International Business: Overview and Perspectives
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1
International Business
Syllabus
•
MODULE I
•
Introduction to International Business:
Meaning, need for International Business,
Evolution of international Business; distinction
between international Business and domestic
Business, Stages of Internationalization,
Globalization- Meaning, Features, Stages-
Production, Investment and Technology,
Advantages and Disadvantages, MNC’s and
International Business
2
International Business
What is International Business
•
International business consists of transactions that
are carried out across national borders to satisfy
the objectives of individuals, companies, and
organizations.
•
International Business conducts business
transactions all over the world.
•
These transactions include the transfer of goods,
services, technology, managerial knowledge, and
capital to other countries.
3
International Business
What is International Business
•
An international business has many options for
doing business, it includes,
1.
Exporting goods and services.
2.
Giving license to produce goods in the host
country.
3.
Starting a joint venture with a company.
4.
Opening a branch for producing & distributing
goods in the host country.
5.
Providing managerial services to companies in
the host country.
4
International Business
Definition of International Business
•
Cambridge dictionary defines international
business as:
“the activity of trading goods and services
between countries.”
•
However, international business is beyond this
definition. International business is a cross-
border transaction between individuals,
businesses, or government entities
5
International Business
Definition of International Business
•
Some more Definition:
1.
The process of extending the business activities
from domestic to any foreign country with an
intention of targeting international customers.
2.
The conduction of business activities by any
company across the nations.
3.
The expansion of business functions to various
countries with an objective of fulfilling the needs
and wants of international customers
6
International Business
Need of International Business
•
The needs of International Business:
1.
Market Expansion.
2.
Non- availability of Product.
3.
Cost Advantage
4.
Economic recession in home market.
5.
Low domestic demand.
6.
Excess production capacity
7.
Greater Purchasing Power
7
International Business
Scope of International Business
•
The scope of international businesses are:
1.
Importing and Exporting
2.
Licensing
3.
Franchising
4.
Contract Manufacturing/Outsourcing
5.
Joint Ventures
6.
Foreign Direct Investment
7.
Growth Opportunities
8.
Integration of Economies
8
International Business
Evaluation Of International Business
•
Global trade is as old as human history
•
Every country is not self Sufficient.
•
In olden times, People uses bartered goods &
services with each other.
•
One could trace International Trade back in
3000 B.C.
•
The origin of International Business is
International Trade.
9
International Business
Evaluation Of International Business
•
One of the oldest known trading routes and
perhaps the longest and most successful in
the history was the Silk Road.
•
The Silk Road was a network of many trading
routes that originated in China and ended at
the Mediterranean Sea and Europe.
•
Silk road was used between 50 BCE to 250 CE
is perhaps the most well-known example of IT.
10
International Business
Evaluation Of International Business
•
The 17 Century so Industry Revolution in
Europe.
•
11
International Business
Distinction Between
12
International Business
Distinction Between
13
International Business
Stages in Internationalization
•
Internationalization is the process of increasing
involvement of enterprises in international
markets.
•
Reach out to the international market more often
than not is faced with hitches and challenges one.
•
The optimal strategic attractive available to firms
depend upon different levels of
internationalization
.
•
Most companies view foreign operations as riskier
than domestic ones because they must operate in
environments which are less familiar to them.
14
International Business
Stages in Internationalization
•
Enterprises undertake international activities
reluctantly and follow practices to minimize their
risks.
•
Stages of internationalization can be followed:
1.
Domestic Company.
2.
International Company
3.
Multinational Company
4.
Global Company:
5.
Transnational Company:
15
International Business
Stages in Internationalization
•
Domestic Company:
•
It limits its operations, 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.
•
These companies analyze the national
environment of the country, formulate the
strategies to exploit the opportunities offered by
the environment.
16
International Business
Stages in Internationalization
•
International Company:
•
These companies select the strategy of locating the
branch in the foreign market and extend the same
domestic operations into foreign markets.
•
These companies remain ethnocentric or domestic
country oriented.
•
Normally internalization process of most of the global
companies starts with this stage of two processes.
•
Many of the companies follow this strategy due to
limited resources and also to learn from the foreign
market gradually before becoming a global company
without much risk.
17
International Business
Stages in Internationalization
•
Multinational Company
:
•
This stage of multinational company is also referred as
multi-domestic company
•
It formulates different strategies for different market
•
thus the orientation shift from ethnocentric to
polycentric.
•
Under polycentric orientation the offices/branches/
subsidiaries of a MNC work like a domestic company
in each country where they operate with distinct
policies and strategies suitable to that country
concerned.
