Definitions Of Financial Terms

Definitions, Scopes, Objective and Importance of international business? Ans – Definition - International business is define as “any commercial transaction taking place across the boundary lines of a sovereign entity.” It may take place either between two countries or companies or both. These transactions includes investments, the physical movement of goods and services, transfer of technology and manufacturing. 1) Introduction to International Business •

It is the process of: - Focusing on the resources of the globe. - Objectives of the organizations on global business opportunities and threats.

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This process gives you the opportunity of transacting in the international business.

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Even without visiting or knowing the country of the company we can get the products from different countries at our door steps.

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It is a Business term used to collectively describe all commercial transactions (private and governmental, sales, investments, logistics, and transportation) that take place between two or more nations.

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Thus, International Business is the Business transactions crossing national borders at any stage of the transaction.

2) Scope of International Business International business seeks to identify, classify and interpret the similarities and dissimilarities among the systems used to anticipate demand and market products’. The system presents inter country comparison and intercontinental

comparison/comparative analysis helps the management to evaluate the markets, finances, human resources, consumers etc. of various countries. The comparative study also helps the management to evaluate the market potentials of various countries. The study also indicates the degree of consumer acceptance of the product, product changes and developments in different countries. Managements of international business houses can group the countries with similar features and design the same products, fix similar price and formulate the same marketing strategies. For example, Prentice Hall grouped India, Nepal, Pakistan Bangladesh, Sri Lanka etc. into one category based on the customers’ ability to pay and designed the same quality product and sell them at the same price in all these countries. Similarly, Dr. Reddy’s Lab does the same for its products to selling the African countries.

3) Objectives •

To understand the impact of International business on the Economy as the whole.

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To know the meaning of international business.

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To know India’s position with respect of International business.

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To find the future prospects for the Indian market in International business.

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To appreciate the opportunities and challenges offered by international business.

Importance Of International business :1. Interdependence 2. Development of country 3. Global capital flow 4. Earn foreign- exchange

5. Generate Employment 6. Optimum utilization of resources 7. Development of service sector 8. Development of Ancillary industry 9. Research and Development 10. Incentives 11. Increase in standard of living

Q. 2) fundamental difference between Domestic Business and International Business Dimension

Domestic Business

International Business

1. Environment

The economic, political, legal, socio-cultural, competitive & technology environment are known hence one can take the necessary precautions.

The environment is not fully known innumerable hidden factors which may emerge at any time to pose problems.

2. Plan & Strategy

Plan & Strategies can be worked out for short terms & carried forward to long term.

Only long term planning & strategy will work. Strategic inputs are required in multiples.

3. Competition

The maximum domestic competitive forces operate & one can understand their movement.

International competitive forces play vital role & it is very difficult to understand their motive & movement.

4. Currency

Local currency is used for transactions. Costing, pricing , revenue &margins are computed in a single currency. Volatility may have a minimum impact in business in short term.

Transactions are carried out in various currencies. Fluctuations in cross currency movement & associated risks are common currency fluctuation influences pricing & costing & investment decisions.

5. Business risks

Comparatively one can predict future risks & shocks & they will not have a major impact on the business houses.

Very difficult to predict & risks may crop up at any time, due to the political situation, the society itself or other unknown factors.

6. Research

It is reasonable & easy to conduct business research, demand analysis & customer survey. It is also reliable for business ventures.

Very expensive & difficult to conduct. Reliability criteria depends on individual countries & there is no uniformity in the output.

7. Human Resource

Due to past laurels & established systems corporate can succeed even if the human resources have minimum skills &knowledge.

Multilingual, multi-strategic &multi-cultural human resources are necessary &they should be able to withstand large risks.

8.Organisational Narrowed down to work in a vision & single country with a steady Objective growth objective. Each one will understand the vision & objective very quickly.

Broadened to cover many countries & geographic & cultural diversity may influence the vision & objective.

9. Product development

Adapted to the local environment, as per the requirement of domestic customer’s affordability, beliefs, values & cultural elements .

Varies from country to country subject to the regulations of the host country. This is especially true for consumer medicinal items.

10. Legal aspects

Only local regulations are fully applicable to conduct business .there is minimum adherence to international regulation related to IPR.

International regulations &host country regulations are applicable . Advanced countries impose strict regulation compared to LDCs.

11.Investment

Depending on the size of the business one can start with a minimum investment.

All overseas operations expect exports, call for huge investments to set up & expand the business

Involvement of regulatory bodies is minimal.

in many countries. Special regulatory bodies are involved in the process since foreign currency is transacted

A majority of companies use cost plus margin pricing or competitive pricing.

Companies use marginal cost pricing or transfer pricing or transfer pricing or competitive pricing to succeed.

