International Business Managment -introducation

INTERNATIONAL BUSINESS MANAGEMENT Definition International trade consists of transaction between residence of different countries – by Wasser man & Haltman. Thus domestic trade occurs within the political boundaries of nations whereas international trade occurs across the political boundaries of different nations. The trade is made up of transactions in goods or exchanges of goods or purchase & sale of goods between countries collectively called import & export. Why Go International? The factors which motivate or provoke firms to go international may be broadly divided into two groups, they are 1. Pull Factors 2. Push Factors Pull Factor: These are the proactive reason which forces the business to the foreign markets. In other words, companies are motivated to internationalize because of the attractiveness of the foreign market, such attractiveness includes profitability & growth prospects. Push Factor: It refers to the compulsions of domestic market like saturations of market, which prompt companies to internationalize. Most of the push factors are reactive reasons. Reasons Of International Trade 1. Profit: The main aim of any business organization is profit. When the domestic markets do not promise high rate of return, business firm search for foreign market which promises for high rate of profits. 2. Expanding the production capacities: Some of the domestic companies expanded their production capacities, more than the demand for the product in the domestic countries. These companies in such cases are forced to sell their excess production in foreign developed countries. 3. Severe Competition in the home country: The countries oriented towards market economics since 1960 had severe competition from other business firms in home countries. The weak companies which could not meet the competitions of the strong companies in the domestic country started entering the markets of the developing countries. 4. Limited home market: When the size of the home market is limited, either due to the smaller size of the population or due to lower purchasing power of the people or both. The companies internationalize their operations. 5. Political stability Vs Political instability: Political stability does not simply mean that continuation of same policies of the govt. for a quiet longer period, business firms prefer to enter the politically stable countries that are restrained from locating the business operations in politically instable countries.

6. Availability of technology & managerial competence: Availability of advanced technology & managerial competence in some countries act as a pulling factor for a business firm from the home country. The companies from developing countries are attracted by the developed countries due to these reasons. 7. High cost of transportation: When at initial stage companies enter foreign countries through marketing suffer because of domestic competition. The domestic company may enjoy high profit margin due to localized manufacturing. Hence foreign companies are also inclined for locating their manufacturing facilities in foreign itself. It may increase their profit margin due to reduction of transportation facilities. 8. Nearness to raw materials: The source of highly qualitative raw materials and bulk raw materials is a major factor for attracting the companies from various foreign countries. 9. Availability of quality human resources at less cost. The sources of highly qualitative & bulk raw materials and is a major factor for attracting the companies from various for attracting the companies from various foreign countries. Most of the US and European based companies locate their manufacturing facilities in India due to availability of high quality and low cost human resources. 10. To increase market share: Some of the large scale business firms would like to enhance their market share in the global market by expanding and intensifying their operations in various foreign countries. Companies that expand internally tend to be oligopolistic. Smaller companies expand internationally for survival while the larger companies expand to increase the market share. 11. To avoid tariffs and import quotas: It was quite common before globalization that government imposed tariffs or duty on imports to protect the domestic company. The government also fixes quotas in order to reduce the competition to the domestic companies from the competent foreign companies. To avoid high tariffs and quotas, companies prefer direct investment to go globally. Stages in Internalization. 1. Domestic Company: It limits operation , mission and vision to the national political boundaries. These companies focus its view on the domestic market opportunities domestic suppliers, domestic financial companies, domestic customers etc. It never thinks of growing globally. If it grows, beyond it present capacity the company selects the diversification strategy of entering into new domestic markets, new products, technology etc. It does not select the strategy of expansion into the international markets. 2. International Company: Some of the domestic companies which grow beyond their production / marketing capacities think of internalizing their operations. Those companies who decide to exploit the opportunity outside the domestic country. The focus of these companies is domestic but extends the wings to the foreign countries. These

companies extend the domestic product, domestic price, promotion and other business practices to the foreign markets. 3. Multinational Company: It formulates different strategies for different markets thus the MNC operate its offices, branches, subsidiaries in other country like domestic company. They formulate distinct polices and strategies suitable to that country. Thus they operate like concerned in each of their markets. 4. Global company: A global company is the one which has either global marketing strategy or a global sourcing strategy. Global company either produces in home country or in a single country and focuses on marketing these products globally or produces globally and focuses on marketing these products domestically. 5. Transnational company: It produces , markets, invests and operate, across the world. It is an integrated global enterprises which links global resources with global markets at profit. There is no pure transnational companies satisfy many of the characteristics of a global corporation. Characteristics: 1. Geocentric Orientation: This company thinks globally and act locally. This company adopts global strategy but allows value addition to the customer of a domestic country. The assets of a transnational company are distributed throughout the world. 2. Scanning or information acquisition: It collects the data and information world wide. These companies scan the environmental information regarding economic environment, political environment, social and cultural environment and technological environment. 3. Vision & Aspirations The vision & aspiration of transnational companies are global markets, global customers and grow ahead of global companies. 4. Geographic scope: The transnational companies scan the global data and information. They analyze the global opportunities regarding the availability of resources customers, market , technology, research and development etc. Similarly they also analyze the global challenge and threats like competition from the other global companies, local companies etc. They formulate global strategy. 5 Operating Style: Key operations of a transnational are globalised. The transnational companies globalize the function like R & D, Product development, placing key human resources procurement of high valued material etc. 6. Adaptation : These companies adapt their products, marketing strategies and other functional strategies to the environment factors of the market concerned. 7. HRM Policy: This company is not restricted by national political or legal constraints. It selects the best human resources and develops them regardless of nationality,

ethnic group etc. But the international company reserves the top and key positions for national. 4. Purchasing; It procures world’s class material from the best source across the globe. International Business Approaches: The EPRG frameworks identifies four types of attitudes or orientations towards internationalization that are associated with successive stages in the evolution of international operations These four orientations are: 1. Ethnocentrism: The domestic company normally formulates their strategies, their product design and their operations towards the national markets, customers and competitors. But the excessive production more than the demand for the product , either due to competition or due to changes in customer preferences push the company to export the excessive production to foreign countries. They continue the exports to the foreign countries and view the foreign market as an extension to the domestic markets just like a new region. This organization is suitable for smaller companies.