18
International Business
Stages in Internationalization
•
Global Company:
•
An International Company that centralizes
management and other decisions in the home
country.
•
It is the one which has either produces in
home country or in a single country and
focuses on marketing these products globally
and focuses on marketing these products
domestically.
19
International Business
Stages in Internationalization
•
Transnational Company:
•
A commercial enterprise that runs several
facilities and conducts business in multiple
countries.
•
These company produces, market, invests and
operate across the world.
•
It is an integrated global enterprise which links
global resources with global market at profits.
•
There is no such pure transnational corporation.
20
International Business
Stages in Internationalization
Characteristics of a Transnational Company
•
This company thinks globally and acts locally.
•
This company adopts global strategy but allow value
addition to the customer of a domestic country.
•
The assets of a transnational company are
distributed throughout the world, independent and
specialized.
•
The R&D facilities of a transnational company are
spread in many countries
21
International Business
Globalization
•
The term globalization refers to the integration
of the economy of the nation with the world
economy.
•
Globalization is the free movement of goods,
services and people across the world in a seamless
and integrated manner.
•
Globalization can be thought of to be the result of
the opening up of the global economy and the
concomitant increase in trade between nations.
22
International Business
Globalization
•
Production & Investment
•
The barriers on foreign trade and foreign investment
were removed to a large extent.
•
This meant that goods could be imported and
exported easily and also foreign companies could set
up factories and offices here.
•
Removing barriers or restrictions set by the
government is what is known as liberalization.
•
With liberalization of trade, businesses are allowed to
make decisions freely about what they wish to import
or export..
23
International Business
Globalization
Factors that have Enabled Globalization
Technology
•
Rapid improvement in technology has been one
major factor that has stimulated the globalization
process.
•
This has made possible much faster delivery of goods
across long distances at lower costs. The
developments in information and communication
technology have made information instantly
accessible.
.
24
International Business
Globalization
•
Advantages of Globalization
1.
Transfer of Technology
2.
Better Services
3.
Standardization of Living
4.
Development of Infrastructure
5.
Foreign Exchange Reserves
6.
Economic Growth
7.
Affordable Products
8.
Contribution to World GDP Growth Rate
9.
Extensions of Market
.
25
International Business
Globalization
•
Disadvantages of Globalization
1.
Growing Inequality:
2.
Increasing of the Unemployment rate:
3.
Trade Imbalance:
4.
Environmental Loots:
26
International Business
MNC & International Business
•
A multinational corporation (MNC) has facilities
and other assets in at least one country other than
its home country.
•
MNC generally has offices and/or factories in
different countries and a centralized head office
where they coordinate global management.
•
Having a presence in a foreign country such as China
allows a corporation to meet Chinese demand for its
product without the transaction costs associated
with long-distance shipping.
27
International Business
MNC & International Business
•
MNC tend to establish operations in markets where
their capital is most efficient or wages are lowest.
•
By producing the same quality of goods at lower
costs, multinationals reduce prices and increase the
purchasing power of consumers worldwide.
•
Establishing operations in many different countries,
a multinational is able to take advantage of tax
variations.
•
The other benefits include spurring job growth in
the local economies, potential increases in the
company's tax revenues, and increased variety of
goods
.
28
International Business
MODULE - II
•
MODULE II
•
Theories of International Trade:
Classical and
Neo-classical theories, Mercantilism, Absolute
Cost Advantage theory,
Comparative advantage
theory, Factor-proportions theory, Product Life
Cycle theory.
29
International Business
Theories of International Trade
•
International trade theories are simply different theories to
explain international trade.
•
Trade is the concept of exchanging goods and services
between two people or entities.
•
International trade is then the concept of this exchange
between people or entities in two different countries.
•
People or entities trade because they believe that they
benefit from the exchange.
•
They may need or want the
goods or services. While at the surface, this many sound
very simple, there is a great deal of theory, policy, and
business strategy that constitutes international trade.
30
International Business
Theories of International Trade
Classical theories:
1.
Mercantilism,
2.
Absolute Cost Advantage theory,
3.
Comparative advantage theory,
4.
Factor-proportions theory
Neo-classical theories:
1.
Product Life Cycle theory.
31
International Business
Theories of International Trade
Mercantilism:
•
Developed in the sixteenth century & was one of
the earliest efforts to develop an economic
theory.
•
This theory stated that a country’s wealth was
determined by the amount of its gold and silver
holdings.
•
In it’s simplest sense, mercantilists believed that
a country should increase its holdings of gold and
silver by promoting exports and discouraging
imports.
32
International Business
Theories of International Trade
•
The objective of each country was to have a trade
surplus or a situation where the value of exports
are greater than the value of imports.
