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KLE LAW ACADEMY BELAGAVI
(Constituent Colleges: KLE Society’s Law College, Bengaluru, Gurusiddappa Kotambri Law College, Hubballi, S.A. Manvi Law College, Gadag, KLE Society’s B.V. Bellad Law College, Belagavi, KLE Law College, Chikodi, and KLE College of Law, Kalamboli, Navi Mumbai)
STUDY MATERIAL
for
INTERNATIONAL BUSINESS
Prepared as per the syllabus prescribed by Karnataka State Law University (KSLU), Hubballi
Compiled by
Deepali V.H., Asst. Prof.
Shubha V.S., Asst. Prof.
Reviewed by
Deepali V.H., Asst. Prof.
K.L.E. Society's Law College, Bengaluru
This study material is intended to be used as supplementary material to the online classes and
recorded video lectures. It is prepared for the sole purpose of guiding the students in preparation
for their examinations. Utmost care has been taken to ensure the accuracy of the content.
However, it is stressed that this material is not meant to be used as a replacement for textbooks
or commentaries on the subject. This is a compilation and the authors take no credit for the
originality of the content. Acknowledgement, wherever due, has been provided.
NTERNATIONAL BUSINESS
CONTENT
Topic
Page No.
UNIT -
INTRODUCTION: INTERNATIONAL MARKETING
INTERNATIONAL MARKETING: AN INTRODUCTION (^1)
EXPANSION OF INTERNATIONAL MARKET (^2)
FEATURES OF INTERNATIONAL BUSINESS (^3)
IMPORTANCE OF INTERNATIONAL BUSINESS (^4)
GLOBAL SOURCING AND PRODUCTION SHARING (^4)
TRENDS IN INTERNATIONAL BUSINESS (^6)
INTERNATIONAL MARKETING (^9)
SPECIAL PROBLEMS IN INTERNATIONAL MARKETING (^10)
REASONS FOR/MOTIVES OF INTERNATIONAL MARKETING (^11)
INTERNATIONAL ORIENTATIONS (^16)
INTERNATIONALISATION STAGES (^18)
INTERNATIONAL MARKETING DECISIONS (^22)
DRIVING AND RESTRAINING FORCES (^24)
CASE STUDY ON PEPSICO (^29)
UNIT – IV
UNIT – V
1
International Business
UNIT – I Introduction: International Marketing – Trends in International Trade – Reasons for going International – Global Sourcing and Production Sharing – International Orientations – Internationalization Stages and Orientations – Growing Economic Power of Developing Countries – International Decision – Case Studies.
INTERNATIONAL MARKETING: AN INTRODUCTION:
The marketing environment across the world has been becoming more and more global. It is true not only in the competitive and technological dimensions but also in the socio-cultural dimensions. In other words, the marketing environment is global for firms from national to local, including many tiny enterprises. Considering this fact, this author would define International marketing as marketing in an internationally competitive environment, whether the market is home or foreign. As Thomas L. Friedman points out in the well-known book "The World is Flat", the technological revolution that was levelling the global economic playing field and enabling so many more people around the world to compete, connect, and collaborate has been ushering in a new phase of globalisation that would have a huge impact on economics, politics, and military and social affairs. Globalisation, in fact, has implications not only for business but also for other organisations and individuals. The following two anecdotes expose this Peter Drucker observes in the Management Challenges for the 21st Century: “No institution, whether a business, a university or hospital, can hope to survive, let alone to succeed, unless it measures up to the standards set by the leaders in its field any place in the world.” The ramifications of globalisation, thus, are all pervasive. As a result of the liberalisation and globalisation, the marketing environment across the world has been becoming more and more global. As a result of the globalisation of even the domestic business environment, the major competition which many Indian firms encounter in the home market now, for instance, is from foreign firms – they now face a substantially growing competition from goods produced in India by MNCs and imports. In short, national markets are being internationalised/globalised by imports and foreign investment. Look at, for example, the competition which Nirma, whose market is almost entirely confined to India, is encountering. Its major competitors are multinational giants like Unilever, Procter and Gamble (P&G) and Henkel. Apart from goods manufactured in India by the multinational outfits, Nirma also faces competition from imported products. Further, there is competition from large and small Indian firms.
