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SGSJKs Aruna Manharlal Shah Institute of Management and Research


International Business

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Q.1 By using appropriate examples, explain various modes of entry in to International Business .

The six major modes of international business are imports and exports, tourism and transportation, licensing and franchising, turnkey operations, management contracts, and direct and portfolio investment. Imports And Exports: Imports and exports are the most common mode of international business, particularly in smaller companies even though they are less likely to export. Large companies are more likely to engage in other modes of international business in conjunction with importing and exporting. Companies may import and export merchandise, defined as tangible goods brought into or out of (respectively) a country. While exports and imports apply mainly to goods, they can also apply to services, or non-products. Tourism And Transportation: Most service imports and exports revolve around tourism and transportation. The revenue gained from international tourism and transportation is best seen in hotels, airlines, travel agencies, and shipping companies. For many countries, especially in the Caribbean and Southeast Asia, their income on foreign tourism is more important than their income from exports. The same holds true in countries such as Norway and Greece, who earn a considerable amount from foreign shipping.

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Licensing And Franchising: Many companies enter into international licensing agreements, allowing other countries around the world to use their assets (ie: trademarks, patents, copyrights, or expertise) under contract, receiving royalty payments in return. Similarly, many companies engage in franchising, a mode of business where the franchisor allows the franchisee to use a trademark that is an essential part of the franchisee's business. For example, Gloria Vanderbilt has franchised her name out to several clothing companies, forming the Gloria Vanderbilt line . The franchisor also assists on a continuing basis in the operation of the business-for example, by providing components, management services, and technology. Turnkey Operations And Management Contracts: Companies also pay fees that may be incurred on an international level for engineering services handled through turnkey operations and management contracts. A turnkey operation involves construction of facilities, performed under contract, which is then transferred to the owner when the company is ready to begin operating. Management contracts are initiated when one company supplies personnel to perform general or specialized management functions for another company. This is most evident in Disney's theme parks in France, Japan, and

China. Direct And Portfolio Investment: Finally, international business occurs within direct and portfolio investments. By investing in a foreign company, the investor takes ownership in a foreign property for a financial
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return. A foreign direct investment (the more common of the two) gives the investor a controlling interest in the foreign company. When two or more companies share in an FDI, it is known as a joint venture. When a government joins a company in an FDI, it becomes a mixed venture. Conversely, a portfolio investment is a non controlling interest in a company that usually involves either taking stock in a company or making loans to a company in the form of bonds, bills, or notes that the investor purchases. Portfolio investments are particularly popular with multinational enterprises as they offer a safe means towards short-term financial gain.

Q.2 What are usual responses to the differences in the taxation regimes in different countries. One of the worlds highest tax rates, and the highest of Western European countries, has been imposed on the citizens of Belgium. On average, Belgium taxpayers are taxed a marginal rate of 54.9%. The countrys growing unemployment and a lackluster economy have attributed to its high taxes, according to economists. Finland taxes citizens at a marginal rate of 46.6%, reportedly the worlds fourth highest. Nevertheless, the nations economy is vigorous and unemployment as of mid-Oct. 2011, was a relatively low 6.8%. Germanys closely similar marginal tax rate of 45% has not hurt the nations economy, Europes biggest and the worlds fourth largest, measured by gross domestic production (GDP). Despite providing extensive and costly social safety to its citizens, Germany continues to flourish economically. Right behind Germany with a marginal tax rate of 44.4%, the worlds fifth highest, Denmark nevertheless prospers. Danish workers, according to an ABC News story of 2007, regard themselves as happy and content, despite their heavy tax burden. Despite endless American complaints about over-taxation, the U.S. has one of the worlds lowest marginal income tax rates, at 27%. Along with what, by comparison with the high rates cited above, seems a relatively low rate, the U.S. has the worlds biggest economy, with a GDP of over $1,400 billion. The next largest economy, Chinas, is only one third as large. The

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U.S. national debt, however, is now seen as an impediment to economic growth, and an ongoing unemployment rate of about 9% threatens to further damage the economy. Switzerland, long a tax haven for the wealthy and a nation with once inflexible banking laws regarding secrecy, has one of the lowest marginal tax rates on working people, at 20%. Unemployment in the nation, as of 2009, stood at less than three percent. U.S. neighbor, Canada, imposes a marginal tax rate of 31.2% on its labor force. Like the U.S., Canada has struggled with an unemployment rate of 7.10%, as of Oct. 2011, the lowest since 2008. Although Canadas tax rate is relatively low, the nation offers a program of national health care. Australia imposes a 31.5% marginal tax rate on workers, and has performed throughout the recent recession better than most other economically developed countries. The country encourages entrepreneurship and business investment, which have contributed to Australias general economic health. The cost of running a country, providing services, maintaining a military, supporting and repairing the infrastructure, and all the other essential functions of government, is immensely expensive. Taxation, along with selling government bonds, assessing fees and imposing tariffs, are the principal means by which governments raise money to meet these expenses. Therefore, taxes are inevitable, but if youre living in the U.S., your share of the tax burden is among the worlds lowest.

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Q.3 What are various strategies, available for entry and operation in International Business? Give suitable example for every strategy.

International Business Entry And Operation Strategies 1. Exporting: Exporting is the simplest method of entering a foreign market. By exporting to a foreign country, a company is able to enter this country without actually establishing itself in the country. The company must simply manufacture products that can then be shipped to the foreign country. Exporters can take two forms, direct exporters and indirect exporters. Direct exporters sell directly to foreign buyers and may have sales teams in those countries. Indirect exporters rely on domestic intermediaries who broker the relationship with foreign buyers. Example: Japan's main export goods are cars, electronic devices and computers. Most important trade partners are China and the USA, followed by South Korea, Taiwan, Hong Kong, Singapore, Thailand and Germany. India exports numerous leather products, textile goods, petroleum like crude and products, gems and jewellery, machinery and instruments, drugs, pharmaceuticals and fine chemicals. 2. Licensing Licensing is a good strategy for a company that has an in demand product or brand, but lacks the resources to expand internationally. When a company licenses its products in a foreign country, it sells the rights to manufacture the product in a foreign country to another manufacturer. This means that a company does not need to invest in developing the market but can simply collect payment from a foreign firm.

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Licensing is very popular in the TOY INDUSTRY, because it allows toy manufacturers to come out with many new toys each year. Even toys based on popular movies and television shows are licensed from their inventors. You may see licensed toys from Batman Begins, Star Wars, Harry Potter, SpongeBob Square pants, and Shrek at your favorite department store or toy store. 3. Joint Venture A joint venture involves entering a new market with a local partner. Joint ventures have the advantage of providing companies with a partner who knows the local environment well. This means that there is less risk of failing due to an inability to understand local customs, laws or culture. The disadvantage of a joint venture is that it does not give a company total control over the operation; the firm must be able to work well with its foreign partner to succeed. Example:

SONY-ERICSSON is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications
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International Business

company Ericsson to make mobile phones. The stated reason for this venture is to combine Sony's consumer electronics expertise with Ericsson's technological leadership in the communications sector.

Virgin Mobile India Limited is a cellular telephone service provider company which is a joint venture between Tata Tele service and Richard Branson's Service Group. Currently, the company uses Tata's CDMA network to offer its services under the brand name Virgin Mobile. 4. Franchising Franchising works well for firms that have a repeatable business model (eg. food outlets) that can be easily transferred into other markets. Two caveats are required when considering using the franchise model. The first is that your business model should either be very unique or have strong brand recognition that can be utilized internationally and secondly you may be creating your future competition in your franchisee.


MCDONALD'S is the leading global food-service retailer in the world, with more than 30,000 restaurants located in more than 100 countries. 5. Wholly Owned Subsidiary Entering a foreign market with a wholly owned subsidiary involves creating a local firm without the aid of a local partner. There are two ways of doing this. The first is through what is called green field development. This involves creating a new organization in the foreign country
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from the ground up. The second method is what is referred to as brown field development. This involves purchasing an existing company in a foreign country. Brownfield developments can be beneficial because they offer local expertise, but they can be difficult because there may be resistance from those in the company to new ownership. Example:


TV) is a wholly owned subsidiary of COMPANY since Walt Disney is the sole owner of ABC


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Q.4 Explain with practical illustration international product life cycle theory propounded by raymond. Discuss similarities and contrast aspects of PLC theory with David Ricardos 2 product and 2 country model. THE PRODUCT LIFE CYCLE (Raymond Vernon, 1966)

The logic here is straight forward --there are four stages in a product's life cycle: Introduction Growth Maturity and Decline and the location of production depends on the stage of the cycle.

Stage 1: Introduction: New products are introduced to meet local (i.e., national) needs, and new products are first exported to similar countries, i.e., countries with similar needs, preferences, and incomes.. If we also presume similar evolutionary patterns for all countries, then products are introduced in the most advanced nations. (E.g., the IBM PCs were produced in the US and spread quickly throughout the industrialized countries

Stage 2: Growth A copy product is produced elsewhere and introduced in the home country (and elsewhere) to capture growth in the home market. This moves production to other countries, usually on the basis of cost of production. (E.g., the clones of the early IBM PCs were not produced in the US.)

Stage 3: Maturity The industry contracts and concentrates -- the lowest cost producer wins here. (E.g., the many clones of the PC are made almost entirely in lowest cost locations.)

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Stage 4: Decline Poor countries constitute the only markets for the product. Therefore almost all declining products are produced in LDCs. (E.g., PCs are a very poor example here, mainly because there is weak demand for computers in LDCs. A better example is textiles.)Note that a particular firm or industry (in a country) stay in a market by adapting what they make and sell, i.e., by riding the waves. For example, approximately 80% of the revenues of H-P are from products they did not sell five years ago.

Determination Of Trading Partners Country Differences Theory "The greater the differences the greater the amount of trade." Differences are due to various factors, including climate, factor endowments, and innovative capabilities. This theory is too simple. For example, the similarity of demand in two countries might induce trade. Therefore, we have the Country Similarity Theory "The greater the similarities the greater the amount of trade." This is a small leaps theory. If a product is developed in one country, the next best place to sell it is the most similar country. For example, the largest trading partner for the US is Canada, and vice versa. These two countries are strikingly similar. Independence, Interdependence, And Dependence Independence - a country alone and apart with respect to trade. (E.g., recently we had Albania, in the past China and Japan.) Interdependence - network of mutual trade exchanges. The generally agreed upon view is that interdependence diminishes the likelihood of both economic and conventional war. (This is the heart of the argument, advanced by Jean Monnet of France, that led to founding of what has become the European Union.)

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Dependence - there are two kinds of one-way dependence * Monopolist = single supplier. (Others will find a substitute.) * Monopsonist = single buyer. (Others may lose interest in producing the good.) Dependence is dangerous because the dependent player is vulnerable, i.e., has no diversification for safety. Why Companies Trade Companies trade so as to increase revenues, reduce costs, and/or mitigate risk. To use excess capacity, companies seek to increase (world) market share. To reduce costs, companies seek to increase production and sales, and thereby reduce the per unit cost. If you price at the marginal cost of the last item produced, then you get remarkable growth in revenue and market share if marginal cost is dropping. You also gamble that these revenues will cover costs. The best example is DRAM chips--a great strategy for a while; then the market was flooded. Companies increase profitability through international sales because the same item often fetches a higher profit elsewhere, due to differences in life cycle (e.g., cosmetics) or demographics (e.g., baby food). Companies reduce risk through international sales by diversification. Future growth - firms must adapt to changing markets and maturing products. Long term growth is often a reason to enter a foreign market. For example, many large firms are attempting to enter Eastern Europe (particularly Poland and Hungry), or have entered Russia and China in anticipation of the coming changes. Similarly, many have entered Spain and Ireland in an effort to gain relatively low cost entry to the European Union. Finally, many US and European reclamation companies have entered the Eastern European market because it provides a vast number of opportunities.