•
A closer look at world history from the 1500s to
the late 1800s helps explain why this theory
flourished.
•
This strategy is called protectionism and is still
used today
•
Nations expanded their wealth by using their
colonies around the world in an effort to
control more trade and amass more riches.
33
International Business
Theories of International Trade
•
Although mercantilism is one of the oldest trade
theories, it remains part of modern thinking.
•
Countries such as Japan, China, Singapore, Taiwan,
and even Germany still favor exports and discourage
imports
•
Mercantilism’s protectionist policies only benefit
select industries, at the expense of both consumers
and other companies, within and outside of the
industry
34
International Business
Theories of International Trade
Absolute Advantage:
•
In 1776, Adam Smith questioned the leading
mercantile theory
•
Smith offered a new trade theory called absolute
advantage, which focused on the ability of a country
to produce a goods more efficiently than another
nation.
•
Smith reasoned that trade between countries
shouldn’t be regulated or restricted by government
policy or intervention.
35
International Business
Theories of International Trade
•
By specialization, countries would generate
efficiencies, because their labor force would become
more skilled by doing the same tasks.
•
Therefore, production would also become more
efficient.
•
Smith’s theory reasoned that with increased
efficiencies
•
This theory stated that a nation’s wealth shouldn’t be
judged by how much gold and silver it had but rather
by the living standards of its people.
36
International Business
Theories of International Trade
Comparative Advantage:
•
The challenge to the absolute advantage theory was
that some countries may be better at producing both
goods and, therefore, have an advantage in many
areas.
•
In contrast, another country may not have any useful
absolute advantages.
•
To answer this challenge, David Ricardo, an English
economist, introduced the theory of comparative
advantage in 1817.
37
International Business
Theories of International Trade
•
Ricardo reasoned that even if Country A had the
absolute advantage in the production of both
products, specialization and trade could still occur
between two countries.
•
Comparative advantage occurs when a country cannot
produce a product more efficiently than the other
country;
•
However, it can produce that product better and more
efficiently than it does other goods.
38
International Business
Theories of International Trade
•
However, it can produce that product better and
more efficiently than it does other goods.
•
The difference between these two theories is
subtle.
•
Comparative advantage focuses on the relative
productivity differences, whereas absolute
advantage looks at the absolute productivity.
39
International Business
Theories of International Trade
•
Case Study
•
Let’s look at a simplified hypothetical example to
illustrate the subtle difference between these
principles. Miranda is a Wall Street lawyer who
charges $500 per hour for her legal services. It turns
out that Miranda can also type faster than the
administrative assistants in her office, who are paid
$40 per hour. Even though Miranda clearly has the
absolute advantage in both kill sets, should she do
both jobs? No. For every hour Miranda decides to
type instead of do legal work, she would be giving up
40
International Business
Theories of International Trade
$460 in income. Her productivity and income will be
highest if she specializes in the higher-paid legal
services and hires the most qualified administrative
assistant, who can type fast, although a little slower
than Miranda. By having both Miranda and her
assistant concentrate on their respective tasks, their
overall productivity as a team is higher. This is
comparative advantage. A person or a country will
specialize in doing what they do relatively better.
41
International Business
Theories of International Trade
In reality, the world economy is more complex and
consists of more than two countries and products.
Barriers to trade may exist, and goods must be
transported, stored, and distributed. However, this
simplistic example demonstrates the basis of the
comparative advantage theory.
•
42
International Business
Theories of International Trade
Heckscher-Ohlin Theory or Factor Proportions
Theory
•
The theories of Smith and Ricardo didn’t help
countries determine which products would give a
country an advantage.
•
Both theories assumed that free and open markets
would lead countries and producers to determine
which goods they could produce more efficiently.
•
In the early 1900s, two Swedish economists, Eli
Heckscher & Bertil Ohlin, focused their attention on
how a country could gain comparative advantage by
43
International Business
Theories of International Trade
producing products that utilized factors that were in
abundance in the country.
•
Their theory is based on a country’s production
factors—land, labor, and capital, which provide the
funds for investment in plants and equipment.
•
They determined that the cost of any factor or
resource was a function of supply and demand.
•
Factors that were in great supply relative to demand
would be cheaper; factors in great demand relative to
supply would be more expensive.
44
International Business
Theories of International Trade
•
Their theory, also called the factor proportions theory,
stated that countries would produce and export goods
that required resources or factors that were in great
supply and, therefore, cheaper production factors.
•
In contrast, countries would import goods that
required resources that were in short supply, but
higher demand.