It is obvious that in the domestic market, Nirma is competing against the technological, financial, marketing, and managerial and prowess of multinationals and domestic firms. Even tiny local enterprises face severe foreign competition. For example, a wayside shop selling local products like fresh lime soda or nimbu pani and
fresh juice encounter competition from natural and synthetic beverages marketed by multinationals. The tiny enterprises, however, often take advantage of the emerging environment by selling competing products, including that of the MNCs, along with his own. In fact, he benefits by dealing in fast moving items in other categories too. Indeed, the tiny entrepreneur does an excellent optimisation of his highly limited shop space, capital and human resource by the prudent choice of the product mix. Many such shops also sell a number of foreign goods. It is often said that distribution is one of the most important factors in international marketing. But one who takes a look at the foreign goods – both durable and non-durable, sold on the footpaths and other unorganised bazaars, would marvel at the channels of distribution of foreign goods. In short, marketing environment ubiquitously has become global, tempting one to think that marketing invariably is international/global.
EXPANSION OF INTERNATIONAL MARKET:
Statistics clearly show that the international market is much more dynamic and is growing much faster than the domestic market. One of the most important facts of this is the difference between the growth rate of the GDP and the global trade. For a long time now international trade has been growing at almost twice the rate of the global GDP. In other words, the proportion of the domestic output sold in the foreign markets has been growing faster than the growth of the domestic income or market. As a result of this, the export-GDP ratio (i.e., the value of exports expressed as a percentage of the GDP) has been increasing in all categories of economies. The growth was faster for the developing economies. In 2013, the export-GDP ratio was 31 per cent for developing economies and 22 per cent for the developed economies. For the world as a whole, it increased from 14 per cent in 1990 to 26 per cent in 2007 and was 25 per cent in 2013. The increase in the export-GDP ratio has been very fast in respect of a number of emerging economies whose economic growth has been driven by exports, like several South-East Asian economies (particularly the Asian tigers – South Korea, Taiwan, Singapore and Hong Kong) and China. In other words, their growth has been depended to a very large extent on the international market. The export dependence of China’s enviable economic growth in the last three decades is particularly noteworthy. Indeed, China’s international market dependent economic growth has been spectacular. A new epoch in the economic growth of China started with the economic reforms ushered in 1978, particularly with the second phase of the reform which characterised a major thrust on foreign investment and exports. The results of the transformation from mark to the market has been marvelous. China’s merchandise export-GDP ratio has risen from 5.6 per cent in 1979 to 17 per cent in 1990, 23 per cent in 2000 and further to 37 per cent in 2007. Including services, in 2013 more than 25 per cent of China’s GDP was sold in the foreign market. The value of goods and services imported to China in 2013 was equivalent to about 24 per cent of GDP value. Thus, China’s foreign trade (exports and imports) GDP ratio was 50 per cent in 2013. In other words, the economy of communist China is nearly 50 per cent foreign. If one
IMPORTANCE OF INTERNATIONAL BUSINESS:
Helps in expansion: Geographic expansion may be used as a business strategy. Even though companies may expand their business at home. Helps in managing product life cycle: Every product has to pass through different stages of product life cycle when the product reaches the last stages of life cycle in present market; it may get proper response at other markets. Technology advantages: Some companies have outstanding technology advantages through which they enjoy core competency. This technology helps the company in capturing other markets. New business opportunities: Business opportunities in overseas markets help in expansion of many companies. They might have reached a saturation point in domestic market. Proper use of resources: Sometimes industrial resources like labour, minerals etc. are available in a country but are not productively utilized. Availability of quality products: When markets are open, better quality goods will be available everywhere. Foreign companies will market latest products at reasonable prices. Good product will be available in the markets. Earning foreign exchange: International business helps in earning foreign exchange which may be used for strategic imports. India needs foreign exchange to import crude oil, deface equipment, raw material and machinery. Helps in mutual growth: Countries depend upon each other for meeting their requirements. India depends on gulf countries for its crude oil supplies. Investment in infrastructure: International business necessitates proper development of infrastructure.