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Q.5 Risks are inevitable in International Business the success is totally depending on the techniques of handling risk at every stage justify with example. Conducting international business requires the proactive management of diverse and uncertain variables. Risks associated with the political and legal climate, the business environment, the economy, and the social culture are an ever present reality. Other risks stem from limitations in legal jurisdiction, since international customers may not be subject to the same laws and enforcement mechanisms as their foreign suppliers. Knowing how to manage risk in international business can help to keep your company profitable around the world. Do your homework before entering a foreign market. Do not enter any nation without being fully aware of the unique risks and issues presented by that nation. Assess political risks and the legal environment as well as the business and competitive environment, and develop strategies to minimize or circumvent these risks. Study the histories of local and international companies in the specific country and industry to gain deeper insight into what your own experience may be like. Pay careful attention to exchange rates, including their histories and expected future actions. Utilize the services of local consulting firms specializing in international investment. These firms will have thorough knowledge of the challenges and opportunities presented to international businesses in their specific country. Partner with local organizations. Much of the risk of uncertainty can be curtailed by cooperating with local organizations to take advantage of their market-specific expertise and local reputation. According to, effective cooperation strategies include joint ventures, licensing agreements, and contracts with local suppliers or customers. Be patient if environmental risk factors are currently unfavorable, and consider pulling out of a market if conditions become extremely adverse. If the business environment becomes unfavorable, do not hesitate to move your operations to a friendlier climate. Do not place all of your foreign investment in one country. If the business environment in a specific country turns sour, your business can benefit from having an established presence in one or more additional countries. Factory output from a given nation, for example, can be shifted to a factory in a different country, or spread among several factories, if you decide to pull out of the given nation.

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Purchase an international business insurance policy. Insurance policies covering political risk, terrorism risk, global property damage and liability, and international credit transactions are available to companies with exposure to international markets. According to, international coverage for additional issues such as auto insurance, medical expenses, and workers' compensation can be included as well. Accept only letters of credit from trusted banks. Deal with banks with which your own bank has had positive dealings in the past, if at all possible. If your customer is only willing to use a foreign bank that is unknown to your own, consider requiring a significant initial payment when offering a credit arrangement, or declining the transaction. Example: Political risk can take the form of violence against employees, as in the oil-rich region of the Niger Delta in Nigeria. Local groups regularly launch attacks against company compounds and kidnap foreign oil workers, demanding that more oil revenue be spent in the local area. Oil companies operating in these areas, such as Shell Oil, often manage these risks by hiring security firms to protect workers, and by negotiating to create schools, hospitals and jobs for locals.

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Q.6 Discuss the contemporary theories of international trade with suitable examples. How can the porters diamond model of competitive advantage be used to assess competitive advantage for India for fresh fruits and vegetables?

In contrast to classical, country-based trade theories, the category of modern, firm-based theories emerged after World War II and was developed in large part by business school professors, not economists. The firm-based theories evolved with the growth of the multinational company (MNC). The country-based theories couldnt adequately address the expansion of either MNCs or intra-industry trade, which refers to trade between two countries of goods produced in the same industry.

For example, Japan exports

TOYOTA vehicles to

Germany and imports MERCEDES-BENZ Germany.

automobiles from

Unlike the country-based theories, firm-based theories incorporate other product and service factors, including brand and customer loyalty, technology, and quality, into the understanding of trade flows. Country Similarity Theory: Swedish economist Steffan Linder developed the country similarity theory in 1961, as he tried to explain the concept of intra-industry trade. Linders theory proposed that consumers in countries that are in the same or similar stage of development would have similar preferences. In this firm-based theory, Linder suggested that companies first produce for domestic consumption. When they explore exporting, the companies often find that markets that look similar to their domestic one, in terms of customer preferences, offer the most potential for success. Linders country similarity theory then states that most trade in manufactured goods will be between countries with similar per capita incomes, and intra-industry trade will be common. This theory

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is often most useful in understanding trade in goods where brand names and product reputations are important factors in the buyers decision-making and purchasing processes. Countries prefer to export to the neighbouring countries in order to have the advantages of less transportation cost. For example, Finland is a major exporter to Russia due to less transportation costs. Exports and imports among European countries, between USA and Canada, among the Asian countries, and among the Islamic countries.

Product Life Cycle Theory: Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory in the 1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct stages: (1) new product, (2) maturing product, and (3) standardized product. The theory assumed that production of the new product will occur completely in the home country of its innovation. In the 1960s this was a useful theory to explain the manufacturing success of the United States. US manufacturing was the globally dominant producer in many industries after World War II. It has also been used to describe how the personal computer (PC) went through its product cycle. The PC was a new product in the 1970s and developed into a mature product during the 1980s and 1990s. Today, the PC is in the standardized product stage, and the majority of manufacturing and production process is done in low-cost countries in Asia and Mexico. The product life cycle theory has been less able to explain current trade patterns where innovation and manufacturing occur around the world. For example, global companies even conduct research and development in developing markets where highly skilled labor and facilities are usually cheaper. Even though research and development is typically associated with the first or new product stage and therefore completed in the home country, these developing or emerging-market countries, such as India and China, offer both highly skilled labor and new research facilities at a substantial cost advantage for global firms. Global Strategic Rivalry Theory: Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. Firms will encounter
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global competition in their industries and in order to prosper, they must develop competitive advantages. The critical ways that firms can obtain a sustainable competitive advantage are called the barriers to entry for that industry. The barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry or new market. The barriers to entry that corporations may seek to optimize include: research and development, the ownership of intellectual property rights, economies of scale, unique business processes or methods as well as extensive experience in the industry, and the control of resources or favorable access to raw materials. Porters National Competitive Advantage Theory: In the continuing evolution of international trade theories, Michael Porter of Harvard Business School developed a new model to explain national competitive advantage in 1990. Porters theory stated that a nations competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. His theory focused on explaining why some nations are more competitive in certain industries. To explain his theory, Porter identified four determinants that he linked together. The four determinants are (1) local market resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics.

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1. Local market resources and capabilities (factor conditions). Porter recognized the value of the factor proportions theory, which considers a nations resources (e.g., natural resources and available labor) as key factors in determining what products a country will import or export. Porter added to these basic factors a new list of advanced factors, which he defined as skilled labor, investments in education, technology, and infrastructure. He perceived these advanced factors as providing a country with a sustainable competitive advantage. 2. Local market demand conditions. Porter believed that a sophisticated home market is critical to ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose domestic markets are sophisticated, trendsetting, and demanding forces continuous innovation and the development of new products and technologies. Many sources credit the demanding US consumer with forcing US software companies to continuously innovate, thus creating a sustainable competitive advantage in software products and services.

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3. Local suppliers and complementary industries. To remain competitive, large global firms benefit from having strong, efficient supporting and related industries to provide the inputs required by the industry. Certain industries cluster geographically, which provides efficiencies and productivity. 4. Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and industry rivalry. Local strategy affects a firms competitiveness. A healthy level of rivalry between local firms will spur innovation and competitiveness. In addition to the four determinants of the diamond, Porter also noted that government and chance play a part in the national competitiveness of industries. Governments can, by their actions and policies, increase the competitiveness of firms and occasionally entire industries. Porters theory, along with the other modern, firm-based theories, offers an interesting interpretation of international trade trends. Nevertheless, they remain relatively new and minimally tested theories.

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Q.7 Companies and countries enter into international business, when opportunities are available in domestic market.

Scope: Scope of international business is quite wide. It includes not only merchandise exports, but also trade in services, licensing and franchising as well as foreign investments. Domestic business pertains to a limited territory. Though the firm has many business establishments in different locations all the trading activities are inside a single boundary. Benefits: International business benefits both the nations and firms. Domestic business have lesser benefits when compared to the former. To the nations: Through international business nations gain by way of earning foreign exchange, more efficient use of domestic resources, greater prospects of growth and creation of employment opportunities. Domestic business as it is conducted locally there would be no much involvement of foreign currency. It can create employment opportunities too and the most important part is business since carried locally and always dealt with local resources the perfection in utilization of the same resources would obviously reap the benefits. To the firms: The advantages to the firms carrying business globally include prospects for higher profits, greater utilization of production capacities, way out to intense competition in domestic market and improved business vision. Profits in domestic trade are always lesser when compared to the profits of the firms dealing transactions globally. Grow your business: When trading internationally the universe of potential clients and suppliers will increase significantly. Just imagine increasing the number of potential clients by 100% each time you start selling in a new country. In all likelihood, this will probably be much easier than trying to expand your market place in your home country.

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Diversify risk: The idea that a business relies solely on one market and directs all its resources into a single currency may prove to be more risky than it may first seem. Just look at the number of unprecedented global disasters (financial meltdown, earthquakes and unrest in the Middle East) over the last few years and the drastic impacts these have had on markets. Your home market could contract or even disappear, but your business may be saved by the business it generates overseas. Better margins: As well as seeing increased sales, you may well enjoy better margins. Sterling which is currently weak may give you a head start when exporting. Pricing pressure could be less and it could also reduce seasonal market fluctuations. Product Flexibility: If you have products that dont sell well in your local or regional market, you may find greater demand abroad. You dont have to dump unsold inventory at deep discounts. You can search for new markets where your products can sell for even higher prices than they did in your local market. In fact, you may find new products to sell abroad that you dont offer where you are based. You can offer a much wider range of products when you market globally. Less competition: The ability to stand out amongst competitors is a crucial factor in business. When there are fewer competitors, this task is made easier. Your business, which may be viewed as comparable to others in the UK, may, when placed in a larger and more diverse environment, turn out to be a unique product or service not to be missed. By making the product or service available to worldwide buyers, you instantly create another life line for the business by being in less competition and increasing the possibility of standing out. This will in turn boost sales potential and allow your business to flourish.

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Protection From National Trends and Events: When you market to several countries, you are not as vulnerable to events in any one country. For example, if you sell soft drinks with high sugar content, you could discover that your home country frowns upon drinks that offer extra calories. You may be able to sell the same product in another country that has a much different attitude toward these drinks. In addition, a natural disaster in any one market can disrupt business, but you can compensate by focusing your sales efforts in another part of the world. Learning New Methods: When you do business in another country, you learn new ways of doing things. You can apply this new knowledge to other markets.

For example, according to the Cite Sales website,

Unilever discovered

a market for laundry detergent that would function in Europes high-mineral-content -- or "hard" -- water. This product can now be marketed to parts of the U.S. that have similar water problems.

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Q.8 Explain country risk and political risk analysis - its important while entering in International Business. Globalization a) Define and explain process in detail b) Stage and phases c) Role of FDI in globalization.

Country Risk Analysis: Country Risk Analysis is the evaluation of possible risks and rewards from business experiences in a country. It is used to survey countries where the firm is engaged in international business, and avoids countries with excessive risk. With globalization, country risk analysis has become essential for the international creditors and investors. Country Risk Analysis identifies imbalances that increase the risks in a cross-border investments. Country Risk Analysis represents the potentially adverse impact of a countrys environment on the multinational corporations cash flows and is the probability of loss due to exposure to the political, economic, and social upheavals in a foreign country. All business dealings involve risks. An increasing number of companies involving in external trade indicate huge business opportunities and promising markets. When business transactions occur across international borders, they bring additional risks compared to those in domestic transactions. These additional risks are called country risks which include risks arising from national differences in sociopolitical institutions, economic structures, policies, currencies, and geography. The Country Risk Analysis monitors the potential for these risks to decrease the expected return of a crossborder investment. For example, a multinational enterprise (MNE) that sets up a plant in a foreign country faces different risks compared to bank lending to a foreign government. The MNE must consider the risks from a broader spectrum of country characteristics. Some categories relevant to a plant investment contain a much higher degree of risk because the MNE remains exposed to risk for a longer period of time.