•
For example, China and India are home to cheap,
large pools of labor. Hence these countries have
become the optimal locations for labor-intensive
industries
45
International Business
Theories of International Trade
•
Their theory, also called the factor proportions theory,
stated that countries would produce and export goods
that required resources or factors that were in great
supply and, therefore, cheaper production factors.
•
In contrast, countries would import goods that
required resources that were in short supply, but
higher demand.
•
For example, China and India are home to cheap,
large pools of labor. Hence these countries have
become the optimal locations for labor-intensive
industries
46
International Business
Theories of International Trade
Neo Classical Theory
Product Life Cycle Theory:
•
Raymond Vernon, US Management Guru, developed
this theory in the 1960s.
•
The theory, originating in the field of marketing,
stated that a product life cycle has three distinct
stages:
1.
New product,
2.
Maturing product, and
3.
Standardized product.
•
47
International Business
Theories of International Trade
•
The theory assumed that production of the new
product will occur completely in the home country of
its innovation.
•
It has also been used to describe how the personal
computer (PC) went through its product cycle.
•
The product life cycle theory has been less able to
explain current trade patterns where innovation and
manufacturing occur around the world.
•
For example, global companies even conduct research
and development in developing markets where highly
skilled labor and facilities are usually cheaper.
48
International Business
Theories of International Trade
•
Even though research and development is typically
associated with the first or new product stage and
therefore completed in the home country,
•
these developing or emerging-market countries, such
as India and China, offer both highly skilled labor and
new research facilities at a substantial cost advantage
for global firms.
•
49
International Business
Syllabus
•
MODULE III
•
Modes of Entry in International Business:
Mode of Entry: Exporting, Licensing,
Franchising, Contract Manufacturing, Turn Key
Projects, Foreign Direct Investment – Mergers,
Acquisitions and Joint Ventures, Comparison of
different modes of Entry.
50
International Business
Mode of Entry
•
The choice for entering foreign market is another
major issue with which international business
must wrestle.
•
The various modes for serving foreign markets.
•
The optimal entry mode varies by situation
depending on factors like transport costs, trade
barriers, political risks, economic risks, and firm
strategy.
51
International Business
Mode of Entry
•
Firms can use six different modes to enter foreign
markets:
1.
Exporting
2.
Turnkey projects,
3.
Licensing,
4.
Franchising,
5.
Joint ventures with a host-country firm,
6.
New wholly owned subsidiary in the host country.
Each entry mode has advantages and disadvantages.
52
International Business
Mode of Entry
•
Mode of Entry - Exporting
•
Using domestic plant as a production base for
exporting goods to foreign markets is an excellent
initial strategy for pursuing international sales
•
Exporting is the marketing and direct sale of
domestically-produced goods in another country.
•
Exporting is a traditional and well established
method of reaching foreign markets.
•
Most of the costs associated with exporting take the
form of marketing expenses.
53
International Business
Mode of Entry
•
Exporting commonly requires coordination among
four players:
1.
Exporter,
2.
Importer,
3.
Transport provider, and
4.
Government.
Advantage:
1.
It minimizes both risk and capital requirements
2.
It is conservative way to test the international
waters.
54
International Business
Mode of Entry
2.
With this strategy the manufacturer can limit its
involvement in foreign markets by contracting with
foreign wholesalers
3. Manufacturer can establish its own distribution and
sales organizations in some or all of the target
foreign markets.
4.
Exporting may help a firm achieve experience curve
and location economies.
5.
This is how Sony came to dominate the global TV
market.
55
International Business
Mode of Entry
Disadvantage:
1.
Exporting from the firm’s home base may not be
appropriate if there are lower-cost locations.
2.
High transport costs can make exporting
uneconomical, particularly for bulk products.
3.
Tariff barriers can make exporting uneconomical.
4.
Exporting through local agent may not be good
proposition since foreign agents often carry the
products of competing firms and so have divided
loyalties.
56
International Business
Mode of Entry
Mode of entry -
Licensing
•
Licensing makes sense when a firm with
valuable technical know-how or a unique
patented product.
•
Licensing essentially permits a company in the
target country to use the property of the
licensor.
•
Such property usually is intangible, such as
trademarks, patents, and production
techniques.
57
International Business
Mode of Entry
•
The licensee pays a fee in exchange for the rights
to use the intangible property and possibly for
technical assistance.
•
Advantages :
•
Licensing has the advantage of avoiding the risks
of committing resources to country markets that
are unfamiliar.
•
Licensing is often used when a firm wishes to
participate in a foreign market but is prohibited
from doing so by barriers to investment.
58
International Business
Mode of Entry
•
Licensing is frequently used when a firