shipment of goods or services produced in one country to another
country for consumption or resale
2. Import Trade-
the act of bringing goods or services into a country from abroad for sale or
use.
3. Entrepot
Trade. - is a combination of export and import trade and is also known as
Re-export. It means importing goods from one country and exporting it to
another country after adding some value to it
2.1.1 Nature of International Business
1.
International restrictions:
In global commerce, there is anxiety over
the governmental limitations in various nations. Numerous governments of
countries prohibit foreign businesses within their borders. Trade blocks,
tariff barriers, foreign exchange restrictions, and other such measures are
detrimental to global commerce.
2.
Benefits to countries:
Participating in international business
provides advantages to the countries involved. More prosperous or advanced
nations expand their businesses internationally to reap the most advantages.
Developing countries benefit from receiving new technology, foreign
investments, job opportunities, and quick industrial growth, all of which aid
in the advancement of their economy. Hence, developing nations allow foreign
investments in their economy.
3.
Large scale operations:
International business involves many
simultaneous operations due to its extensive global scale. In order to meet the
demand worldwide, the goods must be produced in large quantities. The product
is marketed extensively to ensure that customers are informed about its
existence. Initially, they meet the local needs and subsequently they sell the
excess in international markets.
4.
Combination of Economies:
International Business brings together the
economies of numerous nations. The companies utilize the financial, workforce,
materials, and facilities of the foreign countries where they operate. The
parts are made in various countries, the product is put together in different
countries, and the product is sold in other countries.
5.
Dominated by developed countries:
Developed countries and their multinational
corporations control the majority of international business. Nations such as
the United States, Europe, and Japan are known for manufacturing top-notch
goods and employing individuals who receive generous salaries. They possess
significant financial and other resources such as top-of-the-line technology
and Research and Development facilities. As a result, they offer high quality
goods and services at affordable prices. They assist them in seizing the global
market.
6.
Keen Competition:
The multinational corporation must deal with
fierce and abundant competition in the global market. The contest is among
unbalanced participants, specifically advanced and developing countries. Developed
nations and their multinational corporations have an advantage in fierce
competition due to their ability to offer high-quality products and services at
affordable prices. Developed nations also maintain multiple links in the global
market. Thus, it is extremely challenging for less developed nations to compete
with more advanced nations.
7.
Market Segmentation:
International trade relies on dividing
markets based on where the customers are located geographically. The market is
segmented based on consumers' demand in various countries. It manufactures
products based on the needs of consumers in various market segments.
8.
Sensitive Nature:
Global business is significantly influenced
by economic policies, political climates, technology, among other factors.
These aspects can either enhance or hinder business operations. The expansion
and profitability of a business are largely influenced by government policies;
they can either support or hinder these outcomes.
9.
Political Risk:
Global managers must consider the political
risk of working in foreign settings, incorporate fluctuations in foreign
exchange rates into their decision-making process, and understand the impact of
national and cultural influences on their marketing strategies. All these
alterations contribute to the risky and intricate nature of global business.
2.1.2 Scope of International Business
Foreign direct investment plays a crucial
role in global commerce. Foreign investment involves the allocation of funds
from overseas in return for monetary gain. Foreign investment involves
investing in foreign nations through global business activities. Foreign
investments come in two forms: direct investment and portfolio investment.
2.
Imports and Exports of merchandise:
Merchandise refers to physical goods that
are tangible, meaning they can be seen and touched. Exporting merchandise
involves sending tangible goods from one country to another, while importing
merchandise involves bringing tangible goods into the home country.
3.
Licensing and Franchising:
Franchising involves authorizing a new party
in a foreign country to manufacture and distribute goods using your trademarks,
patents, or copyrights for a fee, serving as a gateway into international
business. Licensing system involves local bottlers in foreign countries
producing and selling products for companies like Pepsi and Coca-Cola.
4.
Service Imports and Exports:
Services exports and imports involve
intangible goods that are not physical or tangible. The exchange of services
between nations is alternatively referred to as invisible trade. A range of
services such as tourism, travel, accommodation, construction, education, and
financial services are available. Tourism and travel play a significant role in
global business trade.
5.
Exchange of Technology and Skilled
workforce:
Both developing and underdeveloped countries
have numerous opportunities for growth through global trade with each other.
The exchange of technical and managerial knowledge between countries
contributes to boosting their revenues and fostering global expansion.
6.
Advantages from currency exchange:
International business is crucial in taking
advantage of currency fluctuations through the exchange rate. In the case of a
weak U.S. dollar, potential increases in exports may occur due to the
advantageous currency exchange rate for foreign customers.
7.
Limitations of domestic market:
If a country's local market is limited in
size, engaging in international trade can be a beneficial strategy for
expanding the business within the country. The downturn in the home market is
pushing domestic companies to seek opportunities in foreign markets.
2.1.3 Importance of International Business
Importance to
Firms
Many
organizations choose to enter the international arena, each with its own set of
motivations. Here's how going global can benefit a firm:
1.
Increased Profit Potential:
Firms can access
markets where their products command higher prices due to factors like
different market demands or currency exchange rates. This allows them to
exploit price differentials and potentially boost profits.
2.
Enhanced Capacity Utilization:
Businesses with
excess production capacity beyond domestic demand can tap into international
markets to serve a larger customer base. This leads to efficient utilization of
existing resources.
3.
Economies of Scale:
Large-scale
production allows firms to achieve economies of scale, reducing per-unit
product costs and increasing profit margins. By expanding internationally,
companies can increase their production volume and reap these benefits.
4.
Escape from Domestic Competition:
Businesses
facing intense competition at home can find relief by going global.
International markets offer new customer segments and potentially less fierce
competition.
5.
Extended Product Life Cycle:
When a product
reaches maturity in the domestic market, firms can revitalize its life cycle by
introducing it to new international markets. This approach allows them to
extend the product's profitability.
6.
Enhanced Growth and Brand Image:
Firms aiming for
long-term growth typically look to expand geographically. Entering
international markets fosters diversity and access to new opportunities,
leading to business growth and potentially a more prestigious brand image.
Importance to
Nation
International
business isn't just advantageous for individual organizations. It offers
several significant benefits to nations as well:
1.
Increased Foreign Exchange Reserves:
When domestic
firms export goods and services, they receive payment in foreign currency. This
strengthens a nation's foreign exchange reserves, which can be used to import
essential resources like technology or petroleum. These reserves also provide a
financial buffer.
2.
Efficient Resource Utilization:
International
business allows nations to export surplus production after meeting domestic
needs. This prevents resource wastage and optimizes utilization.
3.
Employment Generation:
International
business operations require a substantial workforce. From large-scale manufacturing and exporting
excess production to international marketing, sales, accounting, and logistics,
numerous jobs are created across various sectors.
4.
Enhanced Economic Growth:
Domestic
production solely for internal consumption limits a nation's growth potential.
International trade allows countries to increase production scale, leading to
economic expansion and improved growth prospects.
5.