13. Distribution

the business house can use its discretion to select any channel to reach the customer

The Distribution channel is governed by the government or market practice. Cash & carry , shopping malls & mail order services are becoming popular in international business

14. Promotion

Advertising , personal selling & other promotional method are not restricted through strict legal frame work if they are not socially objectionable

Different countries have different restrictions . For e.g.. Advertisement for liquor & cigarettes are not permitted in some countries & campaigns using female models are banned in others

15. Logistics

Domestic players are involved in all the activities.

International players with advanced technology & system are involved

12. Pricing

Reasons for international business :- Reasons to enter in international business may differ from individual company’s prospective and the government prospective From an individual company’s :1. Geographical Expansion :- as a growth strategy all companies do their geographical expansion but even if companies expand their business at home (i.e. Domestic business) they may look overseas for new markets. Also due to liberalization, privatization and globalization almost all the countries are having open door policies to global competitors so there are every chance of many global players will enter in domestic market. So there is a possibility of losing domestic market share so they try to go global. 2. Managing product life cycle :- All companies have products that passes through different stages of their life cycles. After product reaches its decline stage the company has to look for untapped market for the managing its PLC. So it’s important for the companies to identify other countries where whole life cycle of the product can be repeated. 3. corporate ambitions :- each and every company has his own ambitions about market share, sales turnover, gross and net profit. To fulfillment of those ambitions companies look to expand their market by going global. 4. building a corporate image :- Building a corporate image is fist objectives of many companies, many companies prefer to create a image as a multinational company and for creating this image they go global. 5. Labor advantages: - availability of manpower is one of the reasons to establish their business in other countries. The labor available may be chip labor or skilled labor or

highly productive labor, according to the need of company they identify their desire countries and expand their business in that country. 6. Cost advantage: - some countries are having low manufacturing cost advantages, due to various reasons as availability of raw materials, low cost labor, cheap land, government policies such as SEZs, AEZ’s and others. 7. new business opportunities :- many companies enters in a new country after seeing new business opportunities . 8. Technological advantage: - some companies have a technological advantage as their core competencies; there is a need for such technology all over the world, exploding this they have enters in a market in other countries.

Form a government perspective: 1. Earning valuable foreign exchange: Foreign exchange is necessary to balance the payments for imports crude oil, defense equipment, essential raw material, and medical equipment, the payment for which must be made in foreign exchange. If the export is high and import is low this indicates a surplus balance of payment. On the other hand, if import is high and export is low, this indicates an adverse balance of payment, which all economies would want to avoid. A vast majority of the nations in the world are facing an adverse balance of payment. 2. Independency of Nations: From time immemorial, nations have depended on each other . Even during the era of Indus valley civiliasation , Egypt and the Indus valley dependent on each other for various items. Today, India depends on the gulf region for crude oil and in turn ,the gulf region depends on India for tea , rice and other such commodities . Developed countries depends on developing countries for value added finished products. No single country is endowed with all the resources to survive on it. 3. Trade theories and their impact: The theories of absolute advantage, comparative advantage, and competitive advantage, which have been propounded by classical economist, indicate that the few nation have certain advantages with respect to resources. The resources may be in the form of labour, infrastructure, technology and even a proactive government policy . 4. Diplomatic relations: Diplomacy and trade always go hand in hand. Many sovereign nations send their diplomatic representative to the other countries with the intent to promote trade in addition to maintaining cordial relations. Indian enbasies and high commission in all countries around the world play a catalytic role of promoting trade and investment.

5. Core competency of nations : many countries are endowed with resources , which are produced at an optimal level . such countries can compete anywhere in the world. Rubber product from Malaysia , rice from Thailand etc. Compete with a focused competency in any major resources or technology gives core competency status. 6. Investment for infrastructure : Over the years , all countries invested huge amount of money on infrastructure by building airports , seaports, economic zones and inland container terminals. If the trade activity do not increase, the country can recover the amount invested . Hence government fixes targets for every infrastructure unit,as well as a time frame to achieve it. 7. National image : A new era emerged from conquering countries by sword to winning them by trade. A businessman gives priority to the image of the countries he belongs to.We come across products with labels such as ‘’Made in India’’ etc. 8. Foreign trade policy and targets: All developing countries announce their trade policies. A clear road map is drafted and given to promotional bodies so that timely implication is possible. All the trade policies had a threefold set of objectives their agenda: production, promotion and competitiveness. 9. National targets: By the year 2010, India aims to have a 2% share of global market from the current level of 1%. By the year 2009-2010, our trade status should have cross $500billion.

Q 4. Different modes of entry Ans:1. Exports :- exports deals with the physical movement of goods and services from one place to another through a customs ports, following the rules of both the country of origin and the destination country.