GLOBAL SOURCING AND PRODUCTION SHARING:
The trend of global sourcing and production sharing has been growing. Encouraged by the success of the Japanese industry, outsourcing became so prominent in the United States, that an increasing dependence on outside suppliers during the decade of 1980s helped reverse a trend toward increased vertical integration that had been occurring for almost a century. In other words, the 1980s witnessed a trend toward de-integration or the emergence of hollow manufacturing companies. Outsourcing has been much more conspicuous with the Japanese industries than others. For instance, typically figures of about 60 to 70 per cent outsourcing for Toyota versus 30 to 40 per cent for General Motors were reported. The successful use of higher percentage of subcontracting by Toyota, Nissan and other Japanese
automotive companies has been cited increasing in recent years as a model for US managers who have increased their own outsourcing.2 As a result of the massive outsourcing programme, GM’s share of parts and components produced in-house was predicted to drop from 60 per cent to 45 per cent by the end of 1980s. Much of the increased sourcing over the past decade or so has been global in nature. Many companies have adopted global sourcing as a major competitive strategy. Some of the offshore sourcing was in fact accompanied by plant or product line closings in the United States as US manufacturers sought the advantage of cheaper labour abroad, either in their own plants or from others. According to the Purchasing survey, the reasons for offshore purchases are the following: listed in the order - (i) Lower price, (ii) Better quality, (iii) Only source available, (iv) More advanced technology, (v) More consistent attitude, (vi) More cooperative delivery, and (vii) Countertrade requirements. It may be noted that, besides the above, outsourcing has certain other advantages. It reduces the capital and manpower requirements. It may also impart more flexibility to adjust to certain conditions like a recession. International sourcing accounts for an estimated one-third of the world trade. Many developing countries have taken a lot of advantage of this trend. India, however, has not benefited to any significant extent. However, with the changes in the business environment, there are positive signs of change. The Indian auto components industry has become, for instance, suppliers to foreign heavy weights like General Motors, Renault, Fiat, etc. The export performance of the Indian auto components is expected to improve very significantly with the further improvement in quality and productivity which the industry is now striving to achieve. Production sharing is a natural corollary of the growing international sourcing. Production sharing, a term introduced by Drucker, refers to the practice of carrying out different stages of manufacturing of a product in several countries. Such production sharing has become quite common in many industries including high technology and sophisticated products. The technical development and designing may be done in one country, the various components may be manufactured in different countries, the assembling may be done in some other country/countries and the product may be marketed globally. For example, the parts and components of a motor car finally assembled in US or a European country are obtained from a large number of suppliers in different countries. In short, what is marketed as an American car or German car is not purely American or German, but really transnational. Most of the parts and components of the IBM personal computer sold in the US, under the label ‘made in USA’ are manufactured abroad. According to the data given in one report in 1985, 6 nearly three-fourths of the total manufacturing costs of the IBM PC was accounted for by parts and
Demographic Shifts Speed of Innovation More Informed Buyers Increased Competition
- Forced dynamism: International business is a complex topic because the environmental is
constantly changing & business continuously push from new ways to expand and grow adopting new technology in the process the cultures and the politics that shaped countries and the way in which these countries at are continuously changing as well as the factors influencing the way in which global economics developed and interact with each other.
- Cooperation among countries: Countries corporate and conduct business with each other
through thousands of different international organisation treaties and consultation this corporation trends in emerging globalisation because restrictions on business operation tends to become less restricted business and countries are able to benefit from more and cooperate because they can grow their market, solve more Complex problem and deal with concerns that lie outside of once territory.
- Liberalisation of cross-border Movement:
a. In one way or the ways every country restrict the movement across its borders of goods services and resources these restrictions tends to limit international trade and business. b. However countries today & in post match favourable restriction on cross-border movement were introduced so that a lot many companies can take the advantage of opportunities and Markets around the world. c. When countries are more open to cross-border movement consumer have better access to a greater variety of goods and services at a lower price this also creates more competition forcing producers to become more efficient because they are competing with foreign companies.
- Transfer of technology: Transfer of Technology refers to the process by which Commercial
technology is disseminated to governments and business around the world. When organisation agrees to a technology transfer all areas of the economy and Society benefits including Research and Education, transportation, employment, infrastructure and Agriculture among others.
- Growth in emerging market: the growth of emerging market as benefited international business
in two measure ways: a. First, they have increase the potential size of markets giving companies a greater number of people to sell their products or services too.
b. Second, as these markets grow they are developing and enter a new generation of innovative companies that can help address the world's most important issue.
