FORMS OF INTERNATIONAL BUSINESS

The firm can sell a physical product abroad, i.e., can export. A firm can locate a production facility abroad,
i.e., engage in foreign direct investment. There's an array of intermediate forms of international business
that can allow a firm to get international returns on its unique advantages. These include:

Form What's sold What's received Pro's Co's
E!"orti# physical
product
sales price (or
countertrade)
) the only changes from
domestic operations entail
foreign mar!eting and
documentation"
#) little investment $$
typically no investment
abroad
) susceptibility to
trade barriers"
#) logistical
difficulties"
%) less suitable for
service products
&) susceptibility to
e'change$rate
fluctuation
Licesi# technical info,
assistance,
and(or use
rights
licensing fee, and
commitment to
use the info or
rights
) increases return on
investments in technology,
creativity, or customer
relations"
#) little additional capital
or time investment
) the agreement
generally prohibits
the originating firm
from e'ploiting the
assets in particular
foreign mar!ets"
#) quality control
Frachisi# trademar!, on$
going service,
some inputs,
shared
mar!eting
e'pense
payment for
trademar!"
payment for
inputs used"
share of
operating
revenues or
profits
) important way of
gaining foreign returns on
certain !inds of customer$
service and tradename
assets" #) some control
over the conditions of sale
in the foreign mar!et" %)
limited financial
commitment
quality control
Maa#emet
Cotracts
people, for a
period of time
salary, benefits,
and indirect
costs" share of
operating
revenues or
profits
) contractor puts up no
capital and bears no ris!"
#) useful in foreign
conte'ts that prohibit (or
are too ris!y for) )*+
contractee will
become a
competitor, at least
in the local mar!et
T$r%e&
O"eratio
design,
construction,
and equipping
of a production
facility
all costs plus
fees" assumption
of ownership and
ris! at end of
pro,ect
) contractor bears no
ris!" #) useful in foreign
conte'ts that prohibit (or
are too ris!y for) )*+
contractee will
become a
competitor, at least
in the local mar!et
Cotract
Arra#emets
e'pertise,
financing,
materials, or
finished product
inputs available
in the foreign
country
avoids currency controls
and foreign$e'change ris!
may be difficult to
negotiate a fair
arrangement
Forei# 'irect
Ivestmet
capital,
management,
technology"
perhaps !ey
material inputs
repatriated
profit" licensing
fees" transfer
payments for
inputs
) control" #) profit" %)
possibility of ta'
avoidance through transfer
pricing
capital and
operating
commitment
(( )oit see above see above ) smaller investment" #) less control over
o*ershi" local mar!eting and
production( procurement
e'pertise from local
partner
the operation
(( sole
o*ershi"
see above see above total control and returns ) larger
commitment" #)
perceived as a
competitor by local
producers (if any)"
%) ris! of national
e'propriation
There are number of ways for internationali-ation ( globali-ation of business. these are referred as foreign
mar!et entry strategies. .ach of these ways has certain advantages and disadvantages. /ne strategy for a
particular business may not be very suitable for another business with different environment. Therefore it is
quite common that a company employs different strategies for different mar!ets.
The different strategies are :
. +mports : +mports is defined as goods and services produced by host country and purchased by parent
country. it is reverse process of .'ports.
#. .'ports : .'ports is defined as goods and services produced in one country then get mar!eted to
other country.
%. )oreign *irect +nvestment ()*+) : 0ere funds are invested in equity from parent country to a host
country. 1ich countries invest funds in growth industries and geographic areas of economic
development.
&. 2icensing : 2icensing which involve minimal commitment of resources and effort on the part of the
international mar!eter, are easy ways of entering the foreign mar!ets. 3nder international licensing,
a firm in one country (the licensor) permits a firm in one country permits the firm in another country
to use the intellectual property (such as patents, trademar!s, copyrights, technology, technical !now
4 how, mar!eting s!ill or some other specific s!ill). The monetary benefits to the licensor is the
royalty fees, which the licensee pays.
5. )ranchising : )ranchising is giving right at a parent company ()ranchiser) to another company
()ranchisee) using his name selling his products, do business in a prescribed manner and get
advantage of brands of parent company.
6. 7oint 8enture : +t is a mutual agreement of two or more partners across globe to collectively own the
company to produce goods and services. This will be pooling the resources to mutual advantages.
9. :anufacturing in )oreign ;ountry : <hen a company finds better economy in manufacturing in host
country due to lower costs of materials labour or duties the manufacturing is underta!en in host
country. The local conditions in host country should support manufacturing and mar!eting activities.
=. :anagement ;ontracts : The foreign country needs management e'pertise in managing e'isting or a
sic! company this method is used. 3nder management contract the service provided gets fees or
shares in the company. The contracts is for a specific period.
>. ;onsultancy ?ervices
@. ?trategic Aartnerships : The positive aspect of two companies in different countries are ,oined
together. The resources are pooled together to produce new mar!etable products. This will put both
companies in win$win situations .
. :ergers : A ;orporate :erger is a combining of corporations in which one of two or more
corporations survives and wor!s for common ob,ectives. These are several types of mergers with a
variety of filing requirements based on number of corporations merging and the type of merger.
#. ;ounter Trades : ;ounter trade is a form of international trade in which certain e'ports and import
transactions are directly lin!ed with each other and in which imports of goods are paid for by e'ports
of goods, instead of money payments.
+,- Motives .or Forei# 'irect Ivestmet /F'I0

Bew :B;s do not pop up randomly in foreign nations. +t is the result of conscious planning
by corporate managers. +nvestment flows from regions of lo* anticipated profits to those of
hi#h returns.
Crowth motive
A company may have reached a plateau satisfying domestic demand, which is not growing.
2oo!ing for new mar!ets.
# Dypass protection in
importing countries
)oreign direct investment is one way to e'pand. )*+ is a means to bypassing protective
instruments in the importing country.
.'amples:
(i) .uropean ;ommunity: imposed common e'ternal tariff against outsiders. 3? companies
circumvented these barriers by setting up subsidiaries.
(ii) 7apanese corporations located auto assembly plants in the 3?, to bypass 8.1s.