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Analysts have categorized country risk into following groups: Economic risk: This type of risk is the important change in the economic structure that produces a change in the expected return of an investment. Risk arises from the negative changes in fundamental economic policy goals (fiscal, monetary, international, or wealth distribution or creation). Transfer risk: Transfer risk arises from a decision by a foreign government to restrict capital movements. It is analyzed as a function of a countrys ability to earn foreign currency. Therefore, it implies that effort in earning foreign currency increases the possibility of capital controls. Exchange risk: This risk occurs due to an unfavorable movement in the exchange rate. Exchange risk can be defined as a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Location risk: This type of risk is also referred to as neighborhood risk. It includes effects caused by problems in a region or in countries with similar characteristics. Location risk includes effects caused by troubles in a region, in trading partner of a country, or in countries with similar perceived characteristics. Sovereign risk: This risk is based on a governments inability to meet its loan obligations. Sovereign risk is closely linked to transfer risk in which a government may run out of foreign exchange due to adverse developments in its balance of payments. It also relates to political risk in which a government may decide not to honor its commitments for political reasons. Political risk: This is the risk of loss that is caused due to change in the political structure or in the politics of country where the investment is made. For example, tax laws, expropriation of assets, tariffs, or restriction in repatriation of profits, war, corruption and bureaucracy also contribute to the element of political risk. Country risk assessment requires analysis of many factors, including the decision making process in the government, relationships of various groups in a country and the history of the

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country. Country risk is due to unpredicted events in a foreign country affecting the value of international assets, investment projects and their cash flows. The analysis of country risks distinguishes between the ability to pay and the willingness to pay. It is essential to analyze the sustainable amount of funds a country can borrow. Country risk is determined by the costs and benefits of a countrys repayment and default strategies. The ways of evaluating country risks by different firms and financial institutions differ from each other. The international trade growth and the financial programs development demand periodical improvement of risk methodology and analysis of country risks. Political Risk Analysis: The term political risk refers to the possibility that investors will lose money or make less money than expected due to political decisions, conditions or events occurring in the country or emerging market in which they have invested. Specific problems include government instability, currency inconvertibility, nationalization, and expropriation. Additionally, political risk analysis examines social conditions such as crime levels the number of recent kidnappings, for example and land rights issues when evaluating the level of risk associated with any investment. Typically, political risk analysts gather information on an area or a country, determine the causes and sources of any rel ated risks and forward their findings to those making investment decisions. Analysts may also be asked to prescribe risk management solutions and to offer recommendations to clients hoping to invest in a specific area of the world. Although political risk analysis has been developing as a field since the 17th century, it has seen a dramatic increase in importance only in the past 20 years. While the political risk divisions of large consulting and insurance companies have traditionally been most involved with this field, todays analysts may find employment with international organizations, smaller financial companies, rating services, energy firms, and online sites specializing in the sale of political risk information. Additionally, three departments within most large banks perform political risk analysis: credit, fixed income and equities. The equity department supports equity research analysts by forecasting key economic variables and may require advanced economic skills, often on the PhD. Level. Those employed in rating agencies, lending institutions and organizations such as the State Department may be required to make in depth economic analysis and would be
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classified as specialists. Analysts with more general knowledge about countries, legal systems and business practices may find employment with smaller consulting companies that gather and analyze information and then sell their findings to others. Career Paths and Salaries: Internships are strongly recommended, especially if they strengthen accounting and financial skills or offer some insight into the political process. Prior experience is becoming increasingly important in finding employment in certain organizations, such as the World Bank. Requirements appear to be more flexible for employment with smaller companies, particularly those that are Internet based. Salaries are competitive but vary widely depending on experience and on the type of organization. The smaller firms and governmental organizations offer anywhere from$30,000 - $ 50,000 for an entry position, and larger consulting and insurance firms pay $60,000 and above. Demand: With globalization and increasing levels of foreign direct investment, forecasts for jobs in this field seem strong. Additionally, the increasing number and types of firms practicing political risk analysis ensure that this field will be attractive to many different types of people. Qualifications Necessary to Enter the Field: Political risk analysts typically hold degrees in business, international relations or related areas but may also have backgrounds in law, intelligence, journalism or law enforcement. Representation of investigative journalists and former intelligence agents is particularly high in online companies specializing in political risk in formation. Banking experience is always beneficial and may be required for those students hoping to work in a financial company. Excellent research, analysis, and decision making abilities as well as good communication and writing skills are necessary to succeed in this field. Companies look for well informed people who themselves may bedescribed as intelligent risk takers. Language skills, especially in reading and speaking, may be helpful when working in a position that is focused on a particular region, but the lack of such skills will not preclude one from employment in the field in general.

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In addition to language skills, some positions may require knowledge of a region that can only be obtained from having lived or worked there for a longer period of time.The ability to decipher a balance sheet, understand a countrys balance of payments or offer insight into the politics of a particular region will be very useful. Therefore, it is recommended that students interested in pursuing a career in political risk analysis take classes in finance, monetary economics, trade and political science. The latter will be most useful for entry level positions, while business related classes will help those pursuing a more specialized track. Specific classes that were named include the following: accounting, corporate finance, private sector project finance, international monetary system and country risk analysis. Although concentrating in an area of study will certainly be useful, many analyst positions will focus on more than one area of the world. Successful analysts excel at adapting their knowledge to new and uncertain situations. Additionally, employers will value the analysts ability to write concise and lucid reports. Globalization: Globalization is a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology. This process has effects on the environment, on culture, on political systems, on economic development and prosperity, and on human physical well-being in societies around the world. Globalization is a broad term which is often used to describe the way that the cultural, political, technological and economic domains of countries are rapidly expanding outside of their own nations and on to an international level. Advances in technology have meant that people, companies and nations are no longer restricted by national borders and geographical distance. The world is more closely connected and, as a result, it is often thought to be a 'smaller place'. For much less than it has cost in the past, new communication technology has allowed people to instantly contact friends and family on the other side of the world through a variety of media, including text messages, telephones, facsimile machines, web cameras and instant messaging.

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The process of globalization: During the late 20th century, globalization rapidly expanded to resemble the form which it is commonly known as today. Some suggest, however, that since the process of globalization results in the world becoming increasingly integrated, then it must have existed since the beginning of man. The process of globalization is said to have existed at least several hundred years ago. Evidence to support this rests on the knowledge that, around that time, European countries began to expand and colonise the continents of Australia, Africa, North America and South America. Towards the end of the 19th century, world trade and investment experienced rapid expansion. The world was further united when the Gregorian calendar was adopted. The International Date Line, Prime Meridian and world time zones were also established at that time. International standards were also devised in the areas of telegraphy and signalling. The period of economic depression (the 'Depression') between WWI and WWII slowed down progress towards globalization when a number of countries introduced anti-free trade measures in an attempt to stimulate their own economies. It did not take long, however, for companies to become interested in expanding their business by operating in the markets of foreign nations. Developments in communication and transport, particularly that of air travel, soon made it possible for these companies to carry out their plans. The development of the internet continued to assist these companies, creating transnational corporations (businesses with a base in one country but conducting operations in a number of other countries) the way of the future. Stages and phases: Continuing globalization process may be divided into many stages encompassing colonization, slave trade, church constructions abroad, inventions in the high-capacity transportation, industrialization, highway constructions among provinces and countries, electrical and electronic infrastructure. On the other hand Robertson claims that globalization which is thought to be peculiar to present day is in fact a process began before the modernity and capitalism and divides this process into five stages and suggests that the last stage started in 1960 is full of ambiguities.
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A commonly accepted division divides the globalization process into three stages.

Stages of Globalization: First Stage 1490 Nautical developments Second Stage 1890 Third Stage 1990



Multi-National Companies in Industrialization and its 1970s, Communication Reform in requirements 1980s, Disappearance of Competitors of the West in 1990s



Evangelists, then Cultural-Ideological effect, Profit and then explorers, then therefore countrywide spontaneous military occupation companies and finally effect occupation Highest level of civilization, To get the Gods Burden of the white governance of international religion to the man, humane mission, community, invisible hand of the pagans racialist theories market, globalization: for everyones interest Empires Colonization Colonialism and Nation States Imperialism Regional Integrations Globalization and Economic

Political Structure Result

First Stage (1490): Started with the overseas discoveries of the West. The discoveries were followed by the establishment of colonial empires. Second Stage (1890): Second extension of the West started after 1870 and institutionalized in 1890s. The utilized technology after the industrial revolution generated high imbalances between the West and the rest of the world. This difference was resulted with the deployment of Western countries into the markets of countries that had not experienced the industrial revolution and exploitation of the resources in these countries. A merciless competition that curtails profit rates started. This competition previously had remained at the firm level as the land and resources abounded but later on as the free lands become scarce it raised to the national level. Increased competition resulted in conflicts and the First World War.

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The world changed in many respects after the First and Second World Wars. Almost all the ordinary balances collapsed and a new formation in the world started. First, balances that collapsed and changed were the former economic powers and political authorities connected to these powers. The empires and monarchies and their colonies which are the power source and scattered into various continents diffused one by one through declarations of independence. When economic and political balances changed, social and cultural values and balances disappeared, the newly gaps were closed by new balances. One of them was USA and the other was USSR. Thereby two poles and two blocs formed in the world. But during the Second World War major changes occurred. When the vast part of Europe was ruined, industrial economy in USA experienced a huge growth. Third Stage (1990): In the first two stages instable balances aroused. The number of independent states increased, conflicts increased and accelerated. Identity conflicts reached to peak in the underdeveloped countries. The national markets of the West were insufficient; markets were desired to expand in order to encompass the whole world. In this process there were no competitors against the West like the ones in 1490 and 1890 stages because the third stage both was the factor that engendered the collapse of Soviet Bloc and the West was left alone to conquer the world as a result of this collapse. The third stage was more powerful, widespread and faster than the first two stages because of the hegemony of MNCs on the world economy started in 1970s, communication revolution created by putting technological inventions of the West like optical cable, communication satellites, computers, internet in 1980s and disappearance of power balances with the dissolution of the USSR and Europes turning up as the only focus of power again in 1990s. Therefore globalization has become a process that can not be reversed and it should be accorded and strategies should be developed against the process. Role of FDI in globalization: Foreign direct investment plays an extraordinary important role in inclusive globalization. It is dramatically increasing in the age of globalization. It has played important role for economic growth in this global process. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, and skills and financing, FDI has come to play a major role in the internationalization of business. Reacting to changes in

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technology, growing liberalization of the national regulatory framework governing investment in enterprises, and changes in capital markets profound changes have occurred in the size, scope and methods of FDI. New information technology systems, decline in global communication costs have made management of foreign investments far easier than in the past. Foreign Direct Investment allows companies to accomplish several tasks like avoiding foreign Government pressure on local production, making the move from domestic export sales to a locally-based national sales office, capability to increase local production capacity, opportunities for coproduction, joint venture with local partners etc. FDI provide opportunities to host countries to enhance their economic development and opens new opportunities to home countries to optimize their earnings by employing their ideal resources. Smaller and weaker economies and can drive out much local competition. For small and medium sized companies, FDI represents an opportunity to become more actively involved in international business activities. In the past decade, foreign direct investment has expanded its role by change in trade policy, investment policy, tariff liberalization, easing of restrictions on foreign investment and acquisition in many nations, and the deregulation and privatization of many industries. In present competitive scenario, FDI has become a prominent source of external finance for developing countries. FDI plays important role in global business world. global world, innovation plays great role for the growth of business. Today, it is the time of using innovative techniques in business for global competitiveness. Innovation is about creating something new out of nothing. In the modern world of globalization, innovation is of prime importance to any company for performing well. After globalization, there is cut throat competition in whole business world. To beat the competition one business organization has to use innovative ways in business. Innovation in technology, machinery, production ways, Human resource development etc. requires huge capital investment. The purpose is solved by FDI in host country by various developed countries. In today's competitive and At constantly changing global economy, leading companies are becoming increasingly aware that real growth in the future will come from innovation rather than from mergers and acquisitionsand even less from 'business as usual'. At present, fast paced business environment, creativity and innovation is a prerequisite for survival. That is why creativity and innovation are now moving to the top of the agenda for organizations around the world.

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Q.9 Explain various theories of foreign direct investment. Give example for each.