- Other Trends in International Business:
a. Demographic Shifts: The population of the industrialized world in many developing countries is still having very youthful populations. b. Speed of Innovation: The pace of innovation is increasing as many new companies develop new products and improved versions of traditional items. Western companies no longer can expect to be automatically at the forefront of technical development, and this trend will intensify as more businesses in developing countries acquire the expertise to innovate successfully. c. More Informed Buyers: More intense and more rapid communications allow customers everywhere to purchase products made anywhere around the globe and to access information about what to buy. As pricing and quality information become available across all markets, businesses will lose pricing power, especially the power to set different prices in different markets. d. Increased Competition: As more businesses enter international markets, Western companies will see increased competition. Because companies based in developing markets often have lower labor costs, the challenge for Western firms is to keep ahead with faster and more effective innovation as well as a high degree of automation.
SPECIAL PROBLEMS IN INTERNATIONAL MARKETING:
Some people talk of “the differences between domestic marketing and international marketing”. But, the fact is that, there is no basic difference between these two; the principles of marketing are universal. What are referred to by some people as differences are not really differences but special problems or features of international marketing? What make international marketing strategy different from the domestic one is the differences in the marketing environment. The important special problems in international marketing are given below:
**1. Political and Legal Differences
- Cultural Differences
- Economic Differences
- Differences in the Currency Unit
- Differences in the Language
- Differences in the Marketing Infrastructure
- Trade Restrictions
- High Costs of Distance
- Differences in Trade Practices**
- Political and Legal Differences: The political and legal environment of foreign markets is different from
that of the domestic. The complexity generally increases as the number of countries in which a company does business increases. It should also be noted that the political and legal environment is not the same in all provinces of many home markets. For instance, the political and legal environment is not exactly the same in all the States of India.
- Cultural Differences: The cultural differences are one of the most difficult problems in international
marketing, as explained in the next chapter. Many domestic markets, however, are also not free from cultural diversity.
- Economic Differences: As described in a following chapter, the economic environment may vary from
country to country.
- Differences in the Currency Unit: The currency unit varies from nation to nation. This may sometimes
cause problems of currency convertibility, besides the problems of exchange rate fluctuations. The monetary system and regulations may also vary.
- Differences in the Language: An international marketer often encounters problems arising out of the
differences in the language. Even when the same language is used in different countries, the same words or
terms may have different meanings or connotations. The language problem, however, is not something peculiar to the international marketing. The multiplicity of languages in India is an example.
- Differences in the Marketing Infrastructure: The availability and nature of the marketing facilities
available in different countries may vary widely. For example, an advertising medium very effective in one market may not be available or may be underdeveloped in another market.
- Trade Restrictions: A Trade restriction, particularly import controls, is a very important problem which an international marketer faces.
- High Costs of Distance: When the markets are far removed by distance, the transport cost becomes high
and the time required for affecting the delivery tends to become longer. Distance tends to increase certain other costs also.
- Differences in Trade Practices: Trade practices and customs may differ between countries.
REASONS FOR/MOTIVES OF INTERNATIONAL MARKETING:
There are several answers to the question ‘why firms go international?’ The factors which motivate or provoke firms to go international may be broadly divided into two groups, viz., the pull factors and the push factors. The pull factors , most of which are proactive reasons, are those forces of attraction which pull the business to the foreign markets. In other words, companies are motivated to internationalize because of the attractiveness of the foreign market. Such attractiveness includes, broadly, the relative profitability and growth prospects.
The push factors refer to the compulsions of the domestic market, like saturation of the market, which prompt companies to internationalize. Most of the push factors are reactive reasons. Important reasons for going international are described below.
Profit Motive
One of the most important objectives of internationalization of business is the profit advantage. International business could be more profitable than the domestic. As pointed out earlier, there are cases where more than 100 per cent of the total profit of the company is made in the foreign markets (in which case the domestic operation, obviously, is incurring loss). Even when international business is less profitable than the domestic, it could increase the total profit. Further, in certain cases, international business can help increase the profitability of the domestic business. This is illustrated with the help of the following diagram.
consumer durables like cars, TV sets etc. exceed the total number of households. Estimates are that in the first quarter of the 21st century, while the population in some of the advanced economies would saturate or would grow very negligibly, in some others there would be a decline. Such demographic trends have very adverse effects on certain lines of business. For example, the fall in the birth rate implies contraction of market for several baby products. Another type of domestic market constraint arises from the scale economies. The technological advances have increased the size of the optimum scale of operation substantially in many ndustries making it necessary to have foreign market, in addition to the domestic market, to take advantage of the scale economies. It is the thrust given to exports that enabled certain countries like South Korea to set up economic size plants. In the absence of foreign markets, domestic market constraint comes in the way of benefiting from the economies of scale in some industries. Domestic recession often provokes companies to explore foreign markets. One of the factors which prompted the Hindustan Machine Tools Ltd. (HMT) to take up exports very seriously was the recession in the home market in the late 1960s. The recession in the automobile industry in the early 1990s, similarly, encouraged several Indian auto component manufacturers to explore or give a thrust to foreign markets.