% avoid high transport
costs
Transportation costs are li!e tariffs in that they are barriers which raise consumer prices.
<hen transportation costs are high, multinational firms want to build production plants close
to either the input source or to the mar!et in order to save transportation costs.
:ultinational firms (e.g. Toyota) that invest and build production plants in the 3nited ?tates
are better off selling products directly to American consumers than the e'porting firms that
utili-e the Bew /rleans port to ship and distribute products through Bew /rleans.
& avoid .'change 1ate
fluctuations
7apanese firms (e.g., Eomatsu) invest here to produce heavy construction machines to avoid
e'cessive e'change rate fluctuations. Also, 7apanese automobile firms have plants to produce
automobile parts. )or instance, Toyota imports engines and transmissions from 7apanese
plants, and produce the rest in the 3.?.
Toyota is behind C: and 8ol!swagen in ;hina, and plans to e'pand its production in ;hina
and has no plans to build more plants in Borth America. (;hina's autoparts are cheaper.) +t
may have been a mista!e for Toyota to overe'pand its plants in the 3?. C: and 8ol!swagen
have e'panded their production plants in ?hanghai.
5 competition
The most certain method of preventing actual or potential competition is to acquire foreign
businesses.
C: purchased :onarch (C: ;anada) and /pel (C: Cermany). +t did not buy Toyota,
*atsun (Bissan) and 8ol!swagen. They later became competitors.
6 reduce costs
A foreign country may have cheap labor or land. 3nited )ruit has established banana$
producing facilities in 0onduras.
*ue to high transportation costs, )A. does not hold. ;heap foreign labor. 2abor costs tend
to differ among nations. :B;s can hold down costs by locating part of all their productive
facilities abroad. (:aquildoras)
multinational corporation (MNC)

'e.iitio
An enterprise operating in several countries but managed from one (home) country. Cenerally, any company
or group that derives a quarter of its revenue from operations outside of its home country is considered a
multinational corporation.
There are four categories of multinational corporations: () a multinational, decentrali-ed corporation with
strong home country presence, (#) a global, centrali-ed corporation that acquires cost advantage through
centrali-ed production wherever cheaper resources are available, (%) an international company that builds on
the parent corporation's technology or 1F*, or (&) a transnational enterprise that combines the previous
three approaches. According to 3B data, some %5,@@@ companies have direct investment in foreign
countries, and the largest @@ of them control about &@ percent of world trade.
FEATURES OF MULTINATIONAL COMPANIES/CORPORATIONS (MNC)
Meaning: - The term Multinational is widely used all over the world to denote large
companies having vast fnancial, managerial and marketing resources. M!s are like holding
companies having its head o"ce in one country and #usiness activities spread within the
country o$ origin and other countries.
%&M computer and 'epsi-!ola $rom (.).*., )iemens $rom +ermany, )ony and ,onda $rom
-apan 'hilips $rom ,olland etc., are some o$ the M!s operating at international levels.
.efnition:-*ccording to %/0 report 1i.e. %nternational /a#our 0rganisation2 3The essential
nature o$ the multinational enterprises lies in the $act that its managerial head4uarters are
located in one country, while the enterprise carries out operations in num#er o$ other
countries.
5ollowing are the some o$ the important $eatures6characteristics o$ M!s:
7. *rea o$ operation: - The M!s operate in many countries with multiple products on large
scale. * M! may operate #oth manu$acturing and marketing activities in a num#er o$
countries. )ome M!s operate in several countries, whereas, others may operate in a $ew
countries. Mostly M!s $rom developed countries dominate in the world markets.
8. 0rigin:-The development o$ M!s dates #ack to several centuries, #ut their real growth
started a$ter the )econd 9orld 9ar Ma:ority o$ the M!s are $rom developed countries like
(.).*, -apan, (;, +ermany and <uropean countries. %n recent years M!s $rom countries like
;orea, Taiwan, %ndia, !hina, etc. are operating in the world markets.
=. !omprehensive Term: - %n general, the term M! is a !omprehensive term and includes
international and transnational corporations. The term glo#al corporation is also included in
the list o$ M!.
>. 'roft Motive: - M!s are proft oriented rather than social oriented. )uch corporations do
not take much interest in the social wel$are activities o$ the host country.
?. Management: - The 'arent company works like a holding company. The su#sidiary
companies are to operate under control and guidance o$ parent company. The su#sidiaries
$unctions as per the policies and directions o$ parent organisation.
@. Manu$acture and Marketing *ctivities: - M!s undertake #oth Manu$acturing and Marketing
*ctivities and they are predominantly engaged in hi-tech and consumer good industries.
Ma:ority o$ the M!s are engaged in pharmaceutical, petrochemicals, engineering, consumer
goods, etc.
A. Buality !onsciousness: - M!s are 4uality and cost conscious and managed #y
pro$essionals and eCperts. They have their own organisation culture and systems. M!s
#elieve in the concept o$ total 4uality management.
1. Large scale business:
The capital of multinational companies considerably large.its assets and volume of sales are also quite
large.The sales turnover of some multinational companies are much more then the annual budget of many
developing countries.
2. Productive Organization:
:ultinational companies are involved in the production distribution of goods and services at the
international companies and level.They produce goods and sales them in one brand name of trademar!
allover the world.
3.Global operation:
:ultinational companies operate globally.the parent company manufacture an sells its products and services
through its subsidiaries established in other countries.0ence,they perform their business scale at the global
scales.
What ar th Ma!or Thori" o# F$I%
The Ma)or Theories o. F'I E!"laied Belo*1
. Theory of :onopolistic Advantage
#. /ligopoly Theory of Advantage
%. Aroduct 2ife ;ycle :odel
&. .clectic theory
+- Moo"ol& Theor& o. Advata#e1
2ori3otal Forei# Ivestmet1
+s e'plained by the monopolistic advantage theory. The theory states that the investing firm possesses
relative monopolistic advantage abroad against the completive local firms. The firm en,oys monopolistic
advantage on two counts:
. ?uperior !nowledge and Advance Technology.
#. .conomies of scale.
