Any business activity or transaction that crosses

national borders is called International Business.

International Business

International & Global Marketing

International
Trade
 International Orientations
Yoram Wind, Susan P. Douglas, and Howard
V. Perlmutter have identified the following
levels of involvement of firms in international
business:
Ethnocentric Orientation
Polycentric Orientation
Regiocentric Orientation
Geocentric Orientation
 Reasons Why Firms Engage in
International Business
• Profit Advantage
• Growth Opportunities
• Acquire Resources
• Domestic Market Constraints
• Uniqueness of Product or Service
• Spreading R&D Costs
• Government Policies and Regulations
• Technological Advancement
• Increase in Global Competition
• Spin-off Benefits
• Strategic Vision
• Diversify Sources of Sales and Supplies
• Liberalization of Cross-border Movements
 Stages of Internationalization
Warren J. Keegan has distinguished between
global and transnational companies, and
classifies companies as they undergo five stages
in the internationalization process
• Stage One – Domestic Companies
• Stage Two – International Companies
• Stage Three – Multinational Companies
• Stage Four – Global Companies
• Stage Five – Transnational Companies
 Foreign Investment

Foreign Direct Investment Portfolio Investment

Wholly owned Mergers and Investment in

Joint Venture Investment by
subsidiary Acquisitions GDRs, FDRs,
FIIs
FCCBs etc
Types of Counter Trade

• Barter Trade

• Counter-purchase

• Offset Trade

• Switch Trading

• Buy-back/Compensation
 Draw Backs of Counter Trade
• Counter trade encourages bilateralism at the expense of
multilateralism.
• Counter trade adversely affects competition.
• The valuation of the goods to be received in payment is
difficult.
• The exporter assumes all the country risk of dealing with the
importer.
• If there is a time lag between exports and the receiving of
goods by the exporter in counter trade, the exporter may
require financing during the interim period.
• There is the problem of disposing off the goods received in
exchange of cash payment.
 Theory of Absolute Advantage
- Adam Smith

1. Natural Advantage 2. Acquired Advantage

Table-1: Labour Cost of Production (in hours).

I Unit of Product A 1 Unit of Product B

Country - X 10 Hours 20 Hours

Country - Y 20 Hours 10 Hours

 Theory of Comparative Advantage
--- David Ricardo
Table-2: Labour Cost of Production before Specialisation (in hours).

I Unit of 1 Unit of Total

Product A Product B
Country X 80 Hours 90 Hours 170 Hours
CountryY 120 Hours 100 Hours 220 Hours
Total Units
2 2 390 Hours
Produced

Table-3: Labour Cost of Production after Specialisation (in hours).

2 Units of 2 Units of Total Savings

Product A Product B
Country X 160 Hours 0 Hours 160 10
Hours Hours
CountryY 0 Hours 200 Hours 200 20
Hours Hours
Total Units
 Table-4: Opportunity Costs in the Production.