The Major Theories of FDI Explained Below: 1. Theory of Monopolistic Advantage 2. Oligopoly Theory of Advantage 3. Product Life Cycle Model 4. Eclectic theory 1. Monopoly Theory of Advantage: Horizontal Foreign Investment: Is explained by the monopolistic advantage theory. The theory states that the investing firm possesses relative monopolistic advantage abroad against the completive local firms. The firm enjoys monopolistic advantage on two counts: 1. Superior knowledge and Advance Technology. 2. Economies of scale. Superior Knowledge: It refers to all intangible skills-intellectual capital plus advanced technologic possessed by the firm that confer a competitive advantage. This permits the firm to create unique product differentiation. The marginal cost of transfer of its superior knowledge asset to foreign countries will be much low in comparison to the local firms which, need to invest the full cost to create such asset. (Roots, 1978) Empirically,the monopolistic advantage suggested horizontal foreign direct investments of the US firms' knowledge technology intensive industries such as petroleum referring, pharmaceuticals, chemicals, transport equipment. It was also observed in the case of US firms in

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high-level marketing skill-oriented industries such as cosmetics and fast-food abroad. (See Root, 1978) 2. Oligopoly Theory of Advantage: Vertical FDI is explained by the oligopoly theory of advantage. The oligopolistic big firms tend to dominate in the global market on account of entry barriers such as: 10 points mistake The big firms intend to retain their monopoly power by sustaining these entry barriers. They do not want new competitors to enter by allowing the market vacuum. They, thus, want growth maximisation of the firm. A firm's relative rate of growth determines its relative size and relative market power. Through vertical direct foreign investment they trend to capture and enlarge market share into the global market. The oligopoly theory thus, explains defensive investment behaviour of a multinational firm. In short, monopolistic advantage theory explains first course of investment of a business firm in a foreign country. The oligopoly theory explain the defensive investment behaviour in terms of oligopolistic reaction to retain the monopoly power of the firm. Besides, thorough horizontal and vertical integration in FDI, the multi-national firm can yield the production-scale economies and comparative cost advantage resulting into over all competitive advantage. The oligopoly multi-national firm can internalise external economies of scale by advantage of backward integration to forward integration. For this reason, petroleum companies tend to land invested in crude oil refineries as well as marketing out-lets. 3. Product Life Cycle Model: Vermon (197l)'s Product Life Cycle Model (PLCM) can explain both trade and FDI. By adding a time dimension to the theory of monopolistic advantage, the PLCM can explain a firm's shift from exporting to FDI. Initially a firm when innovate a product, it produces at home enjoying its monopolistic advantage in the export market, thus, specialises and exports. Once the product

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becomes standardised in its growth product phase, the firm may tend to invest abroad and export from there to retain its monopoly power. The rivals from the home country may also follow to invest in the same foreign country's oligopolistic market. In short, a synthesis of international trade and investment theories can better explain the complexities of international business and marketing behavior. 4. Eclectic Theory: Eclectic theory, propounded by Dunning (1988), is a wholictic, analytic approach for FDI and organisational issues of the MNCs relating to foreign production. Eclectic paradigm considers the significance of three variables: 1. Country-specific 2. Company-specific Internalization 3. Relating to trade and FDI. 4. The country-specific, i.e., location variables refer to: 1. the geographical environment 2. the political environment 3. the government's regulatory framework 4. taxation and fiscal policy 5. production and transportation costs 6. cultural environment 7. research and development advantages.

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5. The company-specific paradigm relates to ownership and managerial variables: 1. managerial effectiveness 2. structure 3. process 4. technology advantages. 6. The internalization variable refers to the firm's inherent flexibility and output cum marketing capabilities on: Peter Drucker (1992), the management Guru, stated that: "it is simply not possible to maintain substantial market standing in an important area unless one has physical presence as a producer" in a global economy. FDI rather than foreign trade, in modern times, is a major driving Force and an engine of growth of an economy under global setting.

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Q.10 WTO is more complex than removing non tariff barriers and reducing tariff barriers explain above statement in the context of its various provisions impacting developing countries.

Developing countries have never had a decisive role in the General Agreement on Tariffs and Trade (GATT)/World Trade Organisation (WTO) system; but their weakness may be much more damaging now than ever before, because of three newly emerging features. First, the WTO is increasingly spreading its coverage to new areas. Second, the impact of the agreements of the WTO (as compared to the GATT) and their operation is much wider and deeper for the economies of countries, particularly the developing countries. Third and perhaps the most important, the economies of the developing countries are much more vulnerable at present than before because of their own weakness and also exposure to the uncertain external environment. The developing countries under the new WTO regime are faced with a considerable increase in their obligations particularly in respect of government procurements, subsidies, antidumping, customs valuation and import licensing procedures. Again, the new obligations that they have accepted in the area of services and intellectual property rights could have adverse economic impact on their development. The developing world, which consists of two-third majority of the total WTO membership, has not reaped plausible benefits under WTO regime. They also have a strong feeling that their voice is not being heard, and the issues raised by them are not being addressed. However, some noticeable change of strategy at the WTO seems to have taken place in recent years. Major share of the world trade is controlled by the developed world. According to a survey only 17 countries control 72% of the world trade. A major dilemma faced by the developing countries in the trade liberalisation process is that a country may be able to control the speed of trade liberalisation, but cannot determine by itself how fast its exports should grow.
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Exports performance depends on quality, price and competitiveness of exportable commodities. Also, to become competitive, investment is required in developing the infrastructure, technology, human resources, and enterprise capacity for new exports, which is a long-term process and not easily achieved. The interesting phenomenon is that the developed world continues to insist on free trade and services and bringing down the tariffs in order to ensure fair competition between local and imported products. While, on the other hand, the developed world itself continues to follow protectionist policies in the case of agriculture to safeguard its costly products against cheaper foodstuff from the developing world. Suggestions to the Developing Countries: The developing world has tried to raise its voice on various forums but without much success. Apart from raising hue and cry for better treatment by the WTO and the developed world it should have its own strategy for economic development. Following are the suggestions for the developing countries: Identification of core strengths and competitive edge,Concentrate mainly on industries which use local raw material, Improve efficiencies, lower costs and upgrade quality of products in order to be able to make them export oriented to earn valuable foreign exchange, Develop small and medium enterprises, Continue to improve productivity in agriculture / fishing in order to remain self reliant in food production and earn good value for their exports, Develop human resource through education, training, healthcare and social justice, and The Government should reduce its role in running business. But, unfortunately, most of the developing countries to-day is plagued by inefficiency, corruption, dishonesty, low productivity and a lack of will and desire on the part of elected representatives to improve the status quo. The developing countries cannot prosper on the prescriptions laid down by the World Bank, IMF or regular dole from rich nations. South Asian economies, especially Malaysia, Singapore, South Korea and China are a glaring example of what can be achieved through following a pragmatic path. Even the Indian economy has grown rapidly over the past decade with real GDP growth averaging some 6% annually, in part due to continued structural reform, including trade liberalisation. In recent years, though, Pakistan has also shown a remarkable performance in real GDP growth rate: 8.4% during the fiscal year 2004International Business Page 37

05, 6.4% during 2003-04 and 5.1% during 2002-03, but yet there are many reforms to be made especially in manufacturing and service sectors.

The developing countries have a tough task ahead.

If they do not take corrective

measures they will be rendered producers of raw materials and operating locally produced agrobased industries only. They will, obviously, miss the opportunity to benefit from global trade. According to a research report by David Dollar of the World Bank, the growth rate of the developing countries during 1990s has been 5% (3.5% excluding China against 2% of the rich countries. He believes that there is solid evidence available to prove that this has happened due to participation in the free trade and globalisation process. According to WTO Annual Report 2002, poor countries need to grow their way out of poverty and trade can serve as a key engine of that growth. But currently products of developing countries face many obstacles in entering the markets of rich countries. Rich counties need to do more to reduce trade-distorting subsidies and dismantle their existing barriers on competitive exports from developing countries.

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Q.11 Short notes with examples



Recession: A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP); although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession. The fear of a recession looms over the United States. And as the cliche goes, whenever the US sneezes, the world catches a cold. This is evident from the way the Indian markets crashed taking a cue from a probable recession in the US and a global economic slowdown. Weakening of the American economy is bad news, not just for India, but for the rest of the world too. Impact on India: A slowdown in the US economy is bad news for India. Indian companies have major outsourcing deals from the US. India's exports to the US have also grown substantially over the years. Indian companies with big tickets deals in the US are seeing their profit margins shrinking. More people have sold the shares in the indian share market than they bought in the recent weeks. This has added to the fall of sensex to lower points. One danger meanwhile is of a dip in the employment market. There is already anecdotal evidence of this in the IT and financial sectors, and reports of quiet downsizing in many other fields as companies cut costs. More than the downsizing itself, which may not involve large numbers, what this implies is a significant drop in new hiring -- and that will change the complexion of the job market.
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Many companies has laid off their staffs, the number of tourists inflow to india has come down, companies have cut down compensations and perks etc, government and other private companies are reluctant in starting new ventures and starting new projects etc. Projects that are halfway to completion, or companies that are stuck with cash flow issues on businesses that are yet to reach break even, will run out of cash. one of the casualties this time could be real estate, where building projects are half-done all over the country and in this tight liquidity situation developers find it difficult to raise finances. The only way out of the mess is for builders to drop prices, which had reached unrealistic levels and assumed the characteristics of a property bubble, so as to bring buyers back into the market, but there is not enough evidence of that happening. Consumers are also frozen in this sudden glare of the headlights. More expensive money means that floating rate loans begin to bite even more; even those not caught in such a pincer will decide that purchases of durables and cars are not desperately urgent. At the heart of the problem lie questions of liquidity and confidence. What the RBI needs to do, as events unfold, is to neutralize the outflow of FII money by unwinding the market stabilization securities that it had used to sterilize the inflows when they happened. This will mean drawing down the dollar reserves, but that is the logical thing to do at such a time. If done sensibly, it would prevent a sudden tightening of liquidity, and also not allow the credit market to overshoot by taking interest rates up too high. Meanwhile, there is an upside to be considered as well. The falling rupee (against the dollar, more than against other currencies) will mean that exporters who felt squeezed by the earlier rise of the currency can breathe easy again, though buyers overseas may now become more scarce. Overheated markets in general (stocks, real estate, employment- among others) will all have an element of sanity restored. And for importers, the oil price fall (and the general fall in commodity prices) will neutralize the impact of the dollar's decline against the rupee.

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Thousands of companies have made it into Europe and many more are going to make it. This interactive publication allows you to find your way into Europe and to find your way within Europe . This is particularly true for the European Union as once you are in one of the Member States it is easy to migrate or expand into the next one. If you have exported or invested into other parts of the world, the pattern of market entry is not much different in Europe . You will, however, have to develop a strategy of where to start your European conquest. Where to position yourself will mainly depend on the market for your product. Germany is often the first point of entry, simply by being the third largest economy in the world, the largest market and the doorstep to low costs in Eastern Europe . Many companies start in the UK or Ireland because of language reasons and then transfer across to continental Europe . Others again avoid being associated with one of the giants Germany , France and UK and instead position themselves in between the Netherlands or Belgium . You may prefer Eastern European countries to benefit directly from low set-up and low employment cost. Turkey and Russia are, at present, the fastest growing economies. Once you have used this publication properly you will be able to make a profound and informed decision. Trade show: Many companies start obtaining a personal impression by presenting at a Trade Show. A trade show gives you the opportunity to understand many things about your market. Even if you do not have a stand, you can simply observe and get a feeling for the industry in Europe . Trade Shows are often very well organised and you need thorough preparation if you do not want to waste time and money. Germany has by far the most and the largest trade shows in Europe and in fact in the world. For each of the countries covered in the lower section of this publication (e.g. Austria) you can find the most important trade shows listed. Simply follow the links.

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Distributor: After a trade show, many companies want to appoint an agent or a distributor in Europe . Please be aware that other rules apply when you terminate agents or distribution contracts in Europe , then those which you might be used to. You will find the specifics in the section down below, say for Ireland. You may wish to consider how many distributors you need for the whole of Europe or if one person can cover a number of countries simultaneously. Logistics: Once you start exporting you will also have to have a look at the logistics of ports, airports and at customs regulations. Europe in general has low tariffs and once you have entered the European Union, there will be no further customs. By that stage you will want to ensure that your intellectual property protection and CE-Marking is in place. The EU regulations on Product Liability might be of particular importance to you if you manufacture goods. Franchising Franchising is an option for many as it allows for return straight away. Franchising is an area, which is not harmonised within the European Union, so each Member State will have their own provisions. You can find out much more about the concept of the European Law, the difference of the Common Law and Civil Law and the impact that this has for your entry or expansion strategy. If you are more established, you will be looking to enter into a Joint Venture or to found your own Company. Entities and Board structures for each country are listed in the country particulars. General information about Corporate Governance and Statues/Articles of Association in Europe or the Limited in Civil law countries should be taken into account. The Limited company table and the Public company table give you an overview of what and how long it takes to found a company in all these countries. You might also decide on some specific European organization like the Economic Interest Group or the European Corporation (Societies European).