S$"erior 4o*led#e:
+t refers to all intangible s!ills$intellectual capital plus advanced technologic possessed by the firm that
confer a competitive advantage. This permits the firm to create unique product differentiation. The marginal
cost of transfer of its superior !nowledge asset to foreign countries will be much low in comparison to the
local firms which, need to invest the full cost to create such asset. (1oots, >9=)
.mpirically,the monopolistic advantage suggested hori-ontal foreign direct investments of the 3? firms'
!nowledge technology intensive industries such as petroleum referring, pharmaceuticals, chemicals,
transport equipment. +t was also observed in the case of 3? firms in high$level mar!eting s!ill$oriented
industries such as cosmetics and fast$food abroad. (?ee 1oot, >9=)
5- Oli#o"ol& Theor& o. Advata#e1
8ertical )*+ is e'plained by the oligopoly theory of advantage. The oligopolistic big firms tend to dominate
in the global mar!et on account of entry barriers such as:
+6 "oits mista%e
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 mar!et vacuum. They, thus, want growth ma'imisation of the firm.
A firm's relative rate of growth determines its relative si-e and relative mar!et power. Through vertical
direct foreign investment they trend to capture and enlarge mar!et share into the global mar!et. The
oligopoly theory thus, e'plains defensive investment behaviour of a multinational firm.
+n short, monopolistic advantage theory e'plains first course of investment of a business firm in a foreign
country. The oligopoly theory e'plain the defensive investment behaviour in terms of oligopolistic reaction
to retain the monopoly power of the firm.
Desides, thorough hori-ontal and vertical integration in )*+, the multi$national firm can yield the
production$scale economies and comparative cost advantage resulting into over all competitive advantage.
The oligopoly multi$national firm can internalise e'ternal economies of scale by advantage of bac!ward
integration to forward integration. )or this reason, petroleum companies tend to land invested in crude oil
refineries as well as mar!eting out$lets.
,- Prod$ct Li.e C&cle Model1
8ermon (>9l)'s Aroduct 2ife ;ycle :odel (A2;:) can e'plain both trade and )*+. Dy adding a time
dimension to the theory of monopolistic advantage, the A2;: can e'plain a firm's shift from e'porting to
)*+. +nitially a firm when innovate a product, it produces at home en,oying its monopolistic advantage in
the e'port mar!et, thus, specialises and e'ports. /nce the product becomes standardised in its growth
product phase, the firm may tend to invest abroad and e'port from there to retain its monopoly power. The
rivals from the home country may also follow to invest in the same foreign country's oligopolistic mar!et. +n
short, a synthesis of international trade and investment theories can better e'plain the comple'ities of
international business and mar!eting behavior.
7- Eclectic Theor&1
.clectic theory, propounded by *unning (>==), is a wholictic, analytic approach for )*+ and organisational
issues of the :B;s relating to foreign production. .clectic paradigm considers the significance of three
variables:
. ;ountry$specific
#. ;ompany$specific
+nternalisation
%. 1elating to trade and )*+.
&. The country$specific, i.e., location variables refer to:
7. the geographical environment
8. the political environment
=. the governmentDs regulatory $ramework
>. taCation and fscal policy
?. production and transportation costs
@. cultural environment
A. research and development advantages.
5. The company$specific paradigm relates to ownership and managerial variables:
7. managerial eEectiveness
8. structure
=. process
>. technology advantages.
6. The internalisation variable refers to the firm's inherent fle'ibility and output cum mar!eting capabilities
on:
Aeter *ruc!er (>>#), the management Curu, stated that: Git is simply not possible to maintain substantial
mar!et standing in an important area unless one has physical presence as a producerG in a global economy.
)*+ rather than foreign trade, in modern times, is a ma,or driving )orce and an engine of growth of an
economy under global setting.
&' The product li$e-cycle theory ade4uately descri#es how a new M< develops a new product
and then engages in 5.%F however, it $ails to descri#e the actions o$ eCisting M<s with
su#stantial 5.% that may skip steps in the model or even reverse the process.
(' MonopoliGation theory suggests that the core competencies o$ an M< are products over
which it holds a monopoly. 5.% occurs when it is more cost-eEective to directly eCploit and
market these monopolies than to license
them to a local company.
=. %nternaliGation theory states that one o$ the ma:or reasons $or M<s to engage in 5.% is to
internaliGe most parts o$ the production process. This signifcantly reduces normal #usiness
risks and gives the M< economy-o$-scale advantages. The eclectic paradigm restates this
concept and integrates it with corporate monopoliGation and national comparative advantage.
Wh) $o Compani" En*a* in Fori*n $irct In+"tmnt%
)oreign direct investment is an important corporate strategy for companies that wish to operate on a global basis.
<hile companies may gain a certain degree of international e'posure through indirect financial investment, trade or
technology transfer, they can better level resources both at home and abroad by directly investing in local production
facilities and mar!eting campaigns. )oreign direct investment is often encouraged by hosting countries that may
impose various trade barriers on imports.
+- Avoid Trade Barriers
o .ven as free trade has become more prevalent, national protectionism can still surface from time to
time. ;ountries tend to impose trade barriers as they don't thin! that importing alone would benefit
their economies in terms of increasing producing capacity and improving technology uses. :oreover,
buying foreign e'ports may lead to more and easier consumptions, as well as use up foreign currency
reserves. Thus, companies may find it ineffective to focus solely on trade when e'panding to foreign
mar!ets. )oreign direct investment offers an alternative of producing goods where they are sold.
Red$ce Prod$ctio Costs
o +ncreasingly, companies engage in foreign direct investment to reduce production costs. <hile
companies can import low$cost raw materials, they cannot ta!e advantage of cheaper labors in
another country if companies produce from their home countries. :eanwhile, directly investing in
oversees production facilities where raw materials are supplied saves additional costs on
transportation when importing the materials is no longer needed. +n some cases, companies can still
save money even when they plan to ship bac! final products to sell in their home mar!ets.