I Unit of Opportunity 1 Unit of Opportunity

Product A Cost Product B Cost

Country X 80 Hours 80/90 = 0.89 90 Hours 90/80 = 1.125

CountryY 120 Hours 120/100 = 1.2 100 Hours 100/120 =

0.83
 Factor – Proportions Theory
(Neoclassical Theory)
• Developed by two Swedish economists – Eli Heckscher
and Bertil Ohlin (Ohlin received the Nobel Prize in
economics, in 1977), the theory is also referred to as the
Heckscher – Ohlin theory.
• The factor – proportions theory shows that comparative
advantage is influenced by the interaction between
nation’s resources (the relative abundance of factors of
production), and the technology of production (which
influences the relative intensity with which different
factors of production are used in the production of
different goods).
Eli Heckscher and Bertil Ohlin made the following assumptions:
• There are two factors of production – labour and capital. Both are
immobile for inter-country transfers, but perfectly mobile for inter-
sector transfers.
• There are two countries and they differ in factor abundance, e.g. one
country is capital abundant but labour scarce, and the other country is
labour abundant but capital scarce. In other words, the two countries
differ in factor endowments.
• There are two commodities. Both involve the use of both the factors
(labour and capital). The production function is such that the relative
factor intensities are the same for each of the commodities/goods in
both the countries. In other words, regardless of what the factor
proportions or factor prices are in the two countries, one commodity is
always capital intensive in both the countries and the other is always
labour intensive in both the countries.
• The technologies are the same across different countries.
 The Heckscher-Ohlin model is also not free from drawbacks:
• The theory assumes that factor endowments are given, whereas
they can also be developed through innovation.
• Further, due to minimum wage laws existing in some countries,
the factor prices may change to such an extent, that an
otherwise labour-rich country may find it cheaper to import
labour-intensive goods, rather than produce them locally.
• The basic trade models are based upon certain assumptions,
such as no transportation costs, and free flow of information to
all the producers and consumers.
• These models do not take into account the effects of trade on
the world prices.
• These trade theories are static, and ignore the effects of
technological progress on the growth of world economy.
 The Leontief Paradox

In a famous study published in 1953, the

economist Wassily Leontief (winner of the
Nobel Prize in 1973), found that US exports
were less capital-intensive than the US
imports. This result is known as the Leontief
Paradox, which is the single biggest piece of
evidence against the factor - proportions
theory.
 Theory of International Product Life Cycle
In 1966, Raymond Vernon of the Harvard Business
School published the Product Life Cycle theory of
international trade and investment. The theory
focuses on market expansion and technological
innovation, which are de-emphasized in the
comparative advantage theory. This theory has two
fundamental constituents:
 Technology is a critical factor in product creation and
development and the existence of proprietary
knowledge.
 Market size and structure are critical factors in
determining the trade patterns.
 New Trade Theory
• Are there increasing returns to specialization, rather than
diminishing returns?
• Has globalization fostered Economies of Scale?
• Is the principle of comparative advantage undermined by
First Mover Advantage?
• Can a company being a first mover, while risky, have
substantial payoffs?
• Is location of production a key variable?
• Can the government policy have important influence on the
competitiveness?
The fixed costs of developing a Boeing’s new commercial jet

airliner are estimated at $5 billion.

If Boeing only makes 100 of the Boeing 777 jetliner, its fixed

costs will amount to $5 billion/100 = $50 million.

If the variable costs (such as labour, equipment, and parts)
equal $80 million per aircraft.
The total cost of each aircraft = $50 million+$80 million =
$130 million.
On the other hand, if Boeing makes 500 of these aircraft, the
fixed costs fall to $10 million ($5 billion/500).
Thus, the total costs per aircraft would be $90 million ($10
million fixed costs + $80 million variable costs).
The economies of scale are quite significant, with average unit
costs falling by $40 million as the output expands from 100 to
500 units.
 Learning effects were first documented in the aerospace industry,
where it was found that each time the accumulated output of
airframes was doubled, unit costs declined to 80 per cent of their
previous levels.
Therefore, the fourth airframe typically costs only 80 per cent of
the
second airframe.
Likewise, the eighth airframe costs only 80 per cent of the fourth,
the
sixteenth airframe costs only 80 per cent of the eighth, and so on.
This observation implies that the $80 million per unit variable costs
required to build a Boeing 777 will decline over time as the output
expands, because of labour productivity.
Thus, while variable costs per unit might be $80 million by the
time
100 aircrafts had been manufactured. By the time 500 aircraft are
manufactured, they may have fallen to $60 million per unit.
Combine learning effects with our earlier calculation of the decline
in
unit fixed costs, our analysis shows that as output of Boeing 777
expands from 100 to 500 units, unit costs will fall from $130 million
 Increasing returns to specialization are very important in this
industry, and the importance can be appreciated by the fact
that the cost price of the Boeing 777 is about $120 million.
 If Boeing sells only 100 aircraft, it will not make any profit.
However, if it sells 500 aircraft, it will be able to make
acceptable profits because of the economies of scale, and
learning effects.
 World demand is large enough to support only a limited
number of aircraft production at high output levels. Moreover,
forecasts suggest that the global market for long-range
aircraft
(with a seating capacity of about 300, such as Boeing 777),
will be about 1500 aircraft between 1997 and 2008.
 If we assume that Boeing has to sell about 500 aircrafts to
make a decent return on investment, this suggests that the
world market is large enough to support only three producers
profitably.
 Theory of Competitive Advantage
• Why do some nations succeed and others fail in international
competition?
• Why does a nation become the home base for successful
international competitors in the industry?
• Why are certain companies based in certain nations able to
overcome barriers to change and innovation, and are capable
of consistent innovation, and ruthlessly pursue improvement?
• Why are firms based in a particular nation able to create and
sustain competitive advantage against the world’s best
competitors in a particular field?
 Theory of Competitive Advantage
• Germany is the home base for so many of the world’s leading
makers of printing presses, luxury cars, and chemicals,
• Switzerland is the home base for international leaders in
pharmaceuticals, chocolate, precision instruments, and trading,
• leaders in heavy trucks and mining equipment are based in
Sweden,
• the US produces international competitors in personal computers,
software, credit cards, and movies,
• Italian firms are so strong in ceramic tiles, ski boots, packaging
machinery, and factory automation equipment, and
• the Japanese firms are so dominant in consumer electronics,
cameras, robotics etc.?
 Firm
Chance Strategy
Structure
and Rivalry