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Our various outlines on taxation and on employment costs will provide you further guidance for your strategy. Please note that it is now possible to transfer losses within European Union companies of one group. Incentives offered by the European Union or by one of the Member States might also influence your decision. Specific country incentives such as setting up in a special economic zone - often amongst Eastern European countries - are mentioned under the specific country. If you are intending to acquire another company in Europe you will need to be familiar with the above mentioned contributions on Companies, Company structure and Corporate Governance as well as with Competition law.

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What are intellectual property rights? Intellectual property rights are the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time. Intellectual property rights are customarily divided into two main areas: Copyright and rights related to copyright The rights of authors of literary and artistic works (such as books and other writings, musical compositions, paintings, sculpture, computer programs and films) are protected by copyright, for a minimum period of 50 years after the death of the author. Also protected through copyright and related (sometimes referred to as neighboring) rights are the rights of performers (e.g. actors, singers and musicians), producers of phonograms (sound recordings) and broadcasting organizations. The main social purpose of protection of copyright and related rights is to encourage and reward creative work. Industrial property Industrial property can usefully be divided into two main areas: One area can be characterized as the protection of distinctive signs, in particular trademarks (which distinguish the goods or services of one undertaking from those of other undertakings) and geographical indications (which identify a good as originating in a place where a given characteristic of the good is essentially attributable to its geographical origin). The protection of such distinctive signs aims to stimulate and ensure fair competition and to protect consumers, by enabling them to make informed choices between various goods and services. The protection may last indefinitely, provided the sign in question continues to be distinctive. Other types of industrial property are protected primarily to stimulate innovation, design and the creation of technology. In this category fall inventions (protected by patents), industrial designs and trade secrets.
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The social purpose is to provide protection for the results of investment in the development of new technology, thus giving the incentive and means to finance research and development activities. A functioning intellectual property regime should also facilitate the transfer of technology in the form of foreign direct investment, joint ventures and licensing. The protection is usually given for a finite term (typically 20 years in the case of patents). While the basic social objectives of intellectual property protection are as outlined above, it should also be noted that the exclusive rights given are generally subject to a number of limitations and exceptions, aimed at fine-tuning the balance that has to be found between the legitimate interests of right holders and of users. Considering Intellectual Property Rights (IPR) While dealing with overseas clients, one of the most important, and often most neglected, issue is Intellectual Property Rights (IPR). Several researches have revealed that businesses that dedicate time and resources to protecting their intellectual property assets can increase their competitiveness in a variety of ways. Therefore, it is very important for a would-be exporter to identify himself/herself to different intellectual property categories; they are 1. Copyrights: Copyright acts protect a creator from having his creation (literary work, dramatic work, musical work, artistic work, cinematographic film, sound recording, etc.) copied or exploited by someone without the creator's permission. 2. Trade Marks: In simple term, a trade mark (or brand name) is nothing but a visual symbol or sign such as signature, name, device, label, numerals, etc. which distinguishes the creator's goods or services or other articles from other similar goods or services created by others.

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3. Patents: Patents allow the inventor of an invention to exert monopoly of the invention and thus to fetch adequate commercial value for a period of 20 years. To gain patent, an invention must be new, inventive and capable of industrial application. 4. Geographical Indications: The term 'geographical indication' (in relation to goods) means an indication which identifies goods as originating, or manufactured in the territory of a country, or a region or locality in that territory, where a given quality, reputation or other characteristic of such goods is essentially attributable to its geographical origin. 5. Industrial Designs: The term 'design' is defined as "only the features of shape, configuration, pattern, ornament or composition of lines or colors applied to any article whether in two dimensional or three dimensional or in both forms, by any industrial process or means, whether manual, mechanical or chemical, separate or combined, which in the finished article appeal to and are judged solely by the eye. 6. Trade Secrets Or Know Hows: Trade Secrets or Know Hows are confidential information which may be commercially or technically valuable, and therefore, they need protection.

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What is a trade Barrier: Trade barriers are measures that governments or public authorities introduce to make imported goods or services less competitive than locally produced goods and services. Not everything that prevents or restricts trade can be characterised as a trade barrier. A trade barrier may be linked to the very product or service that is traded, for example technical requirements. A barrier can also be of an administrative nature, for example rules and procedures in connection with the transaction. In a number of areas, special international ground rules have been agreed, which limit the ways in which countries can regulate trade. It means that some barriers are legal while others are illegal. Trade barriers within the EU are subject to special rules that apply to the internal market of the EU. Sometimes it may also be possible to assist companies that face obstacles to trade that do not fall under the definition of actual trade barriers. Legal and Illegal Trade Barriers

Through the World Trade Organisation (WTO) and agreements made by the EU with other countries, some general rules have been established for trade with countries outside the EU. These ground rules set the limits as to what trade barriers can be put in place. As such a trade barrier may either be: Illegal - it violates international agreements and rules; or Legal - it does not violate rules and agreements.

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Nevertheless, whether legal or not, trade barriers prevent or restrict imports or investments to the market in questions. A barrier may be legal in principle, but still be open to criticism. This is the case, for instance, if the conditions on which a decision was based have changed.

For example: Customs duties: If they exceed an agreed level ("bound duty rates"), they are illegal. If they are below the agreed level, they are legal, but trade restrictive. Customs procedures: They are in principle legal, but a burden on trade. If procedures become more burdensome than necessary, they may be illegal. Technical regulations, standards, etc. They are in principle legal, for example for the purpose of consumer protection, health protection, and the protection of the environment, etc. However, in some areas there are international standards that must be complied with, and there may also be special procedural rules. If they are not complied with, a measure may become illegal. With regard to other types of trade barriers, including intellectual property rights, state aid, or rules relating to the provision of services, it can be more difficult to draw a clear line between what is legal and illegal. In some instances, procedures have been laid down which countries must comply with in regard to measures relating to trade. International agreements also contain rules for what can be done if these agreements are not complied with. In the WTO, the Dispute Settlement Body has been established, which functions much like a court.
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Information about current international trade rules are available from the Technical Export Advice Unit of the Trade Council. The EU Commissions website on market access presents information about applied duty rates and about import formalities. From the World Trade Organization (WTO), information is available about duty rates and about notified technical trade restrictions.


Basic Issues

The Economic Environment

The Political Environment

The Legal Environment


Basic issues:
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The central issues for the decision to go global are concerned with minimizing risk. A company, when considering the environment that it will deal with when entering a new market, has to deal with certain variables. These concern, for example, the cultural barriers to investment, the ability to reach a competitive edge with new investments and the strategic use of new technologies and natural resources that international investment might bring.

The economic environment This element comprises the nature of the economic system and institutions of a particular country or region. It also takes into account the nature of human and natural resources within the target market. A firm will function very differently in a libertarian environment than within a highly statist one. Here, the activities and functions of local economic elites are also very important. The Political Environment Closely tied to the economic environment is the political one, itself also dealing with the nature of systems and institutions. Many variables to consider here are the stability of the political system, the existence of local or international conflict, the role of state enterprises and the nature of the bureaucracy. The Legal Environment The existence of bureaucratic systems and cultures is central in making the decision to invest globally. The nature of corruption, local values and assumptions that are built into national ideologies are major variables in this field. A great concern is the extent to which there is a culture of law or a culture of personal patronage, where negotiations are done on a personal rather than a legal basis. The impact of international lending agencies such as the International Monetary Fund or the World Bank is also important in creating a legal culture that a business will have to take seriously. Social Structure

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Experts such as Robert Brown and Alan Gutterman hold that social structure comprises the basic values of a people and transcends the institutions mentioned above. Issues such as the relation between the individual and the collective, religion, family life and even time concepts and gender roles are all significant in terms of dealing with a new population. Being sensitive to these might be the difference between success and failure.

G. PRODUCT LIFE CYCLE THEORY IN INTERNATIONAL TRADE Product life cycle theory divides the marketing of a product into four stages: introduction, growth, maturity and decline. When product life cycle is based on sales volume, introduction and growth often become one stage. For internationally available products, these three remaining stages include the effects of outsourcing and foreign production. When a product grows rapidly in a home market, it experiences saturation when low-wage countries imitate it and flood the international markets. Afterward, a product declines as new, better products or products with new features repeat the cycle. General Theory When a product is first introduced in a particular country, it sees rapid growth in sales volume because market demand is unsatisfied. As more people who want the product buy it, demand and sales level off. When demand has been satisfied, product sales decline to the level required for product replacement. In international markets, the product life cycle accelerates due to the presence of "follower" economies that rarely introduce new innovations but quickly imitate the successes of others. They introduce low-cost versions of the new product and precipitate a faster market saturation and decline

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The three stages of the product life cycle: GROWTH An effectively marketed product meets a need in its target market. The supplier of the product has conducted market surveys and has established estimates for market size and composition. He introduces the product, and the identified need creates immediate demand that the supplier is ready to satisfy. Competition is low. Sales volume grows rapidly. This initial stage of the product life cycle is characterized by high prices, high profits and wide promotion of the product. International followers have not had time to develop imitations. The supplier of the product may export it, even into follower economies. MATURITY In the maturity phase of the product life cycle, demand levels off and sales volume increases at a slower rate. Imitations appear in foreign markets and export sales decline. The original supplier may reduce prices to maintain market share and support sales. Profit margins decrease, but the business remains attractive because volume is high and costs, such as those related to development and promotion, are also lower.
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DECLINE In the final phase of the product life cycle, sales volume decreases and many such products are eventually phased out and discontinued. The follower economies have developed imitations as good as the original product and are able to export them to the original supplier's home market, further depressing sales and prices. The original supplier can no longer produce the product competitively but can generate some return by cleaning out inventory and selling the remaining products at discontinued-items prices.

H. G20-& ITS IMPACT ON INDIAN FOREING TRADE G20 is a forum of the Heads of Governments of the 19 major economies and the EU for global cooperation on international economic and financial issues. The European Union is represented in G20 by the President of the European Council. The forum has come into existence with the first summit of the Leaders of G20 held in Washington D.C. in November 2008 in the wake of global financial crisis. Subsequently, the forum met biannually in 2009 and 2010 and annually since 2011. Frequently organised Leaders summits of G20 in 2008, 2009 and 2010 resulted in a momentum of its influence because of significant decisions that were taken to avert the impact of Global financial crisis of 2008. Through consultations and cooperation, the forum played a major role as a crisis manager and successfully contributed in averting further serious consequences of the global financial crisis. Some major decisions in these regards are worth mentioning. In November 2008, the G20 Leaders agreed to regulate the hedge-funds and the rating companies, and sought to strengthen standards for accounting and derivatives. In April 2009, the Leaders pledged $1 trillion to the IMF and the World Bank to help emerging market countries to offset the effects of recession. In September 2009, the Leaders established a Financial Stability Board to implement financial reforms. Also they took decisions to regulate tax heavens, and more than deserving executive
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pay increase in the banks and financial institutions. In June 2010, the Leaders agreed to cut their budget deficits to half by 2013 and to eliminate deficits altogether three years later. In November 2010, the G20 Leaders agreed to bring Development agenda under the G20 discussions. G20 is now perceived as a global decision making forum for contextual critical global issues that are important for achieving sustainable growth and maintaining stability. G20 is working towards strengthening the financial system and fostering financial inclusion to promote economic growth, improving the international financial architecture in an interconnected world, enhancing food security and addressing commodity price volatility; and to promote sustainable development, green growth and the fight against climate change. The key challenge for the G20 at the current juncture is to ensure that international policy cooperation is sustained and enhanced in a coordinated manner to be coherent and consistent with the business cycles. G20 also aims to foster and adopt internationally recognized standards through the example set by its members in areas such as the transparency of fiscal policy and combating money laundering and the financing of terrorism. Over the last few years of its existence, G20 has developed a system and process of working. G20 does not have any permanent Secretariat. The Presidency is held on rotation by the member countries. The current presidency in 2013 is held by Russia. In 2012, Mexico held the G20 Presidency. In the next year in 2014 Australia will host the G20 Presidency. These three countries, therefore, constitute what is known as Troika in G20 that represents previous Chair, current chair and the future chair. There are broadly two channels through which discussions are held and recommendations are arrived at: (i) The Finance Channel and (ii) Sherpas Channel. The finance Channel comprises of the Finance Ministers and Central Bank Governors and their Deputies. In the Sherpas channel, every member country of G20 has nominated a Sherpa to lead the Development agenda discussions. The Sherpas have been tasked by their Leaders to negotiate the Summits documents on their behalf. Thus, Leaders Declarations are finalised by Sherpas. The Presidency of the G20 invites non-member countries and institutions to attend Leaders' summit. Invitation to non-member countries is not guided by any formal rule. There is some informal understanding on this. The number of invited non-member countries normally
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does not exceed five. Invitation is extended to give a fair and balanced geographical representation to non-members. Countries presiding over regional forums, such as the African Union, ASEAN, APEC, etc., are invited. So far Spain has always been invited in all the meetings. In the Seoul summit, it was formalized that among the five non-member invitees at least two must be from African countries. Invitees attend Leaders meetings and take part in the Finance Ministers meetings. They are also involved in drafting of Summit decisions, and are invited to take part in the Working Group meetings. The G20 maintain close association with International Organizations. On the request of G20, these organizations provide expert support and advice as per their respective competence. They provide reports and position papers relating to the Agenda Items. The International Organizations which have been involved are International Monetary Fund (IMF), the World Bank (WB), the Financial Stability Board, the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), the United Nations, UNCTAD and International Labor Organization (ILO). These and other international organizations are also frequently invited to participate in the premier forum and G20 Working Groups meetings. The objectives of the g20 are: Coordination among its members in order to achieve global economic stability and sustainable growth; To promote financial regulations that reduce risks and prevent future financial crises; and To create a new international financial architecture. These objectives are pursued through common agenda that are continued and followed up over years. In addition, each year, the G20 Presidency has the privilege to decide its priorities within these broad objectives. The priorities are announced by the Presidency after assuming the Chair. These priorities then shape focus in G20 meetings in the year.