E!"ad Mar%et Chaels
o Aside from concerns of trade barriers and production costs, producing locally through foreign direct
investment helps companies put their finger on the pulse of local mar!et trends. )acing a gradually
saturated domestic mar!et, many companies wish to e'pand to new mar!ets oversees. Dut producing
away from where customers are often reduces response time in terms of following customers'
changing demands. )oreign direct investment brings together production personnel and mar!eting
crew to provide the right products for the new mar!et channels.
O8tai Local S$""ort
o To attract foreign direct investment, hosting countries often provide various incentives from lower
ta'es, streamlined application procedures to government$bac!ed financing and greater access to local
resources. ;ompanies with only local sales offices or some form of strategic alliance with local
businesses are not qualified as having made foreign direct investment. ;ompanies may not benefit
from many of the local governments' giveaways unless they commit their capital locally in buildings,
machineries and equipment. ;ompanies that do ma!e physical investments into setting up factories
and other services facilities can find themselves easily embraced by the hosting countries.
7. The location advantages o$ a host country are its comparative advantages $or 5.% in
relation to other countries. These include cheaper and6or #ette r4uality resources such as
la#or, capital, and natural resources 1$actor endowments2 as well as investment incentives
1created endowments2 that aEect cost.
8. ational markets vary in their industry li$e-cycle stage, market growth potential,
competition intensity, consumer purchasing power, and other $actors. These variations can #e
used to the advantage o$ the M<.
=. 5.% eCpands the market domain in which an M< capitaliGes on its core competencies,
generating more income $rom eCisting resources, capa#ilities, or knowledge.
>. 5.% is also a vehicle $or organiGational learning. &eing actively involved in 5.% grants the
M< learning opportunities that would not have #een availa#le otherwise.
The )trategic /ogic o$ 5.%
.iEerent M<s might have diEerent strategic logic underlying 5.%. R"ourc",in* F$I
attempts to ac4uire particular resources at a lower real cost than could #e o#tained in the
home country. Hesource seekers can #e $urther classifed into three groups: those seeking
physical resourcesF those seeking cheap and6or skilled la#orF and those seeking technological,
organiGational, and managerial skills. Mar,t-",in* F$I attempts to secure market share
and sales growth in the target $oreign market. *part $rom market siGe and the prospects $or
market growth, the reasons $or market-seeking 5.% include situations in which 1a2 the frms
main suppliers or customers have set up $oreign producing $acilities a#road and the frm
needs to $ollow them overseasF 1#2 the frms products need to #e adapted to local tastes or
needs, and to indigenous resources and capa#ilitiesF and 1c2 the frm considers it necessary,
as part o$ its glo#al production and marketing strategy, to maintain a physical presence in the
leading markets served #y its competitors. E.cinc)-",in* F$I attempts to rationaliGe
the structure o$ esta#lished resource-#ased or marketing-seeking investment in such a way
that the frm can gain $rom the common governance o$ geographically dispersed activities.
M<s with this motive generally aim to take advantage o$ diEerent $actor endowments,
cultures, economic systems and policies, and market structures #y concentrating production
in a limited num#er o$ locations to supply multiple markets. 5inally, "trat*ic a""t-",in*
F$I attempts to ac4uire the assets o$ $oreign frms so as to promote their long-term strategic
o#:ectives, especially advancing their international competitiveness. M<s with this intention
o$ten esta#lish glo#al strategic alliances or ac4uire local frms. Many M<s today pursue
pluralistic goals and engage in 5.% that com#ines characteristics o$ several o$ the preceding
categories. 'rocter I +am#le, $or instance, has sales in over 7>J countries and on-the-ground
operations in over AJ countries. %ts strategic aims #ehind product and geographical
diversifcations include #etter resources, larger markets, and higher e"ciency.
7. *lthough 5.% involves a higher risk than eCportation, it allows a company greater
control over its products or services in $oreign markets as well as access to specialiGed
opportunities not availa#le to eCporters.
8. %n addition to 5.% in the $orm o$ su#sidiaries and physical plants, many M<s
engage in $oreign port$olio investment where#y they purchase $oreign stocks, #onds,
or other $oreign fnancial instruments.
=. The strategic logic o$ 5.% includes resource seeking, market seeking, e"ciency
seeking, and strategic asset seeking.
>. ,oriGontal 5.% is a sa$e way to enter a $oreign market #ecause it produces the same
product as the parent company, so eCperience and in$rastructure are easily shared. %$
the investment produces a product unrelated to the parents, it is a conglomerate 5.%.
Kertical 5.% acts as an intermediary or fnishing stage in the production process,
oEering either inputs to the parent or access to a $oreign market.
5.% Kersus 5oreign 'ort$olio %nvestment
Fori*n port#olio in+"tmnt is investment #y individuals, frms, or pu#lic organs 1e.g.,
governments or nonproft organiGations2 in $oreign fnancial instruments such as government
#onds, corporate #onds, mutual $unds, and $oreign stocks. %n other words, port$olio
investment is the investment in /nancial a""t" comprising stocks, #onds, and other $orms
o$ de#t denominated in terms o$ a$oreign countrys national currency, whereas 5.% is the
investment in real or ph)"ical a""t"0 such as $actories and distri#ution $acilities. *s such,
5.% involves control over $oreign production or operations undertaken #y the multinational
enterprise 1M<2, #ut port$olio investment does not. To understand $oreign port$olio
investment, one needs to #e $amiliar with port$olio theory. Port#olio thor)
descri#es the #ehavior o$ individuals or frms administering large amounts o$ fnancial assets
in search o$ the highest possi#le risk-ad:usted net return. 5undamental to this theory is the
idea that a guaranteed rate o$ return 1say, LM per year fCed over the neCt fve years2 is
pre$era#le to a rate o$ return that is higher on average #ut Nuctuates over time 1e.g., average
L.?M per year #ut with high volatility during this fve-year period2. The varia#ility o$ the rate
o$ return over time is re$erred to as the /nancial ri", in port$olio investment. The key task o$
port$olio management is to reduce the varia#ility 1or risk2 o$ a group o$ stocks so that the
varia#ility o$ the whole set is less than that o$ its component parts. %$ it is possi#le to identi$y
some stocks whose yields will increase when the yields o$ others decrease, then, #y including
#oth types o$ securities in the port$olio, the port$olios overall varia#ility will #e reduced. This
is why some people interpret this theory as 3putting eggs in diEerent #askets rather than one
#asket.O This logic also applies to the esta#lishment o$ a conglomerate that diversifes into
many product lines rather than specialiGing in a single line o$ products. * more detailed
discussion o$ port$olio investment can #e $ound in !hapters L and 7>.