Competition
Competition may become a driving force behind internationalization. A protected market does not normally motivate companies to seek business outside the home market. Until the liberalizations which started in July 1991, the Indian economy was a highly protected market. Not only that the domestic producers were protected from foreign competition but also domestic competition was restricted by several policy induced entry barriers, operated by such measures as industrial licensing and the MRTP regulations. Being in a seller’s market, the Indian companies, in general, did not take the foreign market seriously. The economic liberalization ushered in India since 1991, which has increased competition from foreign firms as well as from those within the country, has, however, significantly changed the scene. Many Indian companies are now systematically planning to go international in a big way. Many companies also take an offensive international competitive strategy by way of counter competition. The strategy of counter-competition is to penetrate the home market of the potential foreign competitor so as to diminish its competitive strength and to protect the domestic market share from foreign penetration. “Effective counter-competition has a destabilizing impact on the foreign company’s cash flows, product related competitiveness and decision making about integration. Direct market penetration can drain vital cash flows from the foreign company’s domestic operations. This drain can result in lost opportunities, reduced income, and limited production, impairing the competitor’s ability to make overseas thrusts.”13 Thus, IBM moved early to establish a position of strength in the Japanese main frame computer industry before two key competitors, Fujitsu and Hitachi, could gain dominance. Holding almost 25 per cent of the market, IBM denied its Japanese
competitors vital cash flow and production experience needed to invade the US market. They lacked sufficient resources to develop the distribution and software capabilities essential to success in America. So the Japanese have finally entered into joint ventures with US companies having distribution and software skills (Fujitsu with TRW, Hitachi with National Semi-conductor). In fact, in Fujitsu’s case, it was an ironic reversal of the counter- competitive strategy by expanding abroad to increase its economies of scale for the fight with IBM back home.14 The Texas Instruments established semi-conductor production facilities in Japan “to prevent Japanese manufacturers from their own markets”. Even after much development work, the Japanese producers could muster neither the R&D resources nor the manufacturing capability to compete at home or overseas with acceptable product in sufficiently large quantities.
Government Policies and Regulations
Government policies and regulations may also motivate internationalization. There are both positive and negative factors which could cause internationalization. Many governments give a number of incentives and other positive support to domestic companies to export and to invest in foreign countries. Similarly, several countries give a lot of importance to import development and foreign investment. Sometimes, as was the case in India, companies may be obliged to earn foreign exchange to finance their imports and to meet certain other foreign exchange requirements like payment of royalty, dividend, etc. Further, in India, permission to enter certain industries by the large companies and foreign companies was subject to specific export obligation. Some companies also move to foreign countries because of certain regulations, like the environmental laws in advanced countries. Government policies which limit the scope of business in the home country may also provoke companies to move to other countries. Here is an interesting case: In the early seventies, having failed to make any headway within India, the only alternative left for the Birla Group was to set up industries in other countries and it put up several successful companies in all the ASEAN countries. “This was surely a paradox. The same government which refused us permission to set up manufacturing capacities within the country allowed us to set up industries outside the country for the same products for which it has said ‘no’ in India. Thus, we set up a viscose staple fiber plant in Thailand, and started exporting fiber back to India.”16 According to one study, “the evidence suggests that one of the most important motivations behind foreign direct investment by Indian firms has been the desire to escape the constraining effects of Government of India’s policy. It appears that a number of Indian locally domiciled foreign collaboration industries, those involved in manufacturing at least, go overseas to avoid a policy environment that restricts their domestic growth and undermines their competitiveness. To the extent that foreign direct investment from India takes place for such negative reasons, the phenomenon may be regarded as disguised form of capital flight from India.” With the recent changes in the government of India’s