Managing Director

Mgr – R& D

Mgr- Finance

Asst Mgr- North

Mgr- Production

Asst Mgr - South

Mgr-HR

Asst Mgr - Export

2. Polycentric Approach The domestic companies which are exporting to foreign countries using the ethnocentric approach find that the foreign market need a altogether different approach. Then the company establishes a foreign subsidiary companies and decentralizes all the operation and delegates decision – making and policy making authority to its executives. Infact the company appoints executives and personnel including a chief executives who reports directly to the Managing director of the company. The executives of the subsidiary formulate the policies and strategies design the product based on the host country’s environment and the customer preferences.

Managing Director CEO Foreign Subsidiary

Mgr – R& D

Mgr- Finance

Mgr- Production

Mgr-HR

3. Regio-centric Approach: The company offer operating successfully in a foreign country thinks of exporting to the neighboring countries of the host countries. At this stage the foreign subsidiary considers the regional environment for formulating policies and strategies. However it markets more or less the same product designed under polycentric approach in other countries of the region, but with different market strategies. Managing Director

CEO Foreign Subsidiary

Mkg Lesotho

Mgr – R& D

Mgr- Finance

Mkg Kenya

Mgr- Production

Mkg – Nambia

Mgr-HR

4.Genocentric Approach : Under this approach the entire world is just like a single country for the company. They select the employees from the entire globe and operate with a number of subsidiaries. The head quarters co-ordinate the activities of the subsidiaries. Each subsidiaries function like an independent and autonomous

company in formulating policies , strategies , product design , human resources policies, operation etc.

Managing Director – Headquarters

Subsidiary – India

Subsidiary -Nambia

Subsidiary – Kenya

Subsidiary -Lesotho

Advantages: 1. High Living Standard : Comparative cost theory indicates that the countries which have the advantages of raw materials human resources and climatic conditions in producing particular goods can produce the products at low cost and also of high quality. Customer in various countries can buy more products with the same money. In turn it can also enhance the living standard of the people through enhanced purchasing power and by consulting high quality. 2. Increased socio- Economic Welfare International business enhances consumption level and economic welfare of the people of the trading countries. 3. Wider market International business widens the market and increases the market size. Therefore the companies need not depend on the demand for the product in a single country or customer’s tastes and preferences of a single country. 4. Reduced effects of business cycles: The stages of business cycle vary from country to country. Therefore the companies shift from the country experiencing a recession to the country experiencing a boom conditions. Thus international business firms can escape from the recessionary conditions. 5. Reduced risks: Both commercial and political risks are reduced for the companies engaged in international business due to spread in different countries. Multinationals which were operating in erstwhile USSR were affected only partly due to their safer operations in other countries. 6. Larger –scale economics Multinational companies due to the wider and larger markets produce larger quantities. Invariably it provides the benefits of large-scale economics like reduced cost of production availability of expertise quality etc. 7. Potential – Untapped Markets: International business provides the chance of exploring and exploiting the potential markets which are untapped. These markets provide the opportunity of selling the product at higher price than in domestic markets. 8. Provides the opportunity & challenges to domestic business:

International business firms provide the opportunities to the domestic companies. These opportunities include technology, management expertise, market intelligence, product developments etc. 9. Division of labour and specialization International business of labour, enhancement of productivity posing challenges development to meet them innovation and creations to meet the competition lead to overall economic growth of the world nations. 10. Optimum & proper utilization world resources: International business provides for flow of raw materials from the countries where they are in excess supply to those countries which are in short or need most. 11. Cultural Transformation: International business benefits are not purely economical or commercial they are even social and cultural. 12. Knitting the world into a closely interactive traditional village. International business ultimately knits the global economics, societies and countries into a closely interactive and traditional village where one is for all and all are for one. Problems in International Business: 1. Political Factors: Political instability is the major factor that discourages the spread of international business. 2. Huge Foreign Indebtness; The developing countries with less purchasing power are lured into debt trap due to the operations of MNCs in these countries. 3. Exchange Instability: Currencies of countries are depreciated due to imbalances in the balance of payment political instability and foreign indebt ness. This in turn leads to instability in the exchange rates of domestic currencies in terms of foreign currencies. 4.Entry requirements: Domestic governments impose entry requirements to multinationals. Eg, Joint venture , % of FDI, tariff , quota, trade barriers etc 5.Corruption. Corruption has become an international phenomenon. The higher rate bribes and kickbacks discourage the foreign investor to expand their operations. 6.Bureaucratic practices of government: Bureaucratic attitudes and practices of government delay sanctions, granting permission and licenses to foreign companies. 7.Technology pirating : Copying the original technology producing imitative products other areas of business operations were common in Japan during 1950s and 1960s in Korea, India etc This practices invariably alarms the foreign companies against expansion. 8.High Cost :

Internationalizing the domestic business involves market survey product improvement quality up gradation. Managerial efficiency and the like. These activities need larger investment and involve higher cost and risk. Hence most of the business houses refrain themselves from internalizing their business. National gains from International Trade: 1. Availability of variety of goods: Often it is either impossible or not economically feasible to produce certain goods within a country even though the demand for them may be great. Importation results in availability at a lower cost which in turn present the possibility of more widespread consumption. 2. Enhances the standard of living: It provides new consumption experiences plus the possibility of buying products that more closely meet the requirements of varying life style. International track opens the world market to producers of these goods thereby allowing more efficient and profited production with only local sales. 3. To get non available natural resources; The significance of imports is obvious where the country lacks a strong resources base but similar conditions exist even in more endowed nations. The production of many items in India for example depends on the importation of critical raw material and energy supplies. 4. Quantity goods available will increases; A nation by concentrating production on the items having the greatest comparative advantage and trade a portion of this output for goods that have comparative disadvantages at home. The importation of goods that are produced more efficiently abroad results in a greater variety and quantity of goods on the local market than if resources were applied to the production of where applied to the production of goods where the country does not have a comparative advantage. 5. Wider market availability lead for low cost production. The international trade led to the expansion of plant size. If such expansion in trade leads to scale economics there is a good possibility that the benefits of lower cost will be available to either or both the domestic and foreign consumers. The presence and the degree of domestic competition will be available to either or both the domestic and foreign consumers. The presence and the degree of domestic competition will determine whether and how much of the savings will be passed on to consumer. This lower cost may further broaden the domestic market and make luxury products available to lower income segments. 6. Transfer of technology; Even when the foreign market is serviced by producing abroad there are advantages for domestic consumers and producers. Since both from the transfer of products and technology among countries. 7. Provides the means of exports: While imports sometimes are viewed as competing with domestic products it must be recognized that imports of goods services and capital are necessary