$i1rnc 2t3n F$I 4 Port#olio In+"tmnt
)oreign investments can be of two sorts. The first is when a firm or an individual buys another firm with
full, or very substantial, control of its operations. This investment is called )oreign *irect +nvestment ()*+).
The other type of investment is called portfolio investment. +n such an investment, investors purchase stoc!s
of a number of companies with the ob,ective not to gain management control, but to construct an investment
portfolio.
+- P$r"oses
o The purposes of )*+ and portfolio investments are different.
)*+ allows investors to be actively involved in their investment. +nvestors not only can ta!e
strategic decisions li!e what their foreign subsidiary will produce, in what quantities and for
whom, but also are involved in operational issues li!e cost control, 01, and regulatory
compliance. +nvestors may be motivated by different reasons including improving operations
of their e'isting businesses, and closely monitoring and safeguarding their investments.
+nvestors who decide to put their money in portfolios, are pursuing different ob,ectives. They
want to spread the ris!, without the need to learn about how to run different businesses.
5- Ivestors
o +ndividuals and companies ma!ing )*+ and portfolio investments are usually very different
investors.
)*+ investors are often big multinational companies, social organi-ation (BC/s),
governmental or quasi governmental organi-ations (e.g., 3?A+*) and venture capitalists.
They either get into partnerships with local enterprises, set up affiliates, or ma!e acquisitions
of a foreign companies.
Aortfolio investors are mutual funds, hedge funds, pension funds, and other investors who
wish to diversify their investments and not get involved in the day$to$day running of the
companies they buy into.
,- Ris%s
o The ris!s associated with )*+ and portolio investment primarily are country ris! and
currency e'change ris!. The country ris! includes political and economic instability
(revolutions, nationali-ation, ta' hi!es), and corruption. The currency e'change ris! occurs
when the e'change rate of the country that has been invested in moves sharply against the
e'change rate of the home country.
+t is necessary to note that even if investments (both )*+ or portfolio investments) are
denominated in the home country currency (e.g., 3.?. dollars), investors still bear the
e'change rate ris! to some degree because the cash flows their investments generate will
need to be converted into the home currency and if the e'change rate has moved
substantially, the returns will suffer.
Aortfolio investment, however, has additional ris!, namely conflict of interests between
portfolio investors and control investors. +nvestors who have a big enough share of an
enterprise can appoint the management of the enterprise that will, accordingly, pursue their
interests vigorously, sometimes even acting to the detriment of minority, i.e. portfolio
investors.
7- Ret$rs
o 1eturns on )*+ and portfolio investment are in line with average returns in the country they
are invested into. 0owever, portfolio investments are more liquid, which normally leads to
higher valuations. Dut, on the other hand, )*+ does not suffer from being a minority
investment, which should give it the so$called control premium. /n balance, though, )*+ and
portfolio investment have similar returns.
Macroecoomic Im"act
o Aortfolio investment is much more volatile than )*+. +n periods of crisis, foreign portfolio
investments are the first to leave the country, putting downward pressure on the domestic
e'change rate, often causing depreciation of the currency of the country from which they are
withdrawn.
The underlying reason is that the mar!et for portfolio investment is much more liquid,
ma!ing it easier to ta!e it out of a country (unless the country in question introduces capital
controls, which is not good for its reputation).
Decause of this, )*+ is a preferred source of capital, especially for developing countries.
5.% Ks. 5'%
The ma:or point o$ diEerence #etween 5.% and 5'% is that direct investors gain interest
in the ownership 1maCimum 7JM2 #y controlling the domestic frm, #ut port$olio
investors do not have any managerial control or securities control over the frm in
which they invested.
5.% is a long-term process wherein the investor reNects a long-lasting and controlling
interest in the frm, while 5'% is a short-term process.
5.% is a direct investment in #uildings, technologies, e4uipment and machinery
#elonging to the frm o$ a host country 1$oreign frm2, while 5'% is an indirect investment
in the $oreign frm #y simply #uying the stocks o$ the company and not getting involved
in any ma:or activities o$ the frm.
The investors o$ 5'% are not interested in the management control o$ the frm in which
they invest as it is a short-term investment plan.
&igger loss or risk is involved in making o$ 5'% as $oreign shareholders cannot sue the
domestic stock eCchange or the pu#lic entity in which they invested their money.
.irect investors are more in$ormed a#out the changes in the prospects o$ the pro:ect as
compared to port$olio investors.
%t is easy to sell oE the shares in 5'% as compared to direct investments made #y an
entity $rom one country in another country. %n other words, 5'% is more volatile than 5.%.
5'% investors are more vulnera#le to li4uidity shocks than companies or entities that
make direct investments in $oreign countries. This $orces many 5'% investors to
li4uidate their investment at a $aster rate.
The pro#a#ility o$ withdrawal o$ 5'% is greater than that o$ 5.%.
Introduction
Any operating organization should have its own structure in order to operate efficiently. For an organization,
the organizational structure is a hierarchy of people and its functions.The organizational structure of an
organization tells you the character of an organization and the values it believes in. Therefore, when you do
business with an organization or getting into a new job in an organization, it is always a great idea to get to
know and understand their organizational structure.
Depending on the organizational values and the nature of the business, organizations tend to adopt one of
the following structures for anageent purposes.Although the organization follows a particular structure,
there can be departents and teas following soe other organizational structure in e!ceptional
cases."oeties, soe organizations ay follow a cobination of the following organizational structures
as well.
Functional Structure
Functional structure is set up so that each portion of the organization is grouped according to its purpose.
In this type of organization, for e!aple, there ay be a arketing departent, a sales departent and a
production departent. The functional structure works very well for sall businesses in which each
departent can rely on the talent and knowledge of its workers and support itself. #owever, one of the
drawbacks to a functional structure is that the coordination and counication between departents can
be restricted by the organizational boundaries of having the various departents working separately.
Divisional Structure
These types of organizations divide the functional areas of the organization to divisions. $ach division is
e%uipped with its own resources in order to function independently. There can be any bases to define
divisions.Divisions can be defined based on the geographical basis, products&services basis, or any other
easureent.
As an e!aple, take a copany such as 'eneral $lectrics. It can have icrowave division, turbine
division, etc., and these divisions have their own arketing teas, finance teas, etc. In that sense, each
division can be considered as a icro(copany with the ain organization.
The benefit of this structure is that needs can be et ore rapidly and ore specifically) however,
counication is inhibited because eployees in different divisions are not working together. Divisional
structure is costly because of its size and scope. "all businesses can use a divisional structure on a
saller scale, having different offices in different parts of the city, for e!aple, or assigning different sales
teas to handle different geographic areas.
Matrix Structure
*hen it coes to atri! structure, the organization places the eployees based on the function and the
product.The atri! structure gives the best of the both worlds of functional and divisional
structures.Typically used in large ultinational copanies, the atri! structure allows for the benefits of
functional and divisional structures to e!ist in one organization. This can create power struggles because
ost areas of the copany will have a dual anageent((a functional anager and a product or divisional
anager working at the sae level and covering soe of the sae anagerial territory
Hybrid structure
A hybrid organizational structure is an approach to designing the internal operating structure of a copany or
other entity in a anner that akes use of several different organizational patterns, rather than relying on one
particular odel. Depending on the nature and type of the organization, this approach ay cobine various
eleents of lateral and hierarchical structures, coing up with a uni%ue blend that is ideal for the purposes and
culture of the organization involved. Typically, a hybrid organizational structure will seek to integrate the ost
desirable eleents of other approaches to business organization into the odel, while arranging the corporate
structure so that any eleents seen as liabilities are kept to a iniu.
Factors affecting organisation structure
+rganizational structure is the fraework copanies use to outline their authority and counication
processes. The fraework usually includes policies, rules and responsibilities for each individual in the
organization. "everal factors affect the organizational structure of a copany. These factors can be internal
or e!ternal.There is no perfect solution to developing an organisation structure, and no perfect way to
divide the total work aong the people of the organisation.
#owever there are factors that will likely influence the akeup of the organisation,s workforce. Aong the
ore iportant factors are-
The mission of the
organization
An organisation with a ission to provide service will be structured differently to
an organisation that e!ists priarily to sell products.Anorganisation that is a
non(profit organisation will be structured differently to an organisation that is a
for(profit business.
The priorities of the
organization
.anaging an organisation is about dealing with the proble that there is always
too uch to do and too few staff to carry out the work. .anageent ust
deterine which tasks are ost iportant and assign personnel to the.
Therefore the organisation structure will depend on what decisions have been
ade by anageent with respect to priorities.
Goals and objectives
to be achieved
"tateents of /'oals/ and /+bjectives/ represent what the organisation wants
to achieve. They change fro tie to tie as a result of the changing
environent in which the organisation lives. As 'oals and +bjectives change
so will the organisation,s structure.
Capability of Human
Resource
'enerally the huan resources of any organisationis the key factor deterining
success. *ith enough good people, organisations can achieve all that is
desired. #owever finding good people is often very difficult, especially when
you need the as volunteers 0unpaid1 in non(profit organisations. It is often the
case that priorities, goals and objectives and funding are deterined according
to what /good people/ can be found,
Financial resources
available
+rganisations cannot solve probles by siply eploying ore people, if only
this was the case2 The nuber of paid people in an organisation is liited by
the availability of funding. $ven when organisations rely on volunteers, the
need for oney does not subside.
Si3e
)iGe is many times the driving $actor $or a companyIampFrs4uoFs organiGational structure.
)maller or home-#ased #usinesses do not usually have a vast structure #ecause the #usiness
owner is usually responsi#le $or all tasks. /arger #usiness organiGations usually re4uire a more
intense $ramework $or their organiGational structure. !ompanies with more employees usually
re4uire more managers $or supervising these individuals. ,ighly specialiGed #usiness
operations can also re4uire a more $ormal organiGational structure.
Li.e C&cle
The companyIampFrs4uoFs li$e cycle also plays an important part in the development o$ an
organiGational structure. &usiness owners attempting to grow and eCpand their
companyIampFrs4uoFs operations usually develop an organiGational structure to outline their
companyIampFrs4uoFs #usiness mission and goals. &usinesses reaching peak per$ormance
usually #ecome more mechanical in their organiGational structure. This occurs as the chain o$
command increases $rom the #usiness owner down to $rontline employees. Mature companies
usually $ocus on developing an organiGational structure to improve e"ciency and profta#ility.
These improvements may #e the result o$ more competitors entering the economic
marketplace.
Strate#&
&usiness strategies can also #e a $actor in a companyIampFrs4uoFs organiGational structure
development. ,igh-growth companies usually have smaller organiGational structures so they
can react to changes in the #usiness environment 4uicker than other companies. &usiness
owners may also #e reluctant to give up managerial control in #usiness operations. )mall
#usinesses still looking to defne their #usiness strategy o$ten delay creating an
organiGational structure. &usiness owners are usually more interested in setting #usiness
strategies rather than developing and implementing an internal #usiness structure.
B$siess Eviromet
The eCternal #usiness environment can also play an important part in a
companyIampFrs4uoFs organiGational structure. .ynamic environments with constantly
changing consumer desires or #ehavior is o$ten more tur#ulent than sta#le environments.
!ompanies attempting to meet consumer demand can struggle when creating an
organiGational structure in a dynamic environment. More time and capital can also #e spent in
dynamic environments attending to create and organiGational structure. This additional
capital is usually a negative eCpense $or many small #usinesses.