Cultural Exchange:
International
business fosters interaction between people from different cultures involved in
trade. This cultural exchange fosters understanding and allows businesses to
develop products that resonate with specific cultural preferences.
6.
Stronger International Relations:
Economic
interdependence between nations creates a need for cooperation. International
business helps establish positive relationships among trading companies,
fostering political cooperation and promoting peace.
7.
Improved Living Standards:
International
trade offers consumers a wider variety of products, both domestically produced
and imported. This increased selection ultimately improves people's quality of
life and standard of living.
Difference between domestic business and international
business
|
Point |
Domestic Business |
International Business |
Live Example |
|
Area of Operation |
Within the country |
Across multiple countries |
A local grocery store vs. Walmart |
|
Currency |
Single currency |
Multiple currencies |
Indian Rupee for local business vs. multiple
currencies for Apple Inc. |
|
Quality Standards |
Lower standards |
Higher standards |
Local textile shop vs. Zara |
|
Customer Base |
Homogeneous |
Heterogeneous |
Local restaurant vs. McDonald’s |
|
Legal Regulations |
Fewer regulations |
More regulations |
Local bakery vs. Nestlé |
|
Market Research |
Easier to conduct |
More complex |
Local market survey vs. global market analysis by
Coca-Cola |
|
Competition |
Less intense |
More intense |
Local bookstore vs. Amazon |
|
Cultural Differences |
Minimal cultural differences |
Significant cultural differences |
Local clothing brand vs. H&M |
|
Language |
Single language |
Multiple languages |
Local service provider vs. Google |
|
Transportation Costs |
Lower costs |
Higher costs |
Local delivery service vs. FedEx |
|
Marketing Strategies |
Simple strategies |
Complex strategies |
Local advertising vs. global campaigns by Nike |
|
Political Environment |
Stable environment |
Varying environments |
Local business vs. multinational corporations
like Toyota |
|
Economic Environment |
Single economic environment |
Multiple economic environments |
Local retail shop vs. multinational retail chains
like IKEA |
|
Risk Factors |
Lower risk |
Higher risk |
Local investment vs. international investment by
companies like Tesla |
2.2.1 Stages of Internationalization Process
1.
Domestic Company: In the beginning, a
local company limits its activities, goals, and strategic thinking to within
the country's borders. These companies focus mainly on exploiting opportunities
in the local market, meeting the needs of customers in the area, and adapting
to national environmental limitations. The fundamental belief guiding their
strategy can be summed up by the saying, "If it's not happening
domestically, it's not happening." Reliance Industries Limited and Tata
Motors Limited are examples of domestic companies that first prioritized the
local market over expanding globally.
2.
International Company: Shifting from
a focus on the local market, a global corporation expands its operations
overseas, reaching out to foreign markets. This phase involves making the
strategic choice to enter foreign markets by creating branches or subsidiaries,
thereby entering the field of global business. The decision is motivated by the
wish to seek chances beyond the local realm, signalling the company's first
venture into the worldwide market.
3.
Multi- National Company: The
transformation of international companies into Multi-National Companies (MNCs)
is an ongoing evolution. This change is characterized by a move towards
catering to the specific demands of various country markets through customized
product offerings, pricing strategies, and promotional activities.
Multi-National Corporations, also known as multi-domestic companies, utilize a
localized strategy by creating unique plans for different markets in order to
connect with local customers. This phase highlights the significance of
comprehending and incorporating into the cultural and consumer landscape of
every market they venture into.
4.
Global Company: Another development
can be observed in the rise of the Global Company, which embraces a thorough
global approach. Global companies aim to achieve efficiency and penetrate
markets worldwide by either manufacturing in one country and selling products
internationally or using global production for local marketing. The focus
shifts to utilizing worldwide synergies, highlighting the merging of
international operations to facilitate a smooth movement of products and
services between countries.
5.
Transnational Company: The ultimate
example of globalization is the Transnational Company, showcasing the peak of
worldwide connection. These companies stand out for their capacity to generate,
promote, allocate funds, and manage globally, connecting worldwide resources
with worldwide markets to maximize earnings. Even with their intricacy, global
corporations such as Coca-Cola, Apple, McDonald's, and Nike can uphold
centralized authority while conducting widespread business operations in
various countries. Their goal is to merge worldwide effectiveness with nearby
flexibility, managing the intricate harmony between worldwide standardization
and local adjustment.
2.2.2 Modes of entries in International Entries
Exporting involves the transfer of
products and services from one country to another. Likewise, importing involves
buying goods from other countries and brining them back to one's own country.
There are two key methods for firms to trade goods internationally: direct
exporting/importing and indirect exporting/importing. Regarding direct
exporting/importing, the company engages with foreign buyers/suppliers directly
and manages all export/import processes, such as shipment and financing, on its
own. In contrast, indirect exporting/importing involves minimal participation
from the firm in export/import operations, with export houses, buying offices,
or wholesale importers handling most tasks. These companies do not interact
with foreign customers for exports or foreign suppliers for imports.
There are two ways a firm can export or
import:
·
Direct Export/Import: In Direct
Exporting/Importing, a company engages directly with the customer/supplier in
the foreign country, handling all necessary procedures such as shipping and
financing of products and services.
·
Indirect Export/Import: In Indirect
Exporting/Importing, a company works with intermediaries to interact with the
customer/supplier. They do not have direct interactions with the customers or
suppliers. Middlemen assist in handling the majority of the tasks and paperwork
involved in trade, such as export houses, purchasing businesses, overseas
customer offices, or wholesale importers for imports.
Advantages of
Exporting and Importing
•
Easiest
and Simplest: Exporting and
importing are the simplest ways to access the global market when compared to
other entry methods. In this case, there is no requirement to establish and
oversee any overseas business unit, simplifying the process.
•
Less
Investment: Exporting/importing
requires less investment as the enterprise is not obligated to establish a
business unit in the country they are operating in.
•
Less
Risk: If there is little to no
investment needed for exporting/importing in the foreign country, the firm can
avoid numerous risks associated with foreign investment.
•
Resource
availability: Since resources
are not evenly distributed globally, it is essential for countries to engage in
global trade by exporting and importing goods, as no country can sustain itself
entirely.
•
Improved
management: Exporting/Importing
allows for improved management of the business transaction since there is
minimal engagement in the overseas market. The home country has full control
and there is no necessity for establishing a unit in the foreign country.
Disadvantages of
Exporting and Importing
•
Additional
fees or expenses: Sending
goods to various countries incurs additional expenses due to the packaging and
transportation required, posing a significant constraint.
•
Regulations: Various countries have varying foreign trade
policies, which can pose challenges for companies in adhering to each country's
regulations.
•
Domestic
competition: Companies engaged
in import/export must deal with intense competition within their own country
because of the existence of local competitors.
•
Country's
reputation at risk: Products
being exported to various countries must meet certain quality standards. When
low-quality products are shipped to another country, it raises doubts about the
reputation of the country of origin.
•
Documentation: Obtaining licenses and documentation for
foreign trade from each country is necessary for exporting/importing, and this
process can be challenging.
•
Multitasking: Running a business in multiple countries
requires juggling multiple tasks, creating a hectic environment for the
company.
2.
Licensing and Franchising
Advantages of
Franchising and Licensing
•
Cost-effective
solution: In the
licensing/franchising system, the licensor/franchisor sets up the business unit
and puts their own funds into it. Therefore, the licensor/franchisor will
likely refrain from any significant international investments. Therefore,
licensing/franchising is viewed as a more cost-effective way to expand into
international markets.
•
No
liability for losses: As there
is no or minimal foreign investment, the licensor/franchisor is not responsible
for any losses suffered by foreign businesses. The licensor/franchisor receives
predetermined fees as a percentage of production or sales turnover from the
licensee/franchisee. This payment to the licensor/franchisor will be received
as long as the licensee's/franchisee's business unit remains in operation and
is generating sales.
•
Low
risk: The presence of a local
manager who is a licensee/franchisee reduces the chances of business takeovers
or government interference in a foreign country.
•
Expertise
and Networking: As a resident
of the area, the licensee or franchisee possesses a deeper knowledge of the
market and an extensive network, which can greatly assist the licensor or
franchiser in managing their marketing efforts.
•
Legal
safety: The only individuals
allowed to utilize the licensor's/copyrights, franchisor's patents, and brand
names in other countries are those who are parties to the licensing/franchising
agreement, as specified in the terms of the agreement. Therefore, other companies
in the global market are unable to utilize these trademarks and patents.
Disadvantages of
Franchising and Licensing
•
Similar
startup risk: If the
licensee/franchisee becomes proficient in producing and marketing the
licensed/franchised products, there is a chance they may begin to sell an
identical product with a slightly altered brand name. The provider of the
license/franchise could face fierce rivalry within the sector.
•
Secrecy
issue: If trade secrets are
not adequately safeguarded, they can be exposed to third parties in
international markets. The licensor or franchisor could experience considerable
losses due to mistakes made by the licensee/franchisee.
•
Conflicts
and disputes: Conflicts
commonly occur between the licensee/franchisee and the franchisor/licensor over
issues like accounting upkeep, royalty payments, and noncompliance with quality
production standards. These disputes can result in costly legal battles that
impact both individuals involved.
3.
Contract
Manufacturing
Contract
manufacturing involves a company forming agreements with local manufacturers in
foreign countries to produce specific components or products according to its
requirements. This is often referred to as outsourcing.
It can be
categorized into three different groups.
·
Manufacturing
particular parts like car components or shoe uppers for future use in making
complete products like cars and shoes.
·
Components
like hard disc, motherboard, floppy disc drive, and modem chip are put together
to create computers.
·
Finalize
the manufacturing of items like clothing.
Overseas firms offer
local manufacturers advice on technology and management in order to manufacture
and put together products. The products produced through contract manufacturing
are either utilized as end products or marketed as completed goods by global
companies under their own brand labels in different countries such as domestic,
foreign, and other nations. Nike, Reebok, Levis, and other companies utilize
contract manufacturing to produce their products.
Advantages of
Contract Manufacturing
•
Less
Investment: Through Contract
Manufacturing, multinational companies can mass produce their products without
the need to invest in building their own production plants.
•
Less
Risk: Due to the minimal
investment needed, the risk is lower. Moreover, local producers adhere to
specific product design and quality standards that have been designated for
them. Additionally, there is minimal to no financial investment in overseas
nations, leading to reduced risk when investing abroad.
•
Cost
Effective: Contract
Manufacturing assists global companies in having their products manufactured or
put together at reduced expenses, particularly when local manufacturers are
located in nations with cheaper materials and labour costs.
•
Optimum
utilization of resources: Contract
manufacturing benefits producers in foreign countries. Manufacturing jobs
secured through contracts offer a steady demand for their goods and help
companies make better use of their production capabilities if they have any
excess capacity. For instance, the Godrej group produces soaps for numerous
multinational companies such as manufacturing Dettol Soap for Reckitt and
Colman. By doing this, it is utilizing its surplus production capacity for
soap.
•
Opportunities
to local manufacturers: The
domestic producer can also choose to participate in global trade and receive
benefits if there are any rewards for exporting companies, in case the foreign
company wishes for the manufactured products to be exported to its country or
other nations.
Disadvantages of
Contract Manufacturing
•
Negligence
in production design and standards: Local companies might neglect production design and quality standards,
resulting in significant product quality problems for foreign businesses.
•
Loss of
control: As the goods are
produced in strict accordance with the contract terms, the foreign manufacturer
relinquishes control over the manufacturing process.
•
Unauthorized
to sell the product by local manufacturers: Local businesses participating in contract manufacturing cannot freely
sell the output produced under the contract. They are required to sell the
products to the multinational company at a set price. Lower profits occur when
the prices in the contract are lower than the open market prices for the
commodities.
4.
Joint
Venture
There are three ways to establish a joint venture, as outlined below:
§
A foreign
investor buying shares in a domestic company.
§
A domestic
company is investing in a stake of a foreign company that is already
established.
§
Foreign
and domestic companies work together to establish new businesses.
Advantages of
Joint ventures
•
Increased
Resources and Capacity: Through
working together or forming partnerships, individuals can enhance capacity and
resources, ultimately aiding in the accelerated and efficient growth and
expansion of joint venture businesses. A joint venture involves combining the
financial, physical, and human resources of two or more companies. With this,
businesses seize new possibilities and confront fresh obstacles in the market.
•
Innovation: The current market requires innovative and new
products. Collaboration has been beneficial in creating innovative and new
products. It offers the advantages of modern technology for products and
services. Advanced technology enables the production of top-notch products at
competitive prices. Additionally, collaborating with international partners in
a joint venture frequently leads to the creation of fresh concepts, aiding in
the development of innovative products within our nation.
•
Brand
Exposure: When multiple
parties collaborate in a joint venture, one company can leverage its
established brand name to gain a competitive advantage over other competitors.
Developing a brand name for products requires a considerable investment, but
this cost can be saved when there is an eager market anticipating the product
launch. If an Indian company forms a joint venture with a foreign company, it
can leverage the foreign company's goodwill and brand name in the market.
•
Access
to Technology: Technology
serves as a primary driver for many companies to form partnerships. Utilizing
cutting-edge technology allows for the creation of top-notch products that
conserve time, energy, and resources. It further contributes to improved
efficiency and effectiveness. When forming a joint venture, access to the same
technology as other businesses is possible without the need to create one's own
technology. Therefore, additional investment is unnecessary.
Disadvantages of
Joint venture
•
Clash
of culture: A partnership involves individuals from diverse cultural backgrounds
collaborating. While it can offer creative solutions for the workplace, it also
has certain disadvantages. Some workers refuse to make concessions and are
unyielding towards change. Consequently, there could be variances in culture
between the organizations.
•
Trade
disclosure: Foreign companies
partner with local companies in joint ventures and mutually disclose trade
secrets. Therefore, there is always a possibility of trade secrets and
technology being revealed to others.
•
Conflicts
of Control: In a
collaboration, ownership and management are shared by both parties. The shared
ownership situation causes disagreements, resulting in a power struggle between
the companies.
•
Lack of
Co-ordination: The functioning
of the business can be affected if there is a lack of coordination among the
partners.
5.
Wholly
Owned Subsidiaries
1)
Creating a
brand new company in a foreign country is commonly referred to as a green field
venture.
Advantages of
wholly owned subsidiaries
•
Full
Control: The parent company
exercises full authority over its operations in foreign nations.
•
Secrecy: As the parent company independently oversees
all aspects of the overseas branch, it is not obligated to disclose its
technology or proprietary information to external parties.
•
Synergy: The partnership in various industries like IT,
finance, and marketing can bring advantages in terms of cost reduction and
strategic alignment to both the main company and its branch. Research and
development progress faster when two companies work together. The enduring
strategic support fosters confidence in the completely owned subsidiary.
•
Diversification: Because the subsidiary is fully owned by its
parent company, it has the financial support to explore new markets and expand
its operations by taking risks. Indeed, by acquiring a foreign subsidiary, the
parent company can leverage it to strengthen its foothold in that particular
nation.
Disadvantages of
wholly owned subsidiaries
•
Not
Suitable for Small business: The
parent company needs to put all of its equity into its foreign subsidiaries.
Therefore, this particular foreign company is not suitable for small and
medium-sized companies lacking the financial resources to invest overseas.
•
Burden
of Loss: As the parent company
holds full ownership of the foreign company, it is obligated to bear the
complete loss resulting from the failure of its overseas operations.
•
Political
risk: Certain nations are
against foreign individuals setting up fully-owned branches in their
territories. Therefore, this particular global business endeavour is more
susceptible to political uncertainties.
•
Diverse
regulations and laws: Each
country has its own specific guidelines and laws for carrying out business
operations. It can be challenging to oversee a foreign-based wholly-owned
subsidiary if you are not knowledgeable about the laws and regulations of that
country. Consequently, you might have to hire more staff to oversee your
fully-owned branch in another nation. This could contribute to the financial
burden.
6.
Foreign
Direct Investment
FDI stands for
Foreign Direct Investment, which involves investing in a business or
organization in a different country. Foreign direct investors have a sustained
interest in the level of investment made in foreign businesses. FDI represents
an investment that crosses borders. It entails creating a long-term stake and
authority in a foreign company. These investors receive benefits from the
organization's earnings and suffer consequences from the company's losses.
Foreign direct investment also includes taking the existing business to other
countries for expansion. If an Indian internet service provider buys specific
smartphone shops in the US, it qualifies as a Foreign Direct Investment (FDI).
Foreign direct investment benefits both the investing country and the receiving
country. FDI not only enhances economies but also contributes to fostering
amicable relations between nations.
Foreign direct investment contributes to
the economic development and growth of both the investor and the host
countries. FDI facilitates the transfer of technology, knowledge, and skills
across borders. FDI enhances the competitiveness and innovation of firms and
industries. FDI fosters the cooperation of countries in regional and global
value chains. FDI also influences the political, social, and environmental
aspects of the countries involved.
In India, by the
then finance minister, Dr. Manmohan Singh of prime minister P.V. Narasimha
Rao’s Govt, in 1991, Foreign direct investment (FDI) was introduced under the
Foreign Exchange Management Act (FEMA) and it commenced with the baseline of 1
billion dollars in 1990.
Types of Foreign
Direct Investment (FDI)
1. Horizontal
FDI: This is the most frequent
form of FID where a foreign investor invests in the same industry abroad as the
one they are involved in domestically. One instance is when the company
Mercedes, which is based in Germany, makes investments in TATA Motors located
in India.
2. Vertical FDI: This form of foreign direct investment occurs
when a company invests in a foreign company that does not necessarily operate
in the same industry, but can still benefit the investing company by providing
or selling necessary products. For instance, An Indian fabric producer makes an
investment in a cotton farm in the US to ensure a steady supply of raw
materials.
3. Conglomerate
FDI: This is a rare form of
foreign direct investment where a foreign investor invests in a completely
different sector. In this form of foreign direct investment, there is no
connection between the two sectors. Take, for instance, the American online
retail company Amazon investing in Tata Motors based in India.
4. Platform FDI: In this type of foreign direct investment, a
foreign investor grows their business in another country and sells the
manufactured product to different countries. For instance, a German car
manufacturer sets up its factories in the UAE and ships its goods to countries
in the Middle East and Asia.
Advantages of FDI
1.
Economic
growth: Investments in a
company lead to growth in production capacity and the need for more workers,
creating jobs within the nation. Developing countries seek foreign direct
investment to reduce unemployment, increase GDP, and stimulate economic
development by enabling individuals to earn a living and spend money on
essential goods.
2.
Human
capital development: Human
capital is essential for production, but technological advancements have
lessened its need. People are still necessary in certain areas, considered a
capital investment when they possess the necessary knowledge and skills.
Training and development enhance a country's human capital.
3.
Technology
Enhancement: Developed nations
possess advanced technology and financial resources, solving various
challenges. Through investments, this technology spreads to other countries,
improving production efficiency and boosting overall industry growth.
4.
Export
Growth: Various governments
implement export promotion schemes to facilitate the movement of goods between
nations. Organisations with FDIs aim to benefit both their domestic country and
other nations by expanding their global market reach.
5.
Exchange
rate stability: Each country's
central bank must hold a percentage of foreign exchange reserves. Foreign
Direct Investment helps generate foreign exchange, stabilizing exchange rates
globally.
6.
Improved
capital flow: Every nation's
central bank is required to maintain a certain percentage of foreign exchange
reserves. Foreign Direct Investment contributes to the creation of foreign
currency, helping to stabilize exchange rates on a global scale.
7.
Creation
of competitive market: Foreign
companies setting up operations in a local country generate competitive
dynamics in the market. It aids in eliminating the monopolies established by
local companies. It expands the choices available for purchasing a specific
type of product at competitive prices. It inspires local entities to operate
with effectiveness and efficiency.
Disadvantages of
FDI
1.
Challenges for small businesses: FDI competition challenges domestic
organizations, causing small businesses to struggle or take on foreign
competitors. Lack of skills, technology, and quality hinder domestic
industries, leading to decreased demand and closure of businesses. Domestic investments
suffer as companies favour foreign organizations, impacting domestic businesses
negatively.
2.
Political Risk: As political parties in power shift, the rules and regulations
also shift. This has a direct effect on foreign direct investments and impacts
investors' interests.
4.
Trade Deficit: A trade deficit happens when a country imports more than it
exports. International trade policies restrict production of certain products
to a few countries. Those without production rights must import or receive
through FDI, incurring high costs. This disrupts the trade system and causes a
trade deficit.
2.3
Multinational corporations (MNC’s)
A
multinational corporation (MNC) is a company that operates in multiple
countries, aside from its country of origin, and earns revenue
internationally. It is highly probable that the attire you are currently
wearing, the smartphone in your pocket, and the mode of transportation you use
for commuting to work share a common trait: they were most likely produced by a
multinational corporation, as 90% of imports in America are sourced from such
entities. Multinational corporations have a significant impact on various
facets of modern society, exerting considerable influence in both political and
economic realms. In fact, over a quarter of American employees work for a
multinational corporation. The initial multinational corporations were
essentially colonial ventures. The East India Company (established in
1600), Dutch East India Company (VOC; 1602), and the Hudson's Bay Company (HBC,
1649) are key players in imperialist narratives known for their aggressive
actions that continue to impact those with an awareness of history. The
Hudson's Bay Company continues to thrive, along with its fundamental business
strategy of procuring clothing and materials in one region and selling finished
products to Western consumers, all while retaining significant real estate
holdings. Newly formed multinational corporations have generally not
significantly improved their environmental practices.
2.3.1 Types of Multinational Corporations
(MNC’s)
There
are 4 distinct categories of multinational corporations. Here are a few of the
most typical kinds of multinational companies:
1.
Decentralized Corporation:
Decentralized
companies can have several headquarters, branches, and investments abroad, yet
they continue to have a strong presence in their native country. Although
decentralized companies typically lack a central office, each country they work
in may have its own managerial structure. This allows the company to grow
quickly while ensuring it complies with the laws in every local area. For
example Google: This company is divided into departments, each with its own
management, and some of these departments are located far away.
2.
Global Centralized Corporation:
A
central global company can have a main office in its native land, where the top
executive and other senior managers live. These companies often seek ways to
increase profits by acquiring low-cost resources and machinery from overseas.
The precise leadership team typically handles decisions at both national and
global levels. They also oversee all worldwide operations. For
example, Apple: a global centralized corporation that outsources the
production of iPhone components to countries like China, India, Korea, and
Taiwan.
3.
International Division:
Corporations
can maintain separation between their domestic and international operations by
forming an international division. This new sector is responsible for
overseeing the corporation's operations in overseas territories. Although this
setup may help companies reach a wider audience and draw conclusions that
resonate with different cultures, maintaining a cohesive brand reputation can
also be difficult. For example Infosys: Overseeing operations in different
regions (e.g., North America, Europe, Asia Pacific, Middle East and Africa) and
managing operations within specific countries within each region.
4.
Transnational Corporations (TNC’s):
A
multinational corporation can exist through a relationship between a main
company and its subsidiary. This allows them to utilize some of the parent
company's assets, like their research and development team, even if they
operate in different nations. Usually, the parent company manages the
multinational company and makes decisions on its behalf. Although typically
adhering to a centralized leadership model, this structure may vary between
different companies. For example, McDonald's is a transnational corporation
because it operates in over 100 countries worldwide. It also employs over
200,000 people from the different countries it operates in.
2.3.2 Characteristics of Multinational
Corporations:
1.
Global Presence and Operations:
MNCs
operate in multiple countries across different continents. This global presence
allows them to tap into diverse markets, cater to a wide customer base, and
benefit from varying economic conditions.Despite their global operations, MNCs
usually have a central headquarters located in one country, often where the
company originated. This centralization helps in maintaining a unified
corporate strategy and brand identity.
2.
Large-Scale Operations:
Large
amounts of capital investment: Multinational corporations usually have
considerable capital investments, which enable them to establish manufacturing
plants, distribution channels, and research and development centers in various
nations. Economies of scale allow MNCs to lower costs per unit of output, giving
them a competitive advantage in the market due to their large scale.
3.
Diverse Workforce:
Multinational
corporations hire individuals from different cultural backgrounds, encouraging
diversity within the workforce. This variety can result in a wider scope of
ideas and innovations but also necessitates efficient intercultural leadership.
MNCs frequently look for top talent worldwide to incorporate diverse skills and
knowledge into their operations.
4.
Complex Organizational Structure:
MNCs
typically delegate operational decisions to their subsidiaries, while the
central headquarters retains control over the overall strategy. This enables
the implementation of more personalized and region-specific approaches. A lot
of multinational corporations utilize a matrix organizational system, in which
workers are accountable to both local and global supervisors. This framework
ensures a combination of local adaptability and global cohesion.
5.
Market Seeking and Competitive Strategies:
MNCs
go into international markets to grow their customer reach, frequently adopting
tactics like mergers and acquisitions, joint ventures, and partnerships to
establish a solid presence. Multinational corporations frequently adjust their
products and services to cater to the specific requirements and choices of
various markets, increasing their level of competitiveness.
6.
Transfer of Technology and Innovation:
Multinational
corporations play a crucial role in transferring technology from developed
countries to developing ones. They bring new production techniques, management
practices, and innovative ideas to the local markets. Research and development
(R&D) facilities are widespread in various countries for many multinational
corporations, allowing them to innovate and tailor products for different
markets.
7.
Regulation and Ethical Challenges:
Multinational
corporations need to adhere to the legal requirements of every country they do
business in, which may differ greatly. This involves following labor laws,
environmental regulations, and tax policies. Ethical challenges are frequently
encountered by multinational corporations when operating in various countries.
These challenges may include reconciling financial objectives with social
obligations, handling labor concerns, and overseeing environmental effects.
8.
Economic and Political Influence:
Multinational
corporations frequently have a vital impact on the economies of the nations
where they are present through job creation, GDP contribution, and attracting
foreign direct investment (FDI). MNCs can exert considerable influence on local
and national governments through their economic power, advocating for policies
that support their operations. This impact may cause conflicts between
multinational corporations and local governments at times.
2.3.3 Involvement of MNCs in International
Business
·
Glocalization Employment: Global companies stimulate economic prosperity
by providing significant job opportunities in the countries where they operate,
known as glocalization in employment. By employing local workers who understand
the local culture, they acquire important knowledge about the local community's
needs; additionally, they promote a multicultural business strategy by moving
knowledge and employees between different regions.
·
Investment flows and capital flows: Underdeveloped nations
globally actively promote the investment of foreign corporations in their
economies by offering incentive policies aiming to attract additional capital.
Multinational corporations not only bring technical knowledge, but also offer opportunities
to enter foreign markets, leading to new business prospects. Foreign direct
investments not just aid in the economic growth of nations but also engage in
local markets, create production facilities, share technology, and help in the
growth of local supply chains.
·
Technology advancement and R&D: Multinational
corporations play a crucial role in transferring technology, exerting a notable
impact on the competitiveness and prosperity of the countries they operate in
by investing in capital and technology-driven industries. These companies help
local economies grow by sharing new technologies and innovative practices with
local businesses and employees, transferring knowledge and providing training.
Significant funding in research and development continues to strengthen their
essential function in creating innovative products, methods, and technologies.
This transfer alone promotes more innovation and enhances global
competitiveness.
·
Imports and Exports: Multinational corporations trade their
products and services internationally, both exporting to and importing from
multiple countries. This continuous exchange supports global trade and promotes
increased economic interconnectivity between nations.
·
Economic and Social development: Multinational corporations are crucial in
promoting social and economic progress in the areas where they operate. They
play an active role in advancing society by generating employment, encouraging
diversity in nearby businesses, backing educational initiatives, and nurturing
talent growth.
·
Environmental impact management: In the current age of sustainability,
multinational corporations have a vital role in expanding their efforts and
initiatives to reduce global environmental impacts. They act as important
models in the countries they work in by demonstrating their dedication to
energy efficiency, water conservation, waste management, and reducing carbon
emissions. Moreover, they lead the way in spreading sustainable practices
globally, paving the way for wider acceptance worldwide.
·
Promoting Sustainable development: Multinational
corporations play an active role in promoting sustainable development by
investing in and funding projects that give importance to sustainability. These
investments support important sectors such as renewable energy, clean water,
education, and healthcare, facilitating the long-term development of local
communities and countries.
·
Global value chains and collaborations: Multinational
corporations play a crucial role in fostering a culture of cooperation among
suppliers and other stakeholders as key players in global value chains. All
individuals involved can work together to achieve environmental and social
sustainability goals by constructing value chains based on principles of
sustainability.
2.3.4 Issues in foreign investments
Foreign
investment, characterized by the movement of capital between countries, can
have a major influence on the economic situation in both the investing and
receiving nations. Nevertheless, it presents a variety of difficulties and
hazards that must be cautiously controlled. The following are some of the main
problems:
1.
Regulatory and Political Risks:
Regulations and political landscapes can vary
between countries and may shift unexpectedly. For example, heightened
examination and limitations on foreign investments in key sectors because of
national security worries can present major obstacles. The Committee on Foreign
Investment in the United States (CFIUS) is a body that examines foreign
transactions to identify possible security threats. Other countries such as
Australia, France, and the United Kingdom are implementing comparable measures.
2.
Economic Stability:
The profitability of investments can be
impacted by the economic conditions in the country where they are made.
Inflation, recession, and economic sanctions are all factors that can present
major risks. For instance, changes in the global economy and investment trends
have caused investors to be more cautious, resulting in a slowdown in the
growth of foreign direct investment (FDI).
3.
Currency Fluctuations:
Fluctuations in currency exchange rates can
affect the worth of investments. This is especially important in developing
markets where currency fluctuations are frequent. Investors must take measures
to protect their investments from unfavorable currency fluctuations by hedging
against these risks.
4.
Cultural and Operational Differences:
It can be difficult to grasp and adjust to
various business cultures and practices. This covers variations in management
techniques, employment regulations, and economic conditions. Effective
navigation of such complexities in foreign investments often necessitates the
presence of local partnerships in order to achieve success.
5.
Environmental and Social Concerns:
Investments in certain industries may face
backlash due to environmental and social issues. This can lead to reputational
damage and financial losses. For instance, investments in fossil fuels or
industries with poor labor practices can attract negative attention and
regulatory actions.
6.
Liquidity Issues:
In certain international markets, there may be
reduced liquidity levels, leading to challenges in quickly buying or selling
investments without impacting their prices. This may be a major worry for
investors seeking flexibility and rapid exits.
7.
Legal and Compliance Challenges:
Understanding the legal terrain of a foreign
nation may prove to be intricate. Adhering to laws, tax regulations, and
reporting requirements in the local area can be overwhelming and expensive.
Failure to comply may lead to legal consequences and harm the investor's image.
8.
Geopolitical Issues:
Geopolitical forces play a role in shaping
decisions on foreign investments. Increased protectionism, trade disputes, and
geopolitical tensions may result in a volatile atmosphere for investors. For
instance, the current trade tensions among key economies have caused changes in
international value chains and investment trends.
Technology
involves the creation of goods and services through production, product
development, organization, information, and motivation. Sharing technical
knowledge, general production processes, introducing new products, and
successful technology owned by companies are all part of technology transfer.
Technology transfer can happen either within a country or across borders,
primarily between companies in developed and developing nations. Companies sell
technology to make profits, as advancements in technology progress quickly,
causing older technologies to be sold off. The brief ownership rights also
incentivize companies to market technology.
The
sharing of technology takes place among different parts of TNCs, such as
subsidiaries, affiliates, and joint venture partners, enabling the exchange of
technology for a fee and taking advantage of collective production efforts. The
exchange of technology is now a crucial aspect of the world economy, as
companies trade and purchase technology to stay current with advancements and
monetize their intellectual assets. Over the last few decades, there has been a
rise in the transfer of technology across international borders as companies
realize the advantages of exchanging knowledge and resources in order to stay up to date with technological progress. In the end, sharing technology helps
products and services grow, enabling businesses to stay competitive in a
constantly changing market.
Main
Feature of Technology Transfer
A
small number of big TNCs own proprietary technology, with some medium and small-scale enterprises also present in the market. The sale of technology is
controlled by the TNCs. Many companies, particularly those from developing
nations, are among the numerous purchasers of technology. The successful
acquisition of technology requires the buyer to have knowledge about all
aspects of technology transfer. This knowledge consists of details about
various companies that possess similar technology, whether it is still under
proprietary regulations, and the terms and conditions for trading that
technology in the market. In the world of buying technology, having information
is extremely important. Therefore, it is crucial for a technology buyer to do
the necessary research on this matter.
2.4.1 The process of Transfer Technology
1.
Research and Discovery: Finding a university invention in the research
labs is the initial stage of bringing it to market. If not for this, there
would be no opportunities to develop new ideas or technologies for commercial
purposes. Both faculty members and students in research labs from various
academic fields play a role in aiding this initial phase of the process.
2.
Invention and Disclosure: Professors, staff, or students who believe a
project could be valuable should submit an Invention Disclosure Form (IDF) to
their campus's office in charge of managing inventions, typically known as the
Office of Technology Transfer (OTT) but may have other names at different
universities. This document is crucial for the internal declaration of your
invention. It will enable the OTT to start the technology transfer process. The
Office of Technology Transfer is unable to start assessing any inventions without
receiving an Invention Disclosure Form from the inventor(s). It is crucial to
keep in mind that although this document may be utilized internally, it does
not provide legal protection for safeguarding intellectual property (IP) beyond
the institution.
3.
Evaluation by OTT: The researchers will submit information for
the OTT staff to evaluate the invention. This involves considering elements
like innovation, ability to obtain a patent, and potential future financial
success, as well as other considerations to decide if the university should
seek IP protection and continue developing.
4.
Protection of Intellectual Property: If the organization
chooses to invest in the IP after initial evaluation, they will begin
collaborating with external lawyers to file necessary paperwork. One important
duty of lawyers is to make sure the correct people are listed as inventors;
distinguishing between invention and authorship is crucial in research
projects. Incorrect identification of inventors may lead to the invalidation of
patents that are obtained as a result. The following action could involve
submitting a provisional application with the US Patent and Trademark Office,
followed by filing a nonprovisional and/or Patent Cooperation Treaty (PCT)
application within a year of the provisional submission. Consulting the
inventor(s) will be done at every stage of the process.
5.
Commercialization: Once the IP protection is in place, the OTT team will develop a
marketing strategy for bringing the technology to market. To find the most
suitable route for bringing your research to market, the organization will
collaborate with external corporate partners and the inventors, taking into
account factors like the technology's development stage and market readiness.
After considering this information, a decision will be made in consultation
with the inventor(s) on which corporate partners should be engaged in the
development and marketing process.
6.
Revenue Management: A set percentage of the revenue generated from
the commercialization of university-developed technology should be shared with
the university by the external corporate collaborator. The exact percentage is
established through discussions between the OTT and the corporate partner.
Details on how royalties from corporate partners are allocated within the
institution can be found in employee manuals, institutional policy websites, or
the "Important Documents" section on the OTT webpage.
2.4.2
Pricing Policies and business environment
A
pricing strategy is how a company decides on the price to sell a product or
service. Pricing strategies assist businesses in maintaining profitability
while allowing them the freedom to set different prices for individual
products. Your company could benefit from having a clear pricing strategy in
place to enable fast price changes and capitalize on the strengths of products
in multiple markets.
Types
of Pricing Strategies
1.
Cost Plus Pricing: A cost-plus pricing approach concentrates on
the expenses related to manufacturing your product or service, also known as
the COGS (Cost of Goods Sold). This method is often known as markup pricing as
businesses that use this tactic determine their profit margin by increasing the
prices of products to achieve their desired earnings. The cost-plus pricing
strategy is commonly used in selling consumer products such as groceries,
electronics, and clothing, as it helps determine prices by considering production
costs and desired profit.
For
example, A painter aims to make a profit by selling paintings at double the
production cost. Every painting requires approximately $20 in paint, a $10
canvas, and a day of work valued at $150 by the painter. As the production cost
amounts to $180, the painter decides to charge $360 for the final price.
2.
Competition Based Pricing: Competition-based pricing, which is also referred to as competitive
pricing or competitor-based pricing, is a pricing tactic that is based on the
current market price for a company's product or service. In this method,
competitor prices are used as a reference point for establishing the pricing
strategy. Consider cell phone providers, for instance. Their products are
deliberately priced lower than those of their competitors. The company's goal
is to stand out and draw in customers by offering perceived value at a lower
price through competitive pricing.
For
example, A furniture company introduces a novel coffee table with a distinct
design. It investigates the prices that competitors are asking for tables that
are the same size and made of the same materials, and determines that the price
based on competition is $350. Customers believe the table's design is
outstanding and superior to even some luxury brand options that cost double the
price. The furniture company earns money by selling many tables, but they could
have made a greater profit with a different strategy.
3.
Dynamic Pricing: This type of pricing strategy, also called
surge pricing, time-based pricing, or demand pricing, is a flexible approach
that changes prices based on customer and market demand. For instance, an
airline might raise ticket costs in the holiday season due to increased demand
for flights. Implementing dynamic pricing allows the airline to maximize
revenue by taking advantage of more customers who are willing to pay higher
prices during busy times. This approach helps businesses match their prices
with market conditions and customer preferences, increasing profits in changing
market landscapes.
For
example, Uber uses dynamic pricing, also known as surge pricing, to manage high
demand for taxis by increasing prices in certain regions. This strategy
incentivizes drivers to take more rides until supply meets demand and prices
return to normal.
4.
Price Skimming: The price skimming tactic is commonly used when a new product or
service is launched in a market with little competition. The products are
showcased at the maximum price point that customers are willing to pay. This
strategy enables the company to maximize profits from initial customers who
have few options. Electric vehicles are a prime example of using a
price-skimming strategy, where manufacturers release new models at high prices
to take advantage of environmentally conscious consumers and technology enthusiasts.
As competition grows and production costs decrease, the company can slowly
reduce prices to appeal to a wider range of customers.
For
example, When Reliance Jio launched its sim cards, it offered many free and
discounted rates, which led to customers switching to Jio.
5.
Freemium Pricing: Freemium pricing integrates free elements with
premium ones by providing the fundamental features of a product/service for
free to attract users to purchase extra features at a cost. Businesses
frequently utilize this tactic to broaden their clientele and increase their
profits.
For
example, An example is when a software company offers a free trial of its
product, giving users the chance to try out its fundamental features. This
doesn't just lure in more users but also acts as a way to demonstrate the worth
and advantages of the premium edition. By giving users a glimpse of what the
product can do, the company motivates them to become paying customers and
access the complete set of features for a richer experience. YouTube have used
the freemium model as a part of their growth strategy.
6.
Penetration Pricing: Once more, this is a pricing strategy aimed at
luring customers from rivals by providing comparable products at a reduced
cost. This strategic approach works especially well for introducing recently
released products to the market. The main objective is to quickly capture a
larger portion of the market and create brand recognition.
For
example, Xiaomi employed a penetration pricing tactic to establish a presence
in the Indian market by providing its smartphones at much lower prices compared
to its rivals. This tactic enabled Xiaomi to become a major player in the
smartphone market in India.
7.
Value-Based Pricing: Value-based pricing is a strategic method in
which companies set the price of their products or services according to the
perceived value from customers. This approach emphasizes comprehending what
customers are ready to pay for the advantages and value they obtain from the
product. In order to implement value-based pricing, companies usually study
their competitors' pricing strategies and evaluate the distinctive value
proposition they provide to customers.
For
example, Royal Enfield motorcycles, particularly the Classic and Bullet series,
are priced considering the brand's history, the sentimental worth of having a
classic bike, and the perceived excellence. The bicycles are viewed as
lifestyle items, and consumers are willing to spend extra for the distinctive
riding experience and brand history.
2.4.3 Government Regulations and their effect
on business
Government
oversight of businesses has been present in the US since the inception of
commercial activities. Legislative acts can establish federal regulations for
entire industries or be used on a case-by-case basis for the commercial
activities of owners. These regulations are meant to enhance the well-being and
ethical standards of the population.
Objectives
of government business regulations:
Federal
regulations and laws put in place by the government serve to protect both
businesses and the public interest. Small businesses can take advantage of
these limitations while growing. For instance, government regulations could
require construction companies to utilize certain safety gear at the worksite.
Government
regulation examples
Businesses
have always been required to adhere to government regulations. However, there
has been a growing trend towards increased government regulation of business
practices in recent years. This outcome is due to the process of globalization,
which has expanded and resulted in companies now functioning at both national
and global levels. These are the best instances of government regulations:
·
Tax Regulation: Taxation is a crucial form of legislation intended to incorporate
businesses into the nation's economy. In order to adhere completely to tax
laws, it is necessary to pay the accurate taxes on time. Moreover, tax laws can
vary depending on the category of company. Large companies like national
corporations are required to pay federal taxes, while most small businesses are
obligated to pay state taxes. Engaging in tax avoidance or breaking tax laws
can lead to imprisonment or other repercussions.
·
Employment and Labour Regulations: Employee rights protection regulations are
encompassed within labor laws. Company owners are able to establish minimum
wage and overtime rules that align with the rights of their employees. Certain
regulations outline the way employers should act towards their workers.
Organizations must follow labor regulations and ensure a safe workplace for
their staff.
·
Antitrust regulations: As a business owner, you may have come up with
strategies to dominate the market. Nevertheless, when employing these
strategies, it is essential to adhere to antitrust regulations. Antitrust laws
regulate how business owners can communicate with each other. Therefore, it
guarantees that businesses remain within their scope and prevents the emergence
of unfair competition among them.
·
Advertisement: Effective advertising strategies are crucial for increasing your
company's visibility. Nevertheless, you need to follow specific limitations
while designing these strategies to enhance your company's presence and
reputation in the market. First and foremost, the pledges and assertions
highlighted in your ads should accurately reflect reality. When creating your
advertisement, remember to include your references. Not following these rules
could lead to your ad being redirected from its original goal and may incur
penalties for your business.
2.4.4 Strategic Alliances in business
environments
A
strategic alliance is when two companies work together on a project that
benefits both while still maintaining their independence. A company might form
a strategic partnership to enter a new market, diversify its product range, or
gain a competitive advantage. In certain situations, strategic partnerships may
include more than two companies.
·
An oil and natural gas company could establish a strategic
partnership with a research laboratory to create more financially feasible
extraction methods.
·
A clothing store could create a strategic partnership with one
manufacturer to guarantee uniform quality and sizing.
·
An analytics company could collaborate with a website to enhance
its marketing strategies.
Types
of Strategic Alliances
1.
Joint Ventures: A joint venture is formed when two companies collaborate to
establish a brand-new, independent company that is owned by both of the
original companies.
For
example, In 2012, Microsoft and General Electric Healthcare teamed up to form a
new company named Caradigm, each having a 50% stake in the venture. Caradigm
aimed to create and promote a healthcare intelligence platform that is open.
The joint venture was based on Microsoft's technical skills and GE's healthcare
IT division's expertise in the healthcare field.
2.
Equity Alliance: An equity strategic alliance can result in
similar outcomes as a joint venture. Nevertheless, it is financed in a
different manner where one company provides an equity stake in another.
For
example, In 2010, Panasonic made a $30 million investment in Tesla by buying
shares of Tesla common stock privately. The investment aimed to strengthen the
alliance between the two companies and to support the growth of Panasonic in
the electric vehicle market. Being one of the top battery cell producers
globally, Panasonic's expertise perfectly complemented Tesla's drive to enhance
its battery packs and lower expenses.
3.
Non- Equity Strategic Alliance: Two entities form a non-equity strategic
alliance without exchanging equity. Every company just contributes its
resources to the alliance for the shared benefit of both.
For
example, ICICI Bank and Amazon Pay teamed up to launch co-branded credit cards,
naming it the "Amazon Pay ICICI Bank Credit Card." This partnership
allows Amazon to improve customer loyalty and spending on its platform, while
ICICI Bank grows its credit card customer base.
Importance
of Strategic Alliance
- Helps in short term finances: Companies looking for quick financial
benefits may find it most convenient to use another company's resources to
enhance their immediate market position.
- Innovation and Technological advancements: In the collaboration
between Panasonic and Tesla highlighted earlier, the joining of top experts in
electric vehicles and batteries from both companies boosted the innovation
capabilities of both organizations.
- Gaining better business insights: Companies might not know how well a specific
business model will do. Companies can utilize strategic partnerships to test
scenarios and gather insights for decision making instead of independently
developing and funding experiments.
- Eliminating barriers to entries: Some companies may lack the necessary funds
to penetrate specific markets. Instead, they have the option to collaborate
with businesses that have already made those investments in order to obtain
access more affordably and quickly.
- Sharing Financial risks: In the event of a business venture's failure,
the financial responsibility is typically shared by both parties in a strategic
alliance. Instead of shouldering the blame alone for the failure, both parties
can get support from each other under the alliance agreement.
Key
takeaways
- International
business refers to commercial transactions that occur across country
borders. It involves the exchange of goods, services, technology, and
capital between different countries.
- Globalization
has led to an increase in international trade and investment flows, making
it essential for businesses to understand global markets, culture, and
regulations.
- It
impacts economies by providing access to new markets, labor, and resources
but also poses challenges like increased competition and the need for
compliance with international laws.
- International
business can be conducted through various modes, including exporting,
importing, licensing, franchising, joint ventures, wholly-owned
subsidiaries, and strategic alliances.
- Each
mode has its advantages and disadvantages depending on factors like
control, risk, and investment requirements.
- Contemporary
theories like the Product Life Cycle Theory and Porter's Diamond
Model provide a more nuanced understanding of global trade dynamics.
- Investment
theories such as Dunning's Eclectic Paradigm and Internalization
Theory offer insights into why companies invest abroad and prefer
direct investments over other forms of international market entry.
- International
businesses must navigate diverse political and economic environments that
affect operations. These environments include different legal systems,
political stability, trade regulations, and economic policies.
- Understanding
the impact of government policies, trade barriers, tariffs, and
international agreements (e.g., WTO, NAFTA, EU) is crucial for effective
decision-making.
- Cultural
differences, including language, religion, values, and social norms,
significantly impact international business operations and negotiations.
- Awareness
and adaptation to cultural diversity are critical for effective
communication, relationship building, and negotiation in global markets.
- Technological
advancements influence international business by enhancing production,
communication, transportation, and logistics.
- Innovations
in information technology, the internet, and e-commerce have reshaped
global business practices and strategies.
- International
businesses must comply with both domestic and international laws and
regulations, such as intellectual property rights, trade laws, labor laws,
and environmental regulations.
- Ethics
in international business involves understanding different ethical
standards, corporate social responsibility (CSR), and ethical dilemmas in
a cross-cultural context.
- Companies
need to balance profit-making with ethical practices and social
responsibilities to build sustainable global businesses.
- Companies
need to develop and implement strategic plans that consider market entry
strategies, competitive advantage, global branding, supply chain
management, and risk management.
- Effective
global strategies require a deep understanding of the external
environment, internal capabilities, and dynamic market conditions.
Exercises
Short
Questions
Define
International Business.
What
are the key drivers of globalization?
List
three types of international business strategies.
Mention
any two theories of international trade.
What
is a Foreign Direct Investment (FDI)?
Name
any two barriers to international trade.
What
is meant by 'global supply chain'?
Explain
the impact of cultural differences on international business negotiations.
Describe
how technological advancements have facilitated the growth of international
business.
Discuss
the role of regional trade agreements in promoting international trade.
Long
Questions
Analyze
how a multinational company (MNC) can manage exchange rate risks when operating
in multiple countries. Provide an example.
Apply
Porter’s Diamond Model to analyze the competitive advantage of a nation of your
choice in a specific industry.
Critically
analyze the pros and cons of outsourcing and offshoring for a global business.
Examine
the impact of international political and economic environments on a company's
global strategy. Use a case study to support your answer.
Evaluate
the effectiveness of the World Trade Organization (WTO) in resolving trade
disputes. What reforms would you suggest to improve its functioning?
Create
a strategic entry plan for a company planning to enter an emerging market.
Include considerations like market entry mode, risk management, and competitive
strategy.
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