to provide foreigners with the means of payments for domestically produced exports without imports a country merely sends away it resources and products without receiving usual products in return. Salient features of international Trade: 1. Heterogeneous market 2. Different national groups 3. Different political unit 4. Different national policies 5. Government intervention 6. Different currencies 7. Immobility of factor. INTERNATIONAL TRADE THEORY As the international trade differs from internal trade a separate theory for it was formed. According to Kindle Berger, International trade is treated as a distinct subject because of tradition, because of urgent & important problems presented by international economic questions in the real world because it follows different laws from domestic trade & because it studies, illuminates & enriches our understanding of economics as a whole. The following are the reasons for a separate theory of international trade: 1. Perfect mobility of the factors of production with in the country. 2. Different currencies 3. Differences in natural resources 4. Different national policies 5. Exchange & trade control 6. Separate markets 7. Problem of balance of payment 8. Different political group TYPES OF TRADE THEORIES: I Classical Approach: The classical theory of international trade is an application of the principle of division of labour. This theory as the theory of comparative cost. Acc to this theory, international trade occurs because of geographical specialization in the production of different goods which can be seen through the differences in the comparative cost of production of two Nations. 1. Absolute cost theory: Adam Smith was the first economist who sowed the seeds of the classical theory of international trade. He was a staunch advocate of free trade & critic of protectionism & he over emphasized the importance of division of labour. He believed that the basis of international trade is cost advantage. Acc to this theory the trade between two countries would be mutually beneficial if one country could produce one commodity at a absolute advantage (over the other country) & the other country would in turn produce another commodity at a absolute advantage over the first. He believes that the free international trade increase division of

labour & economic efficiency & consequently economic welfare. In short Acc to Smith’s theory three kinds of gains accrue to the country from international trade. a. productivity gain b. Absolute cost gain c. Vent for surplus gain Criticism: Acc to this theory every country should be able to produce certain products at low cost, compared to other countries. It should produce certain other products at comparatively high price than other countries. But there are very genuine chances that a particular country may not be in a position to specialize in any line of productivity due to technical backwardness. Adam Smith was unable to solve this. 2. Comparative Cost theory: It was formulated by English Economist David Ricardo in his principles of political economy. It is quiet common that some countries have the advantage of producing some goods at a lower cost compared to other countries. This is due to the availability of cheap labour, skilled labour, cheap & quality raw material, advanced technology, competent management practices etc. Availability of these factors enhances productivity & thereby reduces the cost of production per unit. Similarly other countries have this advantage in producing other goods. Acc to this theory the countries in long run will tend to specialize in the business of those goods. This specialization will help for mutual advantage of the countries participating in international business. Assumption of the theory: 1. Labour is the only element of cost of production 2. Goods are exchanged against one another according to the relative amounts of labour embedded in them. 3. Labour is perfectly mobile within the country but perfectly immobile between countries. 4. Labour is homogenous 5. Production is subject to the law of constant return 6. International trade is free from all barriers 7. There is no transport cost 8. There is full employment 9. There is a perfect competition 10. There are only two countries & two commodities Ricardo’s theory: He stated a theorem that other things being equal a country tends to specialize in & export those commodities in the production of which it has maximum comparative cost advantages or minimum comparative disadvantages. Similarly the country’s imports will be of goods having relatively less comparative cost advantages or greater disadvantages. Criticisms: 1. Theory based on labour value. Labour is certainly not the only element of cost. Further in the real world the exchange ratio between commodities need not necessarily reflect the respective cost ratio. The demand and supply

conditions play a very important role in the determination of the price at which commodities are exchanged. 2. In a money economy it is not proper to express the cost of production in real terms. Differences in wages may alter the price ratios from the ratios of labour units expended particularly between countries. 3. There is rarely perfect mobility of labour from one branch of production to another. Inter- regional mobility of labour is not completely perfect within a country. It is also wrong to assume that labour is immobile between countries. Further it is highly unrealistic to assume that labour is homogenous there are in fact many different qualitative types of labour. 4. Ricardo tacitly assumed constant costs. But constant cost is a rare case. Cost may rise or fall as production increases. 5. The assumption of full employment and perfect competition, characteristics of classical economic theories are also obviously wrong. 6. Similarly it is highly unrealistic to assume that international trade is free and does not involve cost of transport. 7. By taking a two – country, two commodity model Ricardo has over simplified the situation. 8. As graham has pointed out, even if we assume that all the assumptions are true. It will not lead to complete specialization if one of the two countries is small and the other big. The small country may be able to specialize fully, but the big country cannot. Since it cannot sell its entire surplus in the small country and cannot the quantity get from the small country the quantity of goods which it can produce though at a comparatively higher cost. 9. Though the Ricardian theory maintains that comparative differences in labour costs from the basis of international trade. It does not explain what underlies such differences in relative costs of production. 3. Opportunity cost theory: One of the main drawbacks of the Ricardian comparative cost theory was that it was based on the labour theory of value which stated that the value or price of a commodity was equal to the amount of labour time going into the production of the commodity. Gottfried Habler gave a mew life to the comparative cost theory by restating the theory in terms of opportunity costs in 1933. The opportunity cost of a commodity is the amount of a second commodity that must be given up in order to release just enough factors of production or resources to be able to produce one additional unit of the first commodity. This approach specifies the cost in terms of the value of the alternatives which have to be foregone in order to fulfill a specific act. Thus this theory provides the basis for international business in terms of exporting a particular product rather than other products. This theory also provides the basis for international business of exporting a product to a particular country rather to another country. It should be noted that as production takes place, under conditions of increasing cost, neither country will be entirely specialized but at the point of which trade settles, there is no gain from additional trade and specialization. The superiority of Haberler’s approach is that it