L+l o# tchnolo*)
,ow To !reate *n <Eective !orporate !ulture
5 La6r" l6 7) 8ampl on a con"i"tnt 7a"i" an6 3r 3illin* to roll up thir
"l+"0 particularl) 6urin* ti*ht 6a6lin" or challn*in* tim"'
5 Emplo)" clarl) un6r"too6 ho3 3hat th) 6i6 ma6 a 6i1rnc an6 ho3
thir contri7ution" ma6 th or*ani9ation ithr mor pro/ta7l or mor
1cti+'
5 Th 3or,#orc inclu66 a 7ln6 o# lon*-trm mplo)" 3ith a rich compan)0
pro6uct/"r+ic an6 cu"tomr hi"tor)0 mplo)" 3ho ha6 7n at th compan)
#or /+ to "+n )ar"0 an6 thn n3 hir" 3ith a #r"h pr"pcti+ an6 ,n
"n" o# n3 tchnolo*i" an6 tchni:u"' That 7ln6 3or,6 7"t 3hn th
mi8 inclu66 +irtuall) all A-pla)r"'
5 Top mana*r" ha6 a clar0 rali"tic an6 "trat*ic +i"ion #or ho3 th compan)
3oul6 *ro3 an6 compt in th mar,tplac'
5 Emplo)" 3r challn*6 an6 r3ar66 throu*h *ro3th opportuniti"0
6ucation an6 trainin* an6 pa) incra""'
5 La6r" pro+i66 opportuniti" #or th compan) an6 it" mplo)" to *i+
7ac, to th communit)' Somtim" it 3a" throu*h compan) or*ani96
+oluntr pro!ct"' Othr tim" it 3a" 7) ncoura*in* (an6 r3ar6in*)
mplo)" to +oluntr on thir o3n'
5 A *roup o# mplo)" "r+6 on an acti+iti" committ 3ith a" littl top
mana*mnt in;unc a" po""i7l0 to plan at la"t monthl) tam-7uil6in*0
nt3or,in*0 education and charita#le activities. This grass-roots approach helped ensure
that the culture was shaped and inNuenced #y employees and not only #y top
management. %n this way, employees owned the culture as much as the management did.
$/nition o# <Tran"#r Pric<
The price at which divisions o$ a company transact with each other. Transactions may include
the trade o$ supplies or la#or #etween departments. Trans$er prices are used when individual
entities o$ a larger multi-entity frm are treated and measured as separately run entities. *lso
known as Ptrans$er costP.
%n managerial accounting, when diEerent divisions o$ a multi-entity company are in charge
o$ their own profts, they are also responsi#le $or their own PHeturn on %nvested !apitalP.
There$ore, when divisions are re4uired to transact with each other, a trans$er price is used
to determine costs. Trans$er prices tend not to diEer much $rom the price in the market
#ecause one o$ the entities in such a transaction will lose out: they will either #e #uying $or
more than the prevailing market price or selling #elow the market price, and this will aEect
their per$ormance.
Definition: change management
3rosci,s definition of change anageent is shown below-
Definition: 4hange anageent is the 5application of6 the set of tools, processes, skills and
principlesfor anaging the people side of changeto achieve the re%uired outcoes of a change
project or initiative
The systematic approach and application of knowledge, tools and resources to deal with change.
Change management means defining and adopting corporate strategies, structures, procedures and
technologies to deal withchanges in external conditions and the business environment.:SHR
!lossary of Human Resources Terms, www.shrm.org.
..a systematic approach to dealing with change, both from the perspective of an organi"ation and on
the individual level...proactively addressing adapting to change, controlling change, and effecting
change.:Case #estern Reserve $niversity
=ohn P >ottr<" <i*ht "tp" to "ucc""#ul chan*<
;otterDs eight step change model can #e summarised as:
7. Incra" ur*nc) - inspire people to move, make o#:ectives real and relevant.
8. 2uil6 th *ui6in* tam - get the right people in place with the right emotional
commitment, and the right miC o$ skills and levels.
=. ?t th +i"ion ri*ht - get the team to esta#lish a simple vision and strategy, $ocus on
emotional and creative aspects necessary to drive service and e"ciency.
>. Communicat #or 7u)-in - %nvolve as many people as possi#le, communicate the
essentials, simply, and to appeal and respond to peopleDs needs. .e-clutter
communications - make technology work $or you rather than against.
?. Empo3r action - Hemove o#stacles, ena#le constructive $eed#ack and lots o$
support $rom leaders - reward and recognise progress and achievements.
@. Crat "hort-trm 3in" - )et aims that are easy to achieve - in #ite-siGe chunks.
Managea#le num#ers o$ initiatives. 5inish current stages #e$ore starting new ones.
A. $on<t lt up - 5oster and encourage determination and persistence - ongoing change -
encourage ongoing progress reporting - highlight achieved and $uture milestones.
Q. Ma, chan* "tic, - Hein$orce the value o$ success$ul change via recruitment,
promotion, new change leaders. 9eave change into culture.
change management principles
7. At all ties involve and agree support fro people within syste 0syste 8 environent,
processes, culture, relationships, behaviours, etc., whether personal or organisational1.
9. :nderstand where you&the organisation is at the oent.
;. :nderstand where you want to be, when, why, and what the easures will be for having got there.
<. 3lan developent towards above =o.; in appropriate achievable easurable stages.
>. 4ounicate, involve, enable and facilitate involveent fro people, as early and openly and as
fully as is possible.
Change management tools
Individual change odel
4ounications
"ponsorship
4oaching
Training
?esistance anageent
@ey eleents for success-
3lan long(ter broadly ( a sound strategic vision, not a specific detailed plan 0the latter is
ipossible to predict reliably1. Detailed five years plans are out of date two weeks after they are written.
Focus on detail for establishing and easuring delivery of iediate actions, not ediu(to(long(ter
plans.
$stablish forus and counicating ethods to enable iediate review and decision(aking.
3articipation of interested people is essential. This enables their input to be gained, their approval and
coitent to be secured, and autoatically takes care of counicating the actions and
e!pectations.
$power people to ake decisions at a local operating level ( delegate responsibility and power as
uch as possible 0or at least encourage people to ake recoendations which can be %uickly
approved1.
?eove 0as far as is possible1 fro strategic change and approval processes and teas 0or
circuvent1 any ultra(cautious, ultra(autocratic or copulsively(interfering e!ecutives. Autocracy and
interference are the biggest obstacles to establishing a successful and sustainable dynaic culture and
capability.
$ncourage, enable and develop capable people to be active in other areas of the organization via
,virtual teas, and ,atri! anageent,.
"crutinise and optiise I4T 0inforation and counications technology1 systes to enable
effective inforation anageent and key activity tea(working.
:se workshops as a vehicle to review priorities, agree broad ediu(to(long(ter vision and ais,
and to agree short ter action plans and ipleentation ethod and accountabilities.
Adjust recruitent, training and developent to accelerate the developent of people who
contribute positively to a culture of epowered dynais.
2uil6in* a "ucc""#ul corporat cultur
Kalues-driven companies are the most success$ul companies.
9hyR
S Kalues drive culture
S !ulture drives employee $ulfllment
S <mployee $ulfllment drives customer satis$action
S !ustomer satis$action drives shareholder value
The *dvantages o$ MatriC 0rganiGational )tructure
1esource ;oordination
The matriC structure allows supervisors to $ocus on their areas o$ eCpertise. 5unctional
supervisors $ocus on hiring, training and managing employees in their feld, while pro:ect
supervisors can $ocus on achieving the goals o$ their specifc pro:ects or products.
?peciali-ation
'lacing employees in $unctional areas allows them to specialiGe in a particular feld. %nstead o$
#eing good at a variety o$ tasks, specialiGed employees can eCcel at tasks in their feld o$
$ocus.
Dreadth of ?!ill
9hen isolated in a $unctional area, employees may have more di"culty #enefting $rom the
skills and eCperiences o$ those in other areas. %n a matriC structure, employees have constant
contact with mem#ers o$ other $unctional areas via their mem#ership in pro:ect teams.
Through the pro:ect team, employees have the opportunity to develop a wider set o$ skills
than they would in a purely $unctional structure.
;ommunication
)ince employees have constant contact with mem#ers o$ diEerent $unctional areas, the
matriC structure allows $or in$ormation and resources to travel more Nuidly #etween those
$unctional areas. The colla#oration #etween $unctional areas allows a pro:ect team to #etter
handle compleC challenges and o#:ectives.
)le'ibility
The matriC structure allows $or human resources to #e shared NeCi#ly across diEerent pro:ects
or products. 5unctional areas maintain a stock o$ talented employees to meet pro:ectsD
re4uirements
*dvantages o$ ,y#rid 0rganiGational )tructures
?hared :ission
* hy#rid organiGational structure creates a shared mission and allows $or employees to work
on diEerent pro:ects and in diEerent sectors. This structure creates a unifed team o$
individuals with a common goal and diEerent eCperience and interest levels. <ach employee
is a#le to per$orm work in the areas he is #est suited to, moving $rom pro:ect to pro:ect and
reporting to diEerent individuals when necessary.
:ar!et *isruption
,y#rid organiGations lend themselves to so-called market disruption, which is when an
organiGation or product inserts itsel$ into a market in the same way that a child cannon#alls
into a swimming pool. &y using viral methods and making a 3splash,O the hy#rid
organiGational structure is a#le to overcome traditional #arriers to a market, such as
advertising #udgets that could cripple fnancially smaller organiGations. * hy#rid
organiGational structure can ride the wave o$ market disruption to the peak o$ creating a
massive media #litG that $uels product development and demand.
?cale of 3se
*nother #eneft to the hy#rid organiGational structure is the massive scale that can #e
reached #y its use. %nstead o$ having a top-heavy, traditional structure o$ management and
employees, a hy#rid organiGation uses a spider we# #ased structure involving groups o$
individuals, sometimes in diEerent geographic areas, working together to accomplish shared
goals. This also removes the pro#lem o$ distri#ution pipelines slowing down access to the
fnished product.
There are a nuber of reasons why a copany or other entity would consider a hybrid organizational structure.
+ne has to do with the ability to be fle!ible. *hile retaining the authoritarian eleents found in a hierarchical
structure, a hybrid would also allow various departents to enjoy a greater degree of authority and responsibility
within their individual areas. *ith this odel, the copany would be better suited to identify and act on
opportunities with greater speed, without having to wait for perission fro those higher in the copany or
organization. At the sae tie, the checks and balances put in place help to ake sure that no one departent
is able to take actions that ultiately har the interests of the reainder of the copany
Aewin,s 4hange .anageent .odel
3ractical "teps for :sing the Fraework-
:nfreeze
7. Deterine what needs to change.
"urvey the organization to understand the current state.
:nderstand why change has to take place.
9. $nsure there is strong support fro upper anageent.
:se "takeholder Analysis and "takeholder .anageent to identify and win the support of key
people within the organization.
Frae the issue as one of organization(wide iportance.
;. 4reate the need for change.
4reate a copelling essage as to why change has to occur.
:se your vision and strategy as supporting evidence.
4ounicate the vision in ters of the change re%uired.
$phasize the /why/.
<. .anage and understand the doubts and concerns.
?eain open to eployee concerns and address in ters of the need to change.
4hange
7. 4ounicate often.
Do so throughout the planning and ipleentation of the changes.
Describe the benefits.
$!plain e!actly the how the changes will effect everyone.
3repare everyone for what is coing.
9. Dispel ruors.
Answer %uestions openly and honestly.
Deal with probles iediately.
?elate the need for change back to operational necessities.
;. $power action.
3rovide lots of opportunity for eployee involveent.
#ave line anagers provide day(to(day direction.
<. Involve people in the process.
'enerate short(ter wins to reinforce the change.
=egotiate with e!ternal stakeholders as necessary 0such as eployee organizations1.
?efreeze
7. Anchor the changes into the culture.
Identity what supports the change.
Identify barriers to sustaining change.
9. Develop ways to sustain the change.
$nsure leadership support.
4reate a reward syste.
$stablish feedback systes.
Adapt the organizational structure as necessary.
;. 3rovide support and training.
@eep everyone infored and supported.
<. 4elebrate success2