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Every product has a life cycle that is a period of time during which it appeals to the consumer, i.e. it sells. But during the period of the Product Life Cycle sales are not constant, there are variations in levels of demand, the amount of competition in the market place, consumer understanding and liking of the product and the share of the market the product captures. Normally five separate stages of a products life cycle are recognized, and these are:






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The stages of the product life cycle: INTRODUCTION The product is new to the market, few potential consumers know of its existence. Price can be high, (for example new computer games) and sales may be restricted to early adopters (those consumers that must have new technology, gadgets, or fashions first). Profits are often low or losses are being made, this is because development costs have to be repaid, and advertising expenditure can be high. Some products are introduced to the market in a splash of publicity, hoping to capture as large a market share as soon as is possible. GROWTH The product is becoming more widely known and consumed. Marketing is used to try to establish or strengthen the brand and develop an image for the product. Profits may start to be earned, but advertis-ing expenditure is still high. Prices may fall as the first competitors enter the market. MATURITY The product range may be extended, by adding both width and depth. Competition will increase and this has to be responded to. Advertising should be used to reinforce the image of the product in the consumers minds. Sales are at their peak, profits should be high. SATURATION Very few new customers are gained, replacement purchases are the trend. Firms should try to reduce their costs, so that pricing strategies can be more flexible. Brand image should be maintained, and in so doing full value is taken from the brand. Alternatively the brand can move down market, capturing new markets, or market niches, but this should not be done at the expense of quality. Profits may be maintained, but can start to fall.

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DECLINE Sales can now fall fast, and as a result the range sold is likely to be reduced, with the firm concentrating on core products. Advertising costs will be reduced, and attempts will be made to mop-up what is left of the potential market. Each product sold could be quite profitable as development costs have been paid back at an earlier stage in the life cycle. But overall, total profits will fall. Price is also likely to fall, but by concentrating on remaining market niches there should be some price stability.

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EXAMPLE OF LIFE CYCLE Dixons Freeserve. In this case the product, the first free ISP (Internet Service provider) entered the market with a massive amount of publicity, with the objective of capturing as much market share as possible. The company were successful in doing this by using its large number of distribution channels, and a loss leader pricing strategy. Within 2 or 3 months Free serve became the UKs largest Internet Service provider. The Introduction stage was very short, and growth took off virtually immediately. The third stage, Maturity, saw competition entering the market, with existing ISPs re-pricing their products, and new market entrants coming to the market with a similar business model to Freeserve. But Freeserve was able to maintain its market position, firstly through availability of the product (software CDs) through its Dixons, Currys and PC World outlets, secondly because it offered an efficient and well designed product, tailored to its users needs, and thirdly ISP users are inclined to remain with the same provider rather than switch providers, so once they have their customer Dixons are likely to keep him. Eventually Freeserve was sold to Wannadoo.

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The Global Strategic Rivalry theory of international trade was developed in the 1980s as a means to examine the impact on trade flows arising from global strategic rivalry between Multi-National Corporations. It explores the notion that in order to stay viable, firms should exploit their competitive advantage globally and try to keep it sustainable. There are many ways in which a firm can hold a competitive advantage, these include; Owning intellectual property rights, Investing in research and development, Achieving economies of scale or scope, Exploiting the experience or learning curve, Forging strategic alliances and Strategic mergers and acquisitions. Owning intellectual property rights: Intellectual property laws confer a bundle of exclusive rights in relation to the particular form or manner in which ideas or information are expressed or manifested, and not in relation to the ideas or concepts themselves. The term intellectual property denotes the specific legal rights which authors, inventors and other intellectual property holders may hold and exercise, and not the intellectual work itself. Owning intellectual property rights boosts ones worth. It is this difference which works as strategic rivalry. Investing in research and development: Investment in research and development is the surest way to reach the top of invention, innovation and patent ownership. Thomas Alva Edison said, Genius = 1 percent inspiration + 99 percent perspiration. He encouraged all people to offer hard work. R&D is perspiration with flash of inspiration. To excel rivals, R&D capability is needed. American firms know this very well. American firms spend around $500 billion on R&D annually, much of it on computing and communications. Most of this money went into making small incremental improvements and getting new ideas to market fast. IBM, GE and Microsoft are leaders in their chosen field because of their R&D commitments.

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IBM, world leader in IT, has eight laboratories on three continents, each with its own personality and expertise. At its Zurich Research Laboratory around 300 scientists representing over 20 nationalities concentrate on areas such as microelectronics, nanotechnology and computer security. Researchers are judged on the basis of patents and papers. IBM knows it must add intellectual property to its offerings. Starting with his invention of the light bulb, Thomas Edison ignited General Electrics (GE) spirit of innovation and discovery. By 1978 itself GE was first to reach 50,000th patent. GE has more than 3,000 of the best and brightest researchers spread out at four multi-disciplinary facilities around the world. Headquartered in New York, it also has facilities in India, China and Germany. It is delivering the innovations and breakthroughs that are driving growth for GEs businesses and revolutionizing markets. It believes in, imaginations = innovations.

Microsoft Research houses 400 researchers in Redmond, Washington. It boasts another 300 around the world. Nearly all of its budget is spent on commercially orientated projects. In the real world, it is not just a big D and a big Rits a continuum. The company performs basic research. But Microsoft also works with its product teams to move those technologies into its products. Microsoft has a team of a dozen people whose sole responsibility
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is to handle technology transfer. Sometimes researchers move from the laboratories to work with product teams. Thus these successful companies invest in R&D to grow strategic in a world full of rivals vying to outwit others. Achieving economies of scale or scope: Achieving economies of scale or scope is in fact leveraging your existing strengths. Scale economies help reduce cost, pass the benefit to consumers and expand market share. It is very important that your capacity is fully utilized. Exploiting the Learning Curve: Learning curve refers to a relationship between the duration of learning or experience and the resulting progress. A cognitive psychological concept, Learning Curve, over time the phrase has acquired a broader interpretation, and expressions such as experience curve, improvement curve, cost improvement curve, progress curve/progress function, start-up curve, and efficiency curve are often used interchangeably, depending on the context. Businesses that use learning curve excel well as they learn to cut cost and add value faster than other and outsmart competitors. A company can reduce overall unit cost by 20 to 30% each time it doubles output, if learning curve effect works well. So, if the first unit costs $ 1000, the next costs $ 700 to $ 800, the fourth unit costs $ 490 to $ 640 and so on. A host of factors, like rectangle- hyperbolic fall in fixed cost of production per unit, rise in dexterity levels and nuances of handling shop floor issues, quantity discounts on purchase owing to large volume orders, etc help reduce cost per unit. Such cost advantages would threaten new entrants. So cost leadership results from learning curve effect which could be a strategic advantage. Strategic Alliance: A Strategic Alliance is a formal relationship formed between two or more parties, usually those in the same business line (i) as horizontals competing with each other in the same or different geographies or (ii) as verticals serving each other in complementary mode, to pursue a common goal or meet a critical business need while remaining independent organizations. One alliance partner might bring products, distribution channels or manufacturing capability and the other project funding, capital equipment, knowledge, expertise, or intellectual property. The
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alliances emphasis is synergy and competitive advantage. A good example of strategic alliance, is the alliance between Qantas and British Airways. Qantas is the largest private airline in Australia and has solid air route throughout the Asia Pacific region, likewise British airways had strong network within Europe, North Atlantics, and North America. By forming an alliance in 1993, both companies strategically positioned themselves to have a strong worldwide network Mergers and Acquisitions: The strategy of Mergers and Acquisitions, sweeping through the corporate, refers to deals involving buying, selling and combining of different companies that can form a new company to usher in a fast track collective growth. Merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. An acquisition, also known as a takeover, is the buying of one company (the target) by another. An acquisition may be friendly or hostile. A smaller firm may also acquire a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover.

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C. PORTER'S NATIONAL COMPETITIVE ADVANTAGE THEORY Attempts to analyze the reasons for a nation's competitive advantage in a particular industry Increasingly, corporate strategies have to be seen in a global context. Even if an organization does not plan to import or to export directly, management has to look at an international business environment, in which actions of competitors, buyers, sellers, new entrants of providers of substitutes may influence the domestic market. Information technology is reinforcing this trend. Michael Porter introduced a model that allows analyzing why some nations are more competitive than others are, and why some industries within nations are more competitive than others are, in his book The Competitive Advantage of Nations. This model of determining factors of national advantage has become known as Porters Diamond. It suggests that the national home base of an organization plays an important role in shaping the extent to which it is likely to achieve advantage on a global scale. This home base provides basic factors, which support or hinder organizations from building advantages in global competition. Porter distinguishes four determinants: Factor Conditions The situation in a country regarding production factors, like skilled labor, infrastructure, etc., which are relevant for competition in particular industries. These factors can be grouped into human resources (qualification level, cost of labor, commitment etc.), material resources (natural resources, vegetation, space etc.), knowledge resources, capital resources, and infrastructure. They also include factors like quality of research on universities, deregulation of labor markets, or liquidity of national stock markets. These national factors often provide initial advantages, which are subsequently built upon. Each country has its own particular set of factor conditions; hence, in each country will develop those industries for which the particular set of factor conditions is optimal. This explains the existence of so-called low-cost-countries (low costs of labor), agricultural countries (large countries with fertile soil), or the start-up culture in the United States (well developed venture capital market).
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Porter points out that these factors are not necessarily nature-made or inherited. They may develop and change. Political initiatives, technological progress or socio-cultural changes, for instance, may shape national factor conditions. A good example is the discussion on the ethics of genetic engineering and cloning that will influence knowledge capital in this field in North America and Europe. Home Demand Conditions Describes the state of home demand for products and services produced in a country. Home demand conditions influence the shaping of particular factor conditions. They have impact on the pace and direction of innovation and product development. According to Porter, home demand is determined by three major characteristics: their mixture (the mix of customers needs and wants), their scope and growth rate, and the mechanisms that transmit domestic preferences to foreign markets. Porter states that a country can achieve national advantages in an industry or market segment, if home demand provides clearer and earlier signals of demand trends to domestic suppliers than to foreign competitors. Normally, home markets have a much higher influence on an organization's ability to recognize customers' needs than foreign markets do. Related and Supporting Industries The existence or non-existence of internationally competitive supplying industries and supporting industries. One internationally successful industry may lead to advantages in other related or supporting industries. Competitive supplying industries will reinforce innovation and internationalization in industries at later stages in the value system. Besides suppliers, related industries are of importance. These are industries that can use and coordinate particular activities in the value chain together, or that are concerned with complementary products (e.g. hardware and software).