recognizes the existence of many different kinds of productive factors where as Ricardo considered only labour. Modern Theories: 1. Factor Endowment theory: The factor endowment theory was developed by Swedish economist. Eli Heckscher and his student Bertill ohlin. Paul Samulelson and wolggang stopler have also made significant contribution to this theory. The factor endowment theory consist of two important theorems namely, the Heckscher –ohlin theorem and the factor price equalization theorem. The Heckschler ohlin theorem examines the reasons for comparative cost differences in productions and states that a country has comparative cost differences in the production of that commodity which uses more intensively the country’s more abundant factor. The factor price equalization theorem examines the effect of international trade on factor prices and states that free international trade equalizes factor prices between countries relatively and absolutely and thus serves as a substitute for international factor mobility. 2. Heckscher –ohlin theorem: Ohiln theory begin where the Ricardian theory of international trade ends. The Ricardian theorem states that the basis of international states that the basis of international trade is the comparative costs differences. But he didn’t costs differences arises ohlin theory explain the real cause of this differences. Ohlin did not invalidate the classical theory but accepted the comparative advantages as the cause of international trade and then tried to examine and analyse it further in a moral and logical manner. Thus ohlin theory supplement but does not support the Ricardian theory. Ohlin states that trade results on account of the different relative price of different goods in different countries. The result of relative costs and factor price differences in different countries. Different in factor prices are due to differences in factor endowments in different countries. Assumptions: 1. Perfect competition is in existence for both product and factor in both the countries. 2. Factor of production are perfectly mobile within each country only. 3. Factors supplies are fixed in each quality in both the countries. 4. Factors of production have full employment in both the countries. 5. Factor endowment varies from one country to another country. 6. Business between two countries is free from all barriers. 7. There is no cost of transportation. 8. Production in both the countries is subject to law of returns. 9. Factor intensity varies between goods. Merits: 1. The heckscher –ohlin theory rightly points out that the immediate basis of international trade is the difference between in the final price of a commodity between countries although the actual basis or ultimate cause of trade is comparative cost difference in production. Thus the Heckscher ohlin theory

2. 3. 4.

5.

provides a more comprehensive and satisfactory explanation for the existence of international trade. The theory is superior to the comparative cost theory in another respect. The Ricardian differences is the basis of international trade, but it does not explain the reasons for the existence of comparative cost differences between nations Ohlin states that regions and nations trade with each other for the same reasons that individuals specialize and trade. The comparative cost differences cost –inter regional as well as international. Nations according to ohlin are only region disguised from one another by such obvious marks as national frontiers, tariff barriers and differences in long wage, customs and monetary systems. Another merit of the Heckscher the impact of trade of trade on product and factor prices.

Factor price Equalization theorem: Having explained the meaning of comparative price advantages as the basis of international trade, Ohlin precedes to analysis the effects of international equilibrium system. The factor price equalization theorem states that free international trade equalizes factor prices between countries relatively and absolutely and this serves as a substitute for international factor mobility. According to ohlin thus trade takes place when relative prices of goods differ between countries and continues until these relative commodity prices in all regions. The commodity price equalization tendency is inherent because the opening of free trade between two countries tends to eliminate the pre-trade differences in the comparative cost. As the volume of the trade increases comparative cost difference between the two countries diminishes so that differences in relative prices become small. Assumptions: 1. There are quantitative differences of factors in different region 2. Production functions of different products are different requiring different proportion of different factors in producing different goods. 3. There is perfect competition in the commodity markets as well as the factor market in all regions. 4. There is no restriction on trade that is free trade policy is followed by all the countries. 5. The consumer preferences as well as demand patterns and positions are unchanged. 6. There are stable economic and physical policies in the participating nations. 7. The transport cost element is ignored. 8. Technological; progress in different region is identical. 9. There are constant returns to scales in each region. 10. There is perfect mobility of factor Draw backs Ohlins Theory: 1. Over simplification: Some critics hold that the factor proportion theory of Ohlin is unrealistic because it is based on over simplified

assumption like those of the classical doctrine. He simplified the model only in order to find out the minimum differences between countries which would be sufficient to initiate trade. It asserts that the ultimate base of international trade is the differences in proportion between qualitatively identical factors in the two regions. 2. Partial equilibrium and not general equilibrium analysis: According to him though the location theory of Ohlin is less abstract and operates closer to reality it has failed to develop a comprehensive general equilibrium concept. It is by and large a partial equilibrium analysis. 3. One sided theory: Ohlin assumes that relative factor prices would reflect exactly relative factor endowments. This means that in the determination of factor price, supply is more significant than demand. But if demand forces are more important in determining factor prices. Probably the capital abundant country will be exporting the labour intensive good. III Complementary Trade Theories 1. Intra industry trade: One important pattern of international trade left unexplained by the H.O. theory is the intra industry trade or the trade in the differentiated products i.e., products which are similar but not identical. A large proportion of such trade takes place between the industrialized countries. There are two reasons for this (i) the producers cater to majority taste within each country leaving the minority taste to be satisfied by imports. Over a period of time sometime consumer taste and preferences and demand pattern may change and a minor market segment may become a large segment. Through marketing strategies a company could succeed in many cases in expanding a minor segment of the market into a large segment. (ii)Another reason is the failure to recognize the in-adequacy of the lumping factors of production into just capital, land and couple of types of labour. 2. Economics of scale: The H.O. model is based on assumption of constant return to scale. However with increase in returns to scale i.e., when economics of scale exceeds in production, mutually beneficial trade can take place even when the two nations are identical in every respect. Since production is subject to increasing returns to scale, it is possible to reduce cost of production, if one country specialized in production of wheat and other rice. 3. Productivity theory: Mr H. Myint proposed productivity theory and the vent for surplus theory. This theory points towards indirect and direct benefits. This emphasis that the process of specialization involves adapting and reshaping the production structure of a trading country to meet the export demands countries increases productivity in order to utilizes the

gains of exports. This theory encourages the developing countries to go for each crops increases productivity by enhancing the efficiency of human resources adapting latest technology etc. 4. Vent for Surplus Theory: International trade absorbs the output of unemployed factors. If the countries produce more than the domestic requirements they have to export the surplus to other countries otherwise a part of the productive labour of the country must cease and the value of its annual produce diminishes. Thus in the absence of foreign trade they would be surplus productive capacity in the country is taken by another country and in turn gives the benefit under international trade. 5. Mill theory of reciprocal demand: Comparative cost advantage theories do not explain the ratio at which commodities are exchanged for one another. Mr J.S Mill introduced the concept of “Reciprocal Demand ” to explain the determination term of trade. Reciprocal demand indicates country demand for one commodity in terms of the other commodity ,it is prepared to give up in exchanges reciprocal demand determine the terms of trade and relative share of each country. Equilibrium = Quantity of a product exported by country A Quantity of another product exported by country B 6. Different Tastes: It has also been shown that even of all countries were identical in their production abilities and had identical production possibility curves there would be a basis for trade as long as tastes differ. Thus even if production capabilities remain same for two difer mutually beneficial international trade could take place. 7. Technology Gap model : According to the technological gap model propounded by posner , a great deal of trade among the industrialized of new products and new production processes. In order words , technological innovation forms the basis of trade. The innovation firm and nation get a monopoly through patents and copyrights or other factors which turn other nations into imports of these products as long as the monopoly remains. However as foreign producers’s acquire this technology they may become more competitive than the innovator because of certain favourable innovating country may turn into an importer of the very product it had introduced. Firms in the advanced countries however strive to stay ahead through frequent innovation which make the earlier products obsolete. 8. Product life cycle Model; It is developed by Vernon represents a generalization model. According to this model an innovative product is then exported to other developed countries. As the market in these developed countries enlarge production facilities are established there. These subsidiaries in

addition to catering to the domestic markets export to the developing countries and to the united states. 9. Availability & Non availability: The availability approach to the theory of international trade seeks to explain the pattern of trade in terms of domestic availability and non availability of goods. Availability influences trade through both demand and supply forces. In a nutshell the availability approach states that a nation would tend to import those commodities which are not readily available domestically and export those whose domestic supply can be easily expand beyond the quantity needed to satisfy the domestic demand. There are 4 basis of the availability factor namely; 1. Natural resources 2. Technological progress 3. Product differentiation 4. Government policy FORMS OF BUSINESS / ENTRY Companies desiring to enter the foreign markets face the dilemma while deciding the method of entry into a given overseas locations companies can reduce the dilemma by analyzing the decision factors. Descision Factors; After deciding to go to foreign market the companies have to decide the mode of entry. This dilemma can be solved to some extent by considering the following factors. 1. Ownership Advantages ; Those benefits designed by a company by owing resources. Those benefits provide competitive advantages to the company over its competitors. 2. Location Advantages Certain locational factors grant benefit to the company. When the manufacturer facilities are located in the host country rather than in the home country. These locational factors include; 1.Customer needs, preferences and tastes. 2. Logistic requirements 3. Cheap land acquisition cost 4. Cheap labour 5. Political stability 6. Low cost raw matrials 7. Climatic conditions. 3. Internationalisation Advantages : Internationalisation advantages are those benefits that a company gets by manufacturing goods or rendering services in the host country by itself rather than contract arrangements with the companies in the host country. Sometimes the cost of negotiating , monitoring and enforcing an agreement with the host country’s company would be difficult and costly. In such cases the the company enters the international markets through direct investment. Otherwise if the company thinks that the transaction

cost are low and the produce efficiently without jeoparadising the interest the company can enter the foreign market through contract manufacturing , franchising or licensing. Thus different firms select different modes based on the nature of the industry , company ‘s abilities and the conditions in the host country. Modes Of Entry: 1. Exporting a. Indirect exports b. Direct exports c. Intra-corporate transfers 2. Licensing 3. Franchising 4. Contract Manufacturing 5. Management Contract 6. Turnkey Project 7. Green field strategy 8. Mergers & Acquisitions 9. Joint ventures Exporting : It means the sale abroad of an item produced ,stored or processed in the supplying firm’s home country. It is a convenient method to increase the sales. Passive exporting occurs when a firm receives canvassed them. Active exporting conversely results from a strategic decision to establish proper systems for organizing the export fuctions and for procuring foreign sales. Advantages Of Exporting: 1. Need for limited finance; If the company selects a company in the host country to distribute the company can enter international market with no or less financial resources but this amount would be quite less compared to that would be necessary under other modes. 2. Less Risks; Exporting involves less risk as the company understand the culture , customer and the market of the host country gradually. Later after understanding the host country the company can enter on a full scale. 3. Motivation for exporting: Motivation for exporting are proactive and reactive. Proactive motivations are opportunities available in the host country. Reactive motivators are those efforts taken by the company to export the product to a foreign country due to the decline in demand for its product in the home country. • Licensing : In this mode of entry ,the domestic manufacturer leases the right to use its intellectual property (ie) technology , copy rights ,brand name etc to a manufacturer in a foreign country for a fee. Here the manufacturer in the

domestic country is called licensor and the manufacturer in the foreign is called licensee. The cost of entering market through this mode is less costly. The domestic company can choose any international location and enjoy the advantages without incurring any obligations and responsibilities of ownership ,managerial ,investment etc. Advantages; 1. Low investment on the part of licensor. 2. Low financial risk to the licensor 3. Licensor can investigate the foreign market without much efforts on his part. 4. Licensee gets the benefits with less investment on research and development 5. Licensee escapes himself from the risk of product failure. Disadvantages: 1. It reduces market opportunities for both 2. Both parties have to maintain the product quality and promote the product . Therefore one party can affect the other through their improper acts. 3. Chance for misunderstanding between the parties. 4. Chance for leakages of the trade secrets of the licensor. 5. Licensee may develop his reputation 6. Licensee may sell the product outside the agreed territory and after the expiry of the contract. Franchising Under franchising an independent organization called the franchisee operates the business under the name of another company called the franchisor under this agreement the franchisee pays a fee to the franchisor. The franchisor provides the following services to the franchisee. 1. Trade marks 2. Operating System 3. Product reoutation 4. Continuous support system like advertising , employee training , reservation services quality assurances program etc. Advantages: 1. Low investment and low risk 2. Franchisor can get the information regarding the market culture, customs and environment of the host country. 3. Franchisor learns more from the experience of the franchisees. 4. Franchisee get the benefits of R& D with low cost. 5. Franchisee escapes from the risk of product failure. Disadvantages : 1. It may be more complicating than domestic franchising. 2. It is difficult to control the international franchisee. 3. It reduce the market opportunities for both

4. Both the parties have the responsibilities to maintain product quality and product promotion. 5. There is a problem of leakage of trade secrets. Contract Manufacturing: Some companies outsource their part of or entire production and concentrate on marketing operations. This practice is called the contract manufacturing or outsourcing. Advantages: 1. It can focus on the part of the value chain where it has distinctive competence. 2. It reduces the cost of production as the host country’s companies with their relative cost advantages produce their relative cost advantages produce at low cost. 3. Small and medium industrial units in the host country can also develop as most of the production activities take in these units. 4. The international company gets the locational advantages generated by the host country’s production. Disadvantages: 1. Host countries may take up the marketing also, hindering the interest of the international company. 2. Host country’s companies may not strictly adhere to the production design quality standard etc. These factors results in quality problems design problem and others. 3. The poor working countries in the host country’s companies affect the company’s image. Management Contract: The companies with low level technology and managerial expertise may seek the assistance of a foreign company. Then the foreign company may agree to provide technical assistance and managerial expertise. This agreement between these two companies is called the management contract. A Management contract is an agreement between two companies where by one company provides managerial assistance ,technical expertise and specialized services to the second company for a certain agreed period in return for monetary compensation like a flat fee , % over sales , Performance bonus based on profitability ,sales growth ,production or quality measures. Advantages: 1. Foreign company earns additional income without any additional investment ,risk and obligations. 2. This arrangement and additional income allows the company to enhance its image among the investors and mobilize the funds for expansion. 3. It helps the companies to enter other business areas in the host country.

4. The companies can act as dealer for the business of the host country’s business in the home country. Disadvantages: 1. Sometimes the companies allow the companies in the host country even to use their trade marks and brand name . The host country’s companies spoil the brand name if they do not keep up the quality of product services. 2. The host country companies may leak the secrets of technology. Turnkey Project: A turnkey project is a contract under which a firm agrees to fully design , construct and equip a manufacturing/ business/services facility and turn the project over to the purchase when it is ready for operation for a remuneration like a fixed price , payment on cost plus basis. This form of pricing allows the company to shift the risk of inflation enhanced costs to the purchaser. Eg nuclear power plants , airports,oil refinery , national highways , railway line etc. Hence they are multiyear project. Greenfield strategy : It is staring of a company from scratch in a foreign market survey selects the location, buys or lease land creates the new facilities, erects the machinery, remits or transfers the human resources and starts the operations and marketing activities. Advantages: 1. The company selects the best location from all view points. 2. The company can avail the latest models of the building ,machinery and equipment technology. 3. The company can also have it own policies and styles of human resources management. 4. it can avoid the cultural shock. Disadvantages: 1. The longer gestation period as the successful implementation takes time and patience. 2. Some companies may not get the land in the location of its choice. 3. The company has to follow the rules and regulation imposed by the host country’s government. 4. It has obligate host government conditions. Mergers & Acquistions: A domestic company selects a foreign company and merger itself with foreign company in order to enter international business. Alternatively the domestic company may purchase the foreign company and acquires it ownership and control. It provides immediate access to international manufacturing facilities and marketing network.

Advantages: 1. The company immediately gets the ownership and control over the acquired firm’s factories, employee, technology ,brand name and distribution networks. 2. The company can formulate international strategy and generate more revenues. 3. If the industry already reached the stage of optimum capacity level or overcapacity level in the host country. This strategy helps the host country. Disadvantages: 1. Acquiring a firm in a foreign country is a complex task involving bankers, lawyers regulation, mergers and acquisition specialists from the two countries. 2. This strategy adds no capacity to the industry. 3. Sometimes host countries imposed restrictions on acquisition of local companies by the foreign companies. 4. Labour problem of the host country’s companies are also transferred to the acquired company. Joint Venture Two or more firm join together to create a new business entity that is legally separate and distinct from its parents. It involves shared ownership. Various environmental factors like social , technological economic and political encourage the formation of joint ventures. It provides strength in terms of required capital. Latest technology required human talent etc. and enable the companies to share the risk in the foreign markets. This act improves the local image in the host country and also satisfies the governmental joint venture. Advantages: 1. Joint venture provide large capital funds suitable for major projects. 2. It spread the risk between or among partners. 3. It provide skills like technical skills, technology, human skills , expertise , marketing skills. 4. It make large projects and turn key projects feasible and possible. 5. It synergy due to combined efforts of varied parties. Disadvantages: 1. Conflict may arise 2. Partner delay the decision making once the dispute arises. Then the operations become unresponsive and inefficient. 3. Life cycle of a joint venture is hindered by many causes of collapse. 4. Scope for collapse of a joint venture is more due to entry of competitors changes in the partners strength. 5. The decision making is slowed down in joint ventures due to the involvement of a number of parties.

Foreign Direct investment: FDI refers to investment in a foreign country where the investor retains control over the investment. It typically takes the form of starting a subsidiary acquiring a stake in an existing firm or starting a joint venture in the foreign country. Direct investment and management of the firms concerned normally go together. FDI are governed by long term consideration because these investments cannot be easily liquidated. Hence factors like economic prospects, long term political stability , government policy ,industrial etc. influences the FDI decisions. Reasons / Motives For direct foreign investment: 1. High transport costs associated with exporting. 2. Problems with licenses and the need to protect intellectual property. 3. Availability of investment grants from foreign governments. 4. Lower operating costs. 5. Faster access to the local market. 6. Under capacity at home. 7. A desire to protect supplies of new materials and components in particular countries. 8. Local content requirements 9. Especially favourable economic conditions in particular countries. 10. Wanting to spread the risk of downturns in particular markets. 11. Acquisition of know – how and technical skills only available locally. 12. Desires to minimize worldwide tax burdens. 13. The need to engage in local assembly or part – manufacture. 14. The increase in world trade and the opening up of new markets that have occurred in recent decades. 15. The development of new technologies that can be transplanted between countries. 16. Liberalisation of the economies of nations throughout the globe including removal of exchange controls and controls on the repatriation of profits. 17. Establishments of common markets and other regional blocs with common external tariffs. Techniques Of FDI; The strategies for DFI may be product driven, market driven or technology driven. Product driven strategies arise when a firm’s welfare depends critically on the properties capabilities or composition of a specific product eg oil companies , Pharma etc. Market – driven strategies relate to the quest for new markets served by foreign – owned local manufacturing plants and distributing systems. This type of DFI typically arises when a firms existing markets cannot absorb its potential outputs. Technology driven strategies are found among enterprises that reply on the application of state of the art technologies for their competitive

advantages such firms invest inorder to undercut the prices of foreign local competition or to introduce completely new products to foreign markets. 1. Acquisitions & Mergers: A mergers is a voluntary and permanent combination of business whereby one or more firms integrate their operations and identities with those of another and henceforth work under a common name and in the interests of the newly formed amalgamations. Motives for acquisitions: 1. Removal of competitor 2. Reduction of the Co failure through spreading risk over a wider range of activities. 3. The desire to acquire business already trading in certain markets & possessing certain specialist employees & equipments. 4. Obtaining patents, license & intellectual property. 5. Economies of scale possibly made through more extensive operations. 6. Acquisition of land, building & other fixed asset that can be profitably sold off. 7. The ability to control supplies of raw materials. 8. Expert use of resources. 9. Tax consideration. 10. Desire to become involved with new technologies & management method particularly in high risk industries. 2.Divestment: This involves the sale of closure of operating units in order to rationalize activities, concentrate resources in particular areas or down size the organization. Reasons: 1. Financial losses attributable to specific operations. 2. The decision to focus all the firms attention on its core business at the expense of peripheral activities. 3. The need to raise large amount of cash at a short notice. 4. Govt’s insistence that a firm may be broken up in order not to contravene state monopoly legislation. 5. Predicted technological changes that will cause product to become out dated. 6. Collapse of a market. 7. Failure of a merger or acquisition. 8. A subsidiary absorbing most of the firm’s resources than of the management is willing to provide. 3. New startups: An entirely new business can be set up to satisfy precisely the owner’s specific needs & all the problems & pit falls of mergers & acquisitions are avoided.

Selection of a location for a fresh startup is a major strategic decision. Factor relevant to this include: 1. Finance: Availability of long term funds, govt grants, subsidiaries & tax relieves in various regions. 2. Labour: Amount of skilled labour in the area, local wage level, training facilities etc. 3. Ancillary services: Extent of local service industries, consultant, distributions etc. 4. Operational factors: Assess to raw material, adequacy of energy supplies, water, road & rail network etc. Once the location decision has been taken the firm committees itself to major capital expenditure. The establishment cannot be relocated in the short term. 4. Joint ventures: A large amount of the recent foreign investment in most countries is associated with joint venturing with local entrepreneur. Major types of joint ventures: 1. Joint venture by adoption ie acquisition of a part of the equity in a small entrepreneur company. 2. By rebirth which occur when a foreign partner transfer technology to an alien domestic business & takes an equity stack in a rejuvenated business. 3. By procreation in which a truly new venture is born out of a marriage between the technical & market know how of the partners. 4. Joint venture through family ties which occur when suppliers join together with each other or when a manufacturer takes in a equity portion in a supplier business. Theories of international investment: 1. Theory of capital movements: The earliest economist who assumed in classical theories considered foreign investment as a form of factor movement to take advantage of differential profit. The validity of this theory is clear from the observations of noted economist, Clarles Kindle berger that under perfect competition, foreign direct investment would not occur, & that would be unlikely to occur in the world where the conditions where even approximately competitive. 2.Market imperfection theory: One of the important market imperfection approaches to the explanation of foreign investment is the monopolistic advantage theory. Acc to this theory FDI occurred largely in oligopolistic industries rather than in industries operating under perfect competition. Hymer suggested that the decision of a firm to invest in foreign market was based on certain advantages the firm possessed over the local firms such as economies of scale, superior technology or skills in the field of management, production, marketing & finance.

3.Internationalization theory: It is an extention of market imperfection theory, the foreign investment results from the decision of a firm to internationalize a superior knowledge. For eg, if a firm decides to externalize its knowhow by licensing a foreign firm, the firm does not make any foreign investment in this respect. But on the other hand if the firm decides to internationalise it may invest abroad in production facilities. 4.Appropriatability theory: Acc to this theory the firm should be able to appropriate the benefits resulting from a technology it has generated. If this condition is not satisfied the firm would not be able to bear the cost of technology generation & therefore would have no incentive for research & development. MNCs tend to specialize in developing new technology which are transmitted efficiently through inter channels. 5.Location specific advantage theory: It suggests that foreign investment is pulled by certain location specific advantages. There are 4 factors which are pertinent to the location specific theory are a. labour cost b. marketing factors c. trade barriers d. Govt policy.however there are also other factors like cultural factors which influence foreign investment. 6.International product life cycle theory: It is developed by Raymond Vernon & Lewis T.Wells. Acc to this theory, the production of the product shifts to the different categories of countries through different stages of product life cycle. 7.Electric theory: John Dunning has attempted to formulate a general theory of international production by combining the postulates of some of the other theories. Acc to this foreign investment by MNCs results from three comparative advantages which they enjoy. a. Firm’s specific advantages. b. Internationalization advantages. c. Location specific advantages. Firm specific advantages result from tangible & intangible resources held exclusively atleast temporarily by a firm which provide the firm a comparative advantage over other firms. Export Procedure: It has been dealt with references to various phases of export . The phases are: 1. Offer and receipt of confirmed orders: 2. Production & clearance of the products for exports 3. Shipment 4. Negotiation of document and realization of export proceeds and 5. Obtaining various export incentives.

I Offer and receipt of confirmed orders: The offer made by the exporter is usually in the form of a “ Proforma invoice ” . Technically this a just a document indicating the exporter’s intention to sell , and is usually addressed to the prospective buyer. It should include the following ; a) Consignee or the buyer - The complete name and address of the buyer should be clearly indicated. b) Description Of Goods – It should carry a brief description of the goods, indicating important technical specification and physical features. c) Price – Invoice should indicate the unit and total prices of the product in internationally accepted or mutually agreed currency. d) Condition of sale – The proforma invoice submitted entails legal obligations on the part of the exporter to supply the product to the buyer in the event of the invoice being accepted by him. The proforma invoice and confirmed order are very important and basic documents in the execution of an exporter order. II Production : The next phase in the processing of an export order is to make arrangements for the items to be produced at the factory of the exporter or be obtained from a supplier. All the operations from of the time an indent for production is placed , till it reaches the export warehouse are normally covered by this phase. An exporter who is a department of a manufacturing concern , an internal indent is raised on the producing division , which indicates the quantity , the complete specifications of the item to be produced as well as the delivery dates by which the goods should be ready at the factory / warehouse of the exporter. III Shipment : It covers all procedural aspects from the time the product meant for export leaves the export warehouse , till it is loaded on board the ship and the relevant documents for such loading are collected from the shipping company. Since the type of work involved is somewhat specialized it is usually performed by the exporter’s clearing and forwarding agents. They are specialized personnel who arrange for the completion of all formalities connected with the shipment of goods. IV Banking Procedure: Once the goods have been physically loaded on the board the ship the exporter should arrange to obtain his payment for the export made, by submitting relevant documents. The submission of the relevant set of documents to the bank and the process of obtaining payment consequently is called “ negotiating the documents” through the bank. A complete set of documents normally submitted for the purpose of negotiation is called a negotiable set of documents. V Export Incentives: The pre-shipment and post shipment procedures adopted so far would enable the exporter to claim the various incentives like Duty Drawback , Excise Duty Refund etc he is entitled to.

Export – Import Documents : 1. Proforma Invoice : It is prepared by an exporter and sent to the importer for necessary acceptance. When the buyer is ready to purchase goods, he will request for a proforma invoice a document which gives an idea to a buyer that if he places the order and goods are supplied to him what will be the invoice. 2. Invoice : An invoice is a fundamental and basic document. It contains the name of the exporter, importer, consignee, and description of goods. It contains the name of the exporter, importer, consignee and description of goods. It is required to be signed by an exporter or his agent. This invoice is normally prepared first and several other documents are prepared by deriving information from this invoice. 3. Packing List: It is a consolidated statement in a prescribed format detailing how goods are packed. It is a very useful document for customs at the time of examination, and for the warehouse keeper of the buyer to maintain a record of the inventory and to effect delivery. The packing list will have many details which are common as in the invoice. 4. Certificate Of origin: It indicates that the goods which are being exported are actually manufactured in a specific country mentioned therein. It is normally issued by the chamber of commerce. 5. Generalised System Of preference : It is a certificate indicating the fact that the goods which are being exported have originated /manufactured in a particular country . It is a mainly useful for taking advantage of a preferential duty if available. 6. Shipping Bill : It is a document required to seek the permission of customs of export goods by sea. It contains a description of export goods number and kind of packages, shipping marks and numbers, value of goods, name of the vessel country of destination etc. 7. ARE 1 It is an application for removal of excisable goods from factory premises for export purposes. 8. Mate’s Receipt: It is issued by the captain of the ship. It contains the name of the vessel , shipping line, port of loading, port of discharge, shipping marks and numbers, packing details, description of goods, gross weight, container number and seal number. 9. GR/SDF form : It is prescribed by RBI in order to control and monitor foreign exchange reserves of the country. It contains; a) Name & address of the exporter and description of goods, dealer through whom proceeds of exports have been or will be realized. b) details of commission and discount due to foreign agent or buyer c) an analysis of the full export value, giving breakup of FOB, freight , insurance, discount, commission. 10. SDF; Some of the department in customs are now computerized. GR from is replaced by a new form know as statuary declaration form. This is prepared in duplicate and submitted to customs at the time of shipment. 11. PP Form : When goods are exported by post , instead of the GR from, the exporter has to fill up a post parcel from in triplicate. This PP form needs to be signed by the banker on the original copy of the form.

12. Softex Form : It is form to be submitted in respect of export of computer software and audio/ video/television software shall be submitted in triplicate to the designated official of department of electronics , government of India at the software technology parks of India or at the free trade zones or export processing zones. 13. Bill of exchange : It is an instrument in writing, containing an order , signed by the maker, directing a certain person to pay a certain sum of money only to the order of a person to the bearer of the instrument. a) Sight Draft : When the drawer, ie exporter expects the drawee ie importer to make the payment immediately upon the draft being presented to him it is called sight draft. b) Usance draft : Where the exporter has agreed to give credit to the foreign buyer, he draws usance bills of exchange and draft if drawn for payment at a date later than the date of presentation. 14. Bill of lading : It is a document issued by the shipping company or its agent. It acknowledges the receipt of the goods mentioned in the bill for shipment on board of the vessel. It is also an undertaking to deliver the goods in the like order and condition as received, to the consignee or his order provided the freight and other charges specified in the bills of lading have been duly paid. 15. Airway : it is an receipt issued by an airlines company or its agent for carriage of goods is called airway bill. It should indicate freight prepaid or freight to collect. 16. Consular Invoice: It is a document required by certain countries. This invoice is an important document which needs to be submitted for certification to the embassy of the country concerned. 17. Marine Insurance Policy : Where the contract with the foreign buyers is on C.I ( cost , Insurance ) or C.I.F ( Cost, Insurance , freight ) basis the responsibility for taking insurance cover against all risks of damage to or loss of goods during the sea voyage is that of the exporter. It covers many type of risks. The insurance cover too differs from material to material and also depends upon the risks involved. The policy issued by the insurance company should carry the name of the vessel, and the description of goods , corresponding to those found in the bill of lading. It comes into effect only after the date of the bill of lading. `