2. Franchising :- Franchising is a form of licensing where in the franchisor exercise more control over the franchisee. The franchisor supplies the main part of product, and provides following services to the franchisee:

1. Trademarks 2. Operating systems

3. Product 4. Brand name Company support systems such as advertising, training employees, and quality assurance are also involved in franchising. McDonalds, Dairy Queen, Domino’s pizza and KFC are well known franchisee brands. NIIT and Aptech have appointed franchisees in Africa, southeast Asia, Gulf countries and China. 3. International Licencing: International licencing is an agreement between the licencor and the lincensee over a period of time for use of the brand name, marketing, know how, copyright, work method, and trademark by paying a license fee. For Example, The British American tobacco Company(BATS) has given license in many countries for manufacture of their brand of cigarettes “555” In India ITC is licensed producer of “555” Pepsi cola provided a license to Heinken of Netherlands giving them the exclusive rights to produce and sell Pepsi cola in Netherlands. 4. Contract manufacturing: Many companies outsource their products and concentrate mainly on marketing operations. Contract manufacturing is the strategy of identifying a manufacturing unit to produce items at a competitive price in any part of the world. Nike is procuring its athletic footware in a no of factories in south east Asia. Mega toys is sourcing from china . Hundreads of international companies with their origin in European countries have selected manufacturing centers in India. 5. Contract Marketing: Not all of the companies that are in production have equal marketing strengths. However, they may be comfortable dealing with marketing outlets around the world, such as TESCO, Macy’s, K Mart, Wal Mart, and spinneys. Such manufacturing units enter into a marketing agreement and concentrate on production on lower costs. Thermax, ION exchange, and supreme Industries have selected marketing firm in other countries that have a good background in technological support. 6. Management Contracts: Companies with lowlevel of technology and managerial expertise may seek the assistance of foreign countries. A management contract is an agreement between two companies whereby one company provides managerial & technical assistance for which proper monetary compensation is given, either as a flat lump sum fee, a percentage of sale, or a share in profits. EX. Delta airlines, Air France, and KLM offer such services in developing countries.

7. Collaboration: While a joint venture deals with the complete project in financial terms and with proportionate partnership commitments, a collaboration deals only with some of functions. For example Bajaj Auto has technological collaboration with Kawasaki of Japan, who offers the technology of two wheelers. Other well known technological collaborations are Ind-Suzuki, Kinetic-Honda and Hero- Honda. 8. Forign Direct Investment: Foreign direct investment (FDI) is the direct ownership

of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment. China, Taiwan, India, Brazil, Argentina and other developing countries have started attracting huge foreign investment. 9. Mergers and Acquisition: In this case, the company in the host country selects a foreign company and merges itself with it. The foreign country acquires control of ownership. This mode of entry provides an outstanding competitive advantage over others. Such companies strengthen their international manufacturing facilities and marketing networks. EX. Proctor & gamble entered Mexico and became a leader in five year s by acquiring Loreto. 1.It is complex task involving Banks, lawyers, Bureaucrats, and politicians. 2. The host countries may impose restrictions on acquisition. 3.The labour problem is big challenge to acquisition, especially in developing countries where unemployment is a critical issue. The global steel king L.N. Mittal was successful right from the first acquisition of steel mill in Indonasia. 10. Take Overs: This is a strategy whereby a company identifies a healthy unit with a strong brand name and network and brigs it under the management of another unit in order to become a leader in the field and guarantee success. Since they may be many parties wanting to take over a well known company, competition becomes inevitable. It is obviously one has to win and other has to withstand hostilities. Therefore process is called hostile takeover & winner is called “takeover tycoon.” Well known examples are Hindujas who took over Ashok Leyland & Unilever who took over Brook Bond & Lipton. 11. Joint Ventures: Joint ventures involve shared ownership in a subsidiary company.

A joint venture allows a firm to take an investment position in a foreign location without taking on the complete responsibility for the foreign investment. Joint

ventures can take many forms. For example, there can be two partners or more, partners can share equally or have varying stakes, partners can come from the private sector or the public, partners can be silent or active, partners can be local or international. The decisions on what to share, how much to share, with whom to share, and how long to share are all important to the success of a joint venture. Many joint ventures fail because partners have not agreed on their objectives and find it difficult to work out conflicts. Joint ventures provide an effective international entry when partners are complementary, but firms need to be thorough in their preparation for a joint venture. There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships. Ex. Hence a joint venture is nothing but “marriage “ between two partners from different background with understanding, commitment, and mutuality rewarding experience to work together. Ex. M&M merged with Renault.

12. turnkey Projects :- A turnkey projects is a contract under which company is fully involved from concept to completion. It covers every thin from supply of manpower and capital , the erection of plant to completion as well as installation and commissioning, to trial operations of projects. And then they handover the keys of projects to other company. 13. counter Trade :- Counter Trade can be classified as 1. Pure Barter – product to product 2. Buy Back – end product from host partner 3. Counter Purchase – exchange of goods in various countries