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A typical example is the shoe and leather industry in Italy. Italy is not only successful with shoes and leather, but with related products and services such as leather working machinery, design, etc. Firm Strategy, Structure, and Rivalry The conditions in a country that determine how companies are established, are organized and are managed, and that determine the characteristics of domestic competition Here, cultural aspects play an important role. In different nations, factors like management structures, working morale, or interactions between companies are shaped differently. This will provide advantages and disadvantages for particular industries. Typical corporate objectives in relation to patterns of commitment among workforce are of special importance. They are heavily influenced by structures of ownership and control. Familybusiness based industries that are dominated by owner-managers will behave differently than publicly quoted companies. Porter argues that domestic rivalry and the search for competitive advantage within a nation can help provide organizations with bases for achieving such advantage on a more global scale. Porters NATIONAL COMPETITIVE ADVANTAGE THEORY has been used in various ways. Organizations may use the model to identify the extent to which they can build on home-based advantages to create competitive advantage in relation to others on a global front. On national level, governments can (and should) consider the policies that they should follow to establish national advantages, which enable industries in their country to develop a strong competitive position globally. According to Porter, governments can foster such advantages by ensuring high expectations of product performance, safety or environmental standards, or encouraging vertical co-operation between suppliers and buyers on a domestic level etc.

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COMPARATIVE COST ADVANTAGE THEORY According to Smiths Theory trade would take place between countries only if the country enjoys an absolute cost advantage in production of a particular commodity over another. However, it is seen in some cases that country A enjoys a produces all commodities at a cost lesser than country B. But, despite this country A ends up importing some commodities from country B. Ricardo explained this using his theory of Comparative Cost Advantage. According to this theory, country A may still import those commodities from country B where opportunity cost of producing a good is higher in country A than in country B. The Comparative Cost Advantage theory can be explained by way of the following example EXAMPLES Bread India England 120 80 Cloth 100 90

In the above example In India it takes 120 units of labor to produce 1 unit of bread while England requires only 80 units of labor to produce the same bread. Further, in India it takes 100 units of labor to produce 1 unit of cloth while the same cloth is produced using only 90 units of labor in England. Clearly England has advantage in production of both cloth as well as bread. Will England import anything from India in such a situation?
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To see that we need to compare the opportunity cost of producing each of the commodities in both the countries. i.e. amount of production of Cloth to be sacrificed for production of bread and vice-versa. Opportunity cost of Bread Opportunity cost of Cloth


120/100 = 1.20

100/120 = 0.83

120 units of labor can produce 1 unit of bread of alternatively be used to produce 1.20 units of cloth. Thus we sacrifice 1.20 units of cloth when we produce 1 unit of bread.


80/90 = 0.88

90/80 = 1.12

Thus we see that the opportunity cost of producing bread in England is less than in India. N the other hand the opportunity cost of producing cloth is more in England than in India. England would thus specialize in production of bread and import cloth from India, while India would specialize in production of cloth and import bread from England. Assumptions of Comparative Cost Advantage Theory (a) 2 countries 2 commodities model 1 factor of production i.e. labor (b) Tastes and preferences in both countries are similar and constant (c) All labor units are homogenous (d) Supply of labor is unchanged

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(e) Full employment (f) Production under constant returns to scale

(g) No currency barter trade (h) Factors of production (labor) perfectly mobile within country but no mobility between countries. (i) Free Trade (j) No transportation costs (k) Perfect competition. MONEY THEORY This field focuses on the macroeconomic performance of countries that are integrated with the world economy both through trade in goods and services and through the exchange of assets. A central concern is the way in which world financial markets contribute to growth and development as well as serve as a means by which economic disruptions may be transmitted across national boundaries. Some of the issues addressed include: exchange rate and financial crises like those in Asia and Latin America in the 1990s; the appropriate exchange rate regime, a question recently addressed in the move towards a single European currency; the causes and consequences of large trade deficits, an issue that is currently facing the United States; and the appropriate role of international institutions like the IMF.

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Courses in this field offer both theory that provides students with frameworks for understanding issues and presentation of timely policy issues and recent experience that provides a context for the use of economic models.


The factor endowments theory (a.k.a. Heckscher-Ohlin theory, and the Modern Theory of International Trade) is a modern extension of the classical approach and attempts to explain the pattern of comparative advantage. Does this by hypothesizing that comparative advantage is ultimately due to international differences in relative factor endowments. Done for 4 reasons: 1. Natural extension of the classical theory which sees international factor immobility as the basis for trade. 2. Can define factor broadly. 3. Seems important in practice. 4. Very useful theoretically for linking trade to internal income distribution, growth, factor movements, and so on. The basic vehicle for developing this theory is the Heckscher-Ohlin-Samuelson model, a twocountry version of the standard two-sector neoclassical model. This model dominated international trade theory from the fifties into the eighties and remains central today, but its practical relevance has always been a central controversy in the field.

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EXAMPLES Supposed a world of 2 countries, 2 goods, and 1 factor of production. In the HeckscherOhlin-Samuelson (HOS) model we have a world with 2 countries, 2 goods, and 2 factors. Each country has a free-market economy consisting of consumers and competitive firms. The only point of contact between countries is trade in goods: factors can not move between countries. We assume that technologies are identical, but that each good uses one of the factors more intensively. In this diagram we have two countries, Angola and Botswana, two goods, shoes and potatoes, and two factors, land and labor. Shoes are a relatively labor-intensive good, requiring only a little land to graze cattle for hides, but a lot of labor. Potatoes need a lot of land and only some labor. Note that in this diagram the two countries differ by theor relative endowments of factors: Angola has a lot of land and not much labor; Botswana has a lot of labor and not much land. In this picture they do not trade.

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Now these two countries, which had previously sealed their borders, begin trading. Basically, each specializes. The country with a lot of labor specializes in the labor-intensive good, and vice versa. Here is how the diagram would change:

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Country similarity theory was developed by a Swedish economist named Steffan Linder. Country similarity refers to what? Is it similarity of location or culture or political/ economic interests or technological capability (that is acquired advantage) or natural advantage or lack of it? Traditional trade theories speak of difference in demand or supply conditions or both as a necessary condition for trade between countries. That is, the traditional trade theories are built upon differences. But thecountry similarity theory is built of identical features of nations in trade. 8 out of top 10 trading partners of the USA are developed economies. Globally 11 out of 12 largest players in world trade are developed nations. Developed countries trade more with developed countries: Developed countries trade more with developed countries: Products of a developed country match demand and user conditions of another developed country only. Hence the similarity in development pace decides trade between countries. The reasoning is that a developed country introduces a new product and similarly developed countries find the product quite useful and hence go for the same. This is because needs become more or less common in countries with similar levels of development. The industrialized countries produce more; hence peoples spend power is high; the power is apportioned between domestic and foreign goods, both of course catering to similar need satisfaction. Countries in same cultural milieu trade more amongst themselves: Countries in same cultural milieu trade more amongst themselves: Countries in same cultural milieu will have similar demands as for as cultural products/services like family functions, rites, rituals, entertainments, religious ceremonies and so on. Cross country offerings are more. Countries with no similarity either by cultural, technological or other basis may not trade. While countries in the northern hemisphere trade intensively inter se, countries in the southern hemisphere do not trade intensively. The pointed out reason is that no historic ties amongst the countries. Perhaps the traders do not want to taste new shores.
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Countries in similar geo-features trade inter se more: Countries in similar geo-features like ecological or climatic factors will mutually cater to cross border demands. a kind of cross-border monopolistic competition emerges with firms vying for cross-country market share with the thrust on product differentiation. Countries with similar political and economic interests trade more inter se: Trade between countries with similar political and economic interests is more common than between countries that differ. cuba and us are in the same continent, but due topolitical ideological differences they scarcely trade for over 5 decades. cuba is a good source of supply of sugar. but us prefers not to taste cuban sugar. eu countries amongst themselves pulled down all protectionist impediments to trade and intra-regional trade is highest, because they have similar geo-features. Intra-industry trade abetted by similarity factor: Intra-industry trade abetted by similarity factor: similarly placed countries capabilities as well as needs happen to be similar. so, quite a lot of intra-industry trade among these similarly placed countries happens. us exports good lot of road vehicles and imports much road vehicles as well too. needs are same across the nations. offerings are also same across the nations, but product differentiation is built through top gear promotion. intra industry trade happens because of sheer dispersed desire for foreign brands. intra industry trade accounts for approximately 40 per cent of world trade. steffan linder believed that international trade of manufactured goods occurred between countries at the same stage of economic development that shared the same consumer preferences. therefore the country similarity theory consists of the value that most trade in manufactured goods should be between nations with similar per capita income, and that intra industry trade in manufactured goods should be common.

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Q.1 What are crutial strengths company must have before going global with examples?

company-wide commitment.

Business plan for accessing global markets.

Afford to invest in your international expansion efforts. Plan at least a two-year lead-time for world market penetration.

Product or service to take

Data need to be predict how product will sell in a specific geographic location.

Prepare product for export.

Find cross-border customers.

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Company-wide commitment Every employee should be a vital member of your international team, from the executive suite to customer service through engineering, purchasing, production and shipping. You're all in it for the long haul. Business plan For accessing global markets. An international business plan is important in order to define your company's present status and internal goals and commitment, but it's also necessary if you plan to measure your results. Afford to invest Determine how much you can afford to invest in your international expansion efforts. Will it be based on ten percent of your domestic business profits or on a pay-as-you-can-afford process Plan Plan at least a two-year lead-time for world market penetration. It takes time and patience to build a great, enduring global enterprise, so be patient and plan for the long haul. Product or service to take overseas Pick a product or service to take overseas. You can't be all things to all people. Decide on something. Then stick with it. Data need to be predict how product will sell in a specific geographic location Search out the data you need to predict how your product will sell in a specific geographic location. Do you want to sell a few units to a customer in Australia or ten 40-foot containers on a monthly basis to retailers in France? Doing your homework will enable you to find out how much you'll be able to sell over a specific period of time.

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Prepare product for export Prepare your product for export. You should expect to adapt your product to some degree for sale outside your domestic markets before you make your first sale. Packaging plays a vital role in enabling international connections. Make yours the best in its class, and you'll be able to sell it anywhere in the world. Find cross-border customers. Find cross-border customers. There is no business overseas for you unless you can locate customers first. Example:

McDonalds internal environment could be analysed using Value Chain Analysis, where the different aspects of the business ranging from the corporate brand, human resource management, technology adaptation, procurement of raw materials, inbound logistics, operations, outbound logistics marketing and sales, and service standards could be seen through the glasses of pluses and minuses. Corporate Branding: In terms of the corporate brand, the main strengths of the business could be seen as its leadership, world-wide reach, band value, intellectual property and its having mastered the game of franchising. However, the major weaknesses involve the large number of lawsuits (BBC, 2002) that the company faces in terms of customers complaining against obesity and the coffee lawsuits (Chicago tribune, 2012) and the kind of damage that they have had on the corporate image.

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Supply Chain Inbound Logistics: The companys recognition as having one of the best supply chains in the world speaks for itself in terms of the strengths of the company in the area. The company has its unrelenting focus on speed, with Just-in-Time Delivery (Small Business) and the economies of scale that it reaps on account of its global presence exerting considerable influence on suppliers, serving as its strength. Operations: In terms of operations, the company has invested heavily in information technology, as seen in the state-of-the-art order processing systems and the high end communication equipment that the staffs are armed with, to provide services that are at par with the best in the industry. Further, the standardisation achieved by McDonalds throughout the distribution system, enforcing its codes of conduct among the extensive network of franchisees would count as its strength. However, the high turnover rates found in fast food industry (Chicago Tribune, 2007) means that the company should keep struggling against the trend and try to keep staff stick to the company and invest heavily in investment in people and in training. Outbound Logistics: The franchise agreements that the company has been able to successfully form among the entire gamut of distribution network, the quality control measures involved in ensuring that the product and the package reach their destinations in proper shape and at the right time, and ensuring freshness of food throughout the distribution process are challenges that McDonalds has been able to live up to. Sales and Marketing: Most aspects of the marketing mix seem to be perfectly in place, which would prove to be one of the key strengths of the company. The price leadership, the distribution network and the reach that the company has worldwide, and the range of promotions that the company is able

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to come up with vouch for the effectiveness of the sales and marketing apparatus. However, there have been frequent cases of product failures (Business Insider, 2011) in the company, which is a reason for worry. Further, driving standardisation across the globe, when dealing with varied eating habits associated with different cultures, is a task at hand. Service Standards: With all the investments made in customer service in terms of technology, accuracy of order processing and speed of delivery, there are also gaps in the process, since the company focuses on volume and turnover for business success. Naturally, with so much emphasis on speed, there would be little to focus on in terms of customer service and satisfaction, with many customers feeling left out and neglected, caught in the crowd.

Q.2 Indian companies, TATAs /ESSAR/ RANBAXY/MITTALS/VEDANT etc. aggressively globalizing in western part of the world- explain complementary needs & strength of both.

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The rise in confidence of the countrys entrepreneurs started with the success of its information technology outsourcing companies, such as TCS, Infosys Technologies and Wipro, in tackling the millennium bug, when they won a multitude of contracts. This was followed by the emergence of global Indians businesspeople such as Lakshmi Mittal, whose Mittal Steel bought Arcelor of Luxembourg last year, and Indra Nooyi, the new chairwoman of PepsiCo. Other acquisitive Indian chief executives include Malvinder Singh, the chief executive of Ranbaxy Laboratories, Indias biggest pharmaceutical company, which is locked in a bidding war for Germanys Merck that could cost up to $5.2bn. Describing his role as spearheading the companys management and global operations, Mr Singh led Ranbaxy to acquire six companies last year, including four in Europe and one in the US. His rival, G.V.Prasad, chief executive of DrReddys Laboratories, the countrys third largest drugs maker, was also busy last year snapping up companies in markets including Germany, where it bought Betapharm for $572m. Behind this ability to expand lies the achievements of such companies at home in building scale and improving productivity. That prompted Goldman Sachs recently to raise its estimate of the countrys so-called potential or sustainable long-term economic growth rate to 8 per cent a year until 2020, compared with an original projection of 5.7 per cent. Goldman, praising the manufacturing performance achieved since 2003, says: After the restructuring, the private sector emerged fitter, leaner and more productive. A range of reasons have been advanced for what Indian companies are doing that makes them competitive overseas. Certainly, pay levels help. In the outsourcing industries, a business whose main overheads are people, entry-level software engineers are still at least 40 per cent cheaper than they are in the west. Indias IT companies also do not have the so-called legacy structures of their western peers, most of whose operations remain in developed economies even though they are trying to move more tasks to lower-cost countries such as India. Indian IT companies are moving some of their operations overseas but usually to other low-cost destinations and, even then, are careful to keep the bulk of their labour in India. While the country is at the same time beginning to face a shortage of suitably qualified engineers, the problem is nothing compared with that of the west.
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India is a proven place from a cost perspective. There is no place that is better than India right now, says S.? Mahalingam, chief financial officer of TCS. In manufacturing, low-cost talent still plays a large part in the Indian success story but less so. Companies such as Bharat Forge, which has risen to become the second largest forging company in the world, making crankshafts and other automotive components, initially benefited from regulatory arbitrage. Higher European environmental standards made it prohibitive for forging companies to operate on the continent at a time when there were fewer restrictions in India, analysts say. The company also enjoys access to cheaper raw materials because of Indias state-controlled allocations of low-cost iron ore to steel producers. Its growing more and more expensive to run forging companies internationally and, as a result, those companies that source from India are extremely competitive, says Yezdi Nagporewalla, national industry director for KPMG in India. Bharat Forges chief achievement, however, has been to move up the value chain by installing technology and acquiring small companies in developed markets near its clients. It has subsidiaries in Germany, the US, Scotland, Sweden and China. Other businessmen attribute their success to the very conditions that foreign investors complain about Indias bumpy roads, poor infrastructure and red tape. The ability to innovate around these obstacles is what gives companies such as Tata Motors, the automotive unit of the Tata group, its edge, says Mr Tata. A European or US producer with their high cost bases simply could not compete against a project like his one lakh car [a lakh is a unit of 100,000], under which he is seeking to bring to market a $2,000 passenger vehicle.

Being in this market, contrary to what everyone believes, you always need to be more competitive than what you have to be outside, because the buying power in this country is so low. So youre always thinking of how to address that segment of the market, he says.

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As part of the one lakh car mission, Tata Motors plans to cut costs by changing the supply chain, among other measures. Rather than trucking finished cars from the factory to the dealer, for example, the company will ship kits en masse to warehouses where dealers can pick them up. Banking may be the next frontier for Indian acquirers, some analysts maintain. The costs per transaction of Indias private-sector banks are only about 10 per cent of those of the west due to their use of the latest technology at fractions of the prices of developed markets. With this kind of back office, Indian banks could make headway in the fragmented but liberalised markets of Europe. With the relaxation in regulatory environment in can gain access to wider European markets. The existing banks there havent gone yet through consolidation and restructuring. So there is an opportunity for Indian banks to go and seize market share, s ays Sanjay Aggarwal, national industries director of financial services for KPMG in India. Helping its domestic companies has been Indias robust economic growth, which in turn has fuelled a threefold increase in stock market capitalisation in the past three years. If one year your economy grows at 8 per cent, it could be a fluke. Two years you grow at 8 per cent, people say: Huh. Three years of high growth and people start to believe, says Adil Zainulbhai, managing director of McKinsey & Co in India. This process has left Indian corporate balance sheets in robust health. A sample of 90 leading listed Indian companies tracked by Morgan Stanley reported a record 57 per cent increase in net profit for the quarter that ended last December.

Some market participants are concerned, however, at what they see as nationalist euphoria over mergers and acquisitions and over the record levels being achieved on the stock market. If shares went through a prolonged slide, the large amounts in convertible bonds issued last year by midsized companies to fund overseas expansion could come back to haunt their balance sheets.

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Even the long-established Tata group, for example, is also more heavily geared than before to the steel cycle and to the risks associated with integrating a large acquisition. Mr Tata says he intends to restore the balance of the group through an expansion in the automotive and other divisions, though that will take time. But a Mumbai banker observes: It takes one bad steel cycle for all this to come home. Then there are the obstacles well-known in India: not only poor infrastructure but also rapidly rising property prices and shortages of talent, which if not solved would put a brake on companies ability to grow.

Q.3 LOACALISING PRODUCTS FOR CUSTOMER NEEDS is winning strategy for suceess. explain. with examples

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Localisation is the process of adapting digital products and services to the needs of global users. Language translation is only a small part of localisation it also involves modifying content, products and services to consider cultural and political sensitivities, date, time and currency formats, colours and sounds, social factors and legal requirements of the country for which they are being adapted. FOR EXAMPLE For example, localising software for a mobile phone might require adding a predictive text tool that recognises words in the local language. Ring tones, colour schemes, games and many other elements might need to be altered to appeal to the tastes and preferences of customers in the target country. GOAL The goal is to enable people to use content, products and services in their own language, according to their own culture and according to their own personal needs. BENEFITS Localisation The Benefits to Industry and Society Ever hear the expression think global, act local? Well, by doing just that, localisation enables companies to launch their products in markets for which their original product would not be suitable. For this reason, it is big business. Current estimates put the value of the localisation sector in Ireland alone at over 680 million annually. However, the true potential of localisation goes beyond opening up business opportunities across the globe. Many communities on the planet find themselves on the wrong side of the digital divide with vital (hygiene, health, food, education, etc.) information not available in their local languages. Localisation technologies and processes have the potential to make a considerable contribution to bridging this divide by overcoming the language and cultural barriers to life-saving and life-enhancing information.

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Localisation brings added value as it enables companies to introduce their products to foreign markets. This means that the company can benefit from having access to a whole new pool of potential customers. Proper localisation means adapting the product seamlessly, as if it was created locally in its destination market. This is important because although English is the international business language, research has shown that even fluent English speakers are much more likely to buy a product when it is in their native tongue. The more valuable an item, the more likely it is that someone will want to read about the product and buy it in their own language.

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FOR EXAMPLE The Tide detergent company sought to overcome the language barrier by using picture-only adverts in a number of countries. These adverts showed a woman with a dirty shirt, then putting the shirt into the washing machine with Tide detergent. Finally, she holds up the now-clean shirt. The only problem with the advert was that in arabic-speaking countries images and text are read from right to left, so the tide advert suggested that the detergent will dirty your nice, clean clothes! The Chevrolet Nova car sold poorly countries spaced in Spanish-speaking its name, literally

because NOVA,

translates to it doesnt go. Very soon the company realised its mistake and renamed the model Caribe in Spanish-

speaking countries. Examples such as these might seem funny but the financial loss and damage to the companys reputation can be serious if they get localisation wrong. So proper location of product is winning strategy for success of organization.

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Despite the countrys small size, Ireland is a giant in localisation. The localisation industry was practically invented in Ireland in the 1990s and the country continues to play a global leadership role.Most of the worlds large software and web companies have a presence in Ireland, with the bulk of their localisation and multilingual customer support being managed from here. These include Amazon, Apple, Facebook, IBM, LinkedIn, Microsoft, Oracle, PayPal and Symantec. The financial services and medical device industries rely heavily on localisation to bring their products to foreign markets. Among the international financial services and medical device companies with a major presence in Ireland are Abbott, Allianz, Bausch & Lomb, Baxter Healthcare, Boston Scientific, Citi Group, MBNA and Zurich.

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Q.4 BUILDING LOCAL LEADERSHIP adopted by mittals in more than 19 global project

To safeguards companies from corruption and fraud are soft factors namely strong local leadership, and a culture of compliance. The tone local leadership sets is critical. "One thing we must appreciate is that in a hierarchical culture, bribery and corruption depend largely on the tone from the top," points out a leading fraud expert. Global companies must hold their country CEOs accountable for compliance with their policies and codes of conduct as well as Indian laws. A zero-tolerance policy is vital. Few companies discuss the character of leaders during the appraisal process; hitting the numbers is para-mount. However, companies must pay attention to the small things, like segregation of personal phone calls, appropriateness of business expenses, and the personal use of company assets. Must found a sense of entitlement in small things to be a predictor of bigger problems. They ask people to persist and prevail, not take shortcuts. Whenever they get stuck, however small the matter, like a fire clearance for a building or an issue with the electricity board, there top management walks shoulder to shoulder with operating people to get things cleared including attending meetings with government officials. The message is simple: we will work alongside you. We will not hold it against you if a project gets delayed or we lose money; do what is right, not what is convenient. Over time, people will know what is acceptable here and what's not. Social memory is many times more effective than a bunch of policies. Acceptance of change Lakshmi Mittal is Britains wealthiest man and a non-resident Indian who heads up the worlds biggest steel manufacturer, ArcelorMittal, and he has clear views on leadership and on change: Always think outside the box and embrace opportunities that appear - wherever they might be. Problems are a gift

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The Indian born Lakshmi Mittal, head of Arcelor Mittal, knows about tough times and has this view: Everyone experiences tough times, it is a measure of your determination and dedication how you deal with them and how you can come through them." The Indian born Lakshmi Mittal, head of Arcelor Mittal, knows about tough times and has this view: Everyone experiences tough times, it is a measure of your determination and dedication how you deal with them and how you can come through them. The next generation To safeguard the future of ArcelorMittal, we are committed to developing the next generation of leaders through initiatives such as ArcelorMittal Universitys leadership academy and the global employee development programme (GEDP) We want to ensure there is a succession of motivated employees capable of becoming the next generation of leaders, together with a diverse and highly skilled workforce that can help us meet our business and organisational needs around the world. We strive to improve management and leadership capabilities from within, and create opportunities for those employees who have been identified as future leaders through professional and personal growth. This means providing inspiring and effective leadership, open, transparent communication and excellent learning and development opportunities. As part of our leadership role, we also recognise that the company has a duty to its stakeholders to operate in a responsible and transparent manner and to safeguard the wellbeing of all its stakeholders, including employees, contractors and the communities in which it operates. Through good leadership, we aim to nurture a culture that values, recognises and rewards individual performance. a consistent management strategy that focuses on product diversity, geographic reach and diversification we are industry leaders in terms of new technology, sustainability and corporate responsibility.

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