Factor Demand
Conditions Conditions

Related and Governm

Supporting ent
Industries
 Limitations of the Competitive Advantage Theory

• Factor conditions can be changed.

• Foreign rather than domestic demand has spurs much of the
growth in exports.
• If related and supporting industries are not available locally,
materials and components are outsourced.
• Companies not only react to domestic rivals, but also react
to foreign-based rivals.
• There is more emphasis on merchandize exports.
• Porter failed to understand the two-way FDI.
• The existence of favourable conditions is not sufficient to
guarantee that an industry will start up and develop in a
given location.
• The Porter’s model recognizes the efficiency and
effectiveness. However, it does not take into consideration
the criterion of economy.
A firm’s strategy can be defined as the actions that managers take to attain
the goals of the firm.

Profit = TR – TC
[Where TR = P x Q and TC = C x Q]
ROS = Profit / TR, and ROI = Profit / Total Capital
Value Creation

V = Consumer Value
V–P P = Market Price
C = Cost of Production

V – P = Consumer
P-C
Surplus
P – C = Profit Margin
V – C = Value Added

V-C
 The Firm as a Value Chain

Support Activities
Company Infrastructure
Human Resources
Information Systems
Materials Management

Marketing
R&D Production Service
& Sales
Primary Activities
 Global Expansion allows firms to increase their profitability, in ways
not available to purely domestic firms. Firms that operate
internationally are able to:

 Realise location economies by dispersing individual value creation

activities to those locations around the globe where they can be
performed most efficiently and effectively.
 Realise great cost economies from experience effects by serving an
expanded global market from a central location, thereby reducing the
costs of value creation.
 Earn a greater return from the firm’s distinctive skills or core competencies
by leveraging those skills and applying them to new geographical markets.
 Earn a greater return by leveraging any valuable skills developed in foreign
operations and transferring them to other entities within the firm’s global
network of operations.
 Strategic Choices

High

Global Transnational
Strategy Strategy

Cost Pressures

International Multidomestic
Strategy Strategy
Low

Low Pressures for Local Responsiveness High

 CEO

Marketing Production Finance R&D Exports

 CEO

Marketing Production Finance R&D

Export
Department
 CEO

Central Staff

Domestic Division Vice-President International Division Vice-President

Planning &
Finance Staff

Export Foreign Foreign

Finance R&D
Department Subsidiary I Subsidiary II
 President

Central Staff

Vice-President Vice-President
Production Marketing
(Worldwide) (Worldwide)

Subsidiary I Subsidiary II Subsidiary III

President President President
 FUNCTION BASED GLOBAL ORGANISATIONAL
STRUCTURE
ATTRIBUTES: Divisions are according to the major tasks of the
organization i.e., production, marketing, personnel, finance etc.
STRENGTHS:
• Fosters professional identity & career path for members
• Ease of Supervision
• Allows maximum specialization in trained occupational skills.
• Other departments have access to specialized skills.
WEAKNESSES:
• Inability to respond to environmental changes.
• Inter- departmental coordination is lacking. Thus, vertical
differentiation often results in deliberate decision making that
moves more slowly as the volume of data expands than the layers
of the hierarchy can process it.
 President

Central Staff

Vice-President Vice-President
Product Group I Product Group II

Domestic Subsidiary I Subsidiary II

President President President
 PRODUCT BASED GLOBAL ORGANIZATIONAL
STRUCTURE
ATTRIBUTES: Divisions are according to the products or services.
STRENGTHS:
• Simplifies coordination among functions.
• Permits growth without loss of control.
• Permits accountability for performance.
• Divisional goals are clear, providing motivation for divisional
management.
• Decision making authority is moved closer to the problem.
WEAKNESS:
• No formal means by which one product division could learn from
another’s international experience. Thus, synergy could be lost
within countries if different subsidiaries do not communicate with
each other or with a common manager.
 President
Central Staff

Vice-President Vice-President Vice-President

Area I Area II Area III
 AREA BASED GLOBAL ORGANISATIONAL
STRUCTURE
ATTRIBUTES: Divisions are according to end user regions.
STRENGTHS:
• Simplifies coordination among functions.
• Permits growth without loss of control.
• Permits accountability for performance.
• Divisional goals are clear, providing motivation for divisional
management.
• Decision making authority is moved closer to the problem.
WEAKNESSES:
• The major drawback of this structure is the potential for
duplication of work among areas as the company locates similar
value activities in several places rather than consolidating them
in the most efficient place.
 President

Central Staff

Vice-President Vice-President
Production Marketing
(Worldwide) (Worldwide)

Subsidiary I Subsidiary II Subsidiary III

President President President
 MATRIX FORM OF GLOBAL ORGANISATIONAL
STRUCTURE
ATTRIBUTES: Divisions are according to the major tasks of the
organization i.e., production, marketing, personnel, finance etc.
STRENGTHS:
• Fosters professional identity & career path for members
• Ease of Supervision
• Allows maximum specialization in trained occupational skills.
• Other departments have access to specialized skills.
WEAKNESSES:
• Groups compete for scarce resources, preferred operating
methods, shares of rewards, or shares of risk.
• Top level managers have often to intervene in the likely disputes
that may arise among lower level managers.
• Possibility of bias against particular groups.
Aspects of Relationship between the
Headquarters and the Subsidiaries

• Information Sharing

• Resource Sharing

• Decision Flows

• Coordination of Activities

• Strategy Formulation

• Control of Operations
Factors Affecting Centralization/Decentralization Decisions

1. Ownership Structure
2. Age of Subsidiary
3. Size of the Company
4. Nature of the Industry
5. Time and Distance
6. Interdependence among Subsidiaries
7. Interdependence between Headquarters and Subsidiaries
 Pooled Interdependence
 Sequential Interdependence
 Reciprocal Interdependence
8. Diversification of Products
9. Level of Technology
10. Cultural Proximity
11. Importance of Foreign Market
12. Level of Competitive Environment
 Production in Home Market And/Or Foreign Production Sources

Indirect Export Direct Export Contractual Investment

Entry modes Entry Modes

Foreign
Trading Houses Assembly
Distributorst Licensing Franchising
Operations

Export Mangement
Foreign Agents Turnkey Management
Company Joint Ventures
Operations Contracts

Overseas
Cooperation in
Marketing Contract Wholly Owned
Exporting Strategic Alliance
Subsidiary Manufacturing Subsidiary

Web Pomerene Export Trading Piggyback

Associations Companies Operations
Advantages of using an Export
Management Company
The producer gets instant foreign market knowledge and
contacts through the operations and experience of export
management company.
Producer does not require in-house expertise in exporting, and a
significant cost saving as the export management company’s
costs are spread over the sales of several producers.
Consolidated shipments offer freight savings to export
management company’s clients.
A line of complimentary products can get better foreign
representation than products of just one manufacturer.
Most of the export management companies accept foreign
credit responsibility.
Functions of Webb-Pomerene Associations
Exporting in the name of the association,
Consolidating freight, negotiating rates, and chartering ships,
Performing market research,
Appointing sales agents in foreign countries,
Obtaining credit information and collecting debts,
Setting export prices,
Allowing uniform contracts and terms of sale, and
Allowing cooperative bids and sales negotiations.
Essential Characteristics to be Associated with
a Foreign Distributor
• The size and capabilities of the distributor’s sales force.
• Market area(s) covered
• Sales record of the foreign distributor.
• Financial strength and credit rating
• Products handled and current product mix
• Capability to provide after-sales service (if needed)
• Facilities and equipment
• Marketing policies
• Customer profiles
• Promotional strategies.
• Relations with local government and other groups
Major Benefits of using International Licensing for Market Entry
– Licensing facilitates rapid penetration in international markets for technology intensive
products and processes.
– The market potential of the target country may be too small to support manufacturing
operations.
– For a company with limited resources, it can be advantageous to have a foreign partner
to market its products by signing the licensing contract.
– In some countries where political and economic situation remains uncertain, the
licensee absorbs both commercial and political risk.
– In countries where trade restrictions prohibit free import of products, licensing is the
best alternative.
– In industries like telecommunications, defense, or aerospace, where government is the
major buyer and often buys from local firms, foreign competitors are forced to enter
these markets via licensing.
– Some companies use licensing as a means of preventing competitive technology from
achieving market success, thereby assuring themselves of a larger market share.
– For industries where technological changes are frequent and affect many different
products, companies in various countries often exchange technology rather than
compete with each other on every product in every market. This is known as cross
licensing.
– In case of developing and least developed countries wherein forged products are in
high circulation in the market, licensing helps in curtailing the duplicate products’
market.
– Since only intangibles are exported in case of international licensing, the exit cost from
the market is very low.
 Major Causes of Concern for the Licenser
The licenser does not have any management control over the
licensee and is therefore unable to control either the quality or
the price. An inefficient licensee can damage the long-term
market potential.
Licensing is extremely limited in its scope. The licenser cannot
share the returns from the manufacturing and marketing
operations of the licensee, unless specified under the agreement.
Since the licensee is given exclusive rights to manufacture and
market the products in the assigned territory, it may restrict the
licenser’s own marketing activities in those countries.
One of the important risk of licensing is that the licenser would be
developing a potential competitor.
Licensees based in the developing nations can score an edge over
the licenser after the expiry of the licensing agreement. This is
because of the low cost labour.
Major Benefits of using International Franchising for
Entry into Foreign Markets
A company may not have the expertise or time to engage more
actively in international marketing. Franchising facilitates rapid
penetration in international markets at low costs and risks.
In franchising, the upfront expenditure is minimal, which the returns
can be substantial.
When a franchisee invests its own capital in the franchise,
commitment follows.
A franchise generally requires fewer management personnel than a
chain organization and therefore has a lower staff payroll and
problems.
From the point of view of the franchisee, the franchiser provides the
franchisee to operate a tested, proven, and profitable business and in
addition provides him support services and training that increase the
chances of success. The franchiser is expected to pass on to its
franchisees the benefits of its ongoing research programme as part of
the agreement.
Limitations of Franchising from the point of view of
the Franchiser
Lack of commitment on the part of the franchisee may adversely
affect the brand image of the international franchiser. Unless strict
monitoring is done, the franchisee may default on quality and
delivery, thus affecting the reputation of the franchiser.
Net receipts from franchisees could be less than net receipts from
company owned operations. Only a few new franchises breakeven
immediately, most of these contractual arrangements take up to six
months to one year.
The franchiser needs to realize that it is working with several
independent businesses that have their own ideas and ways of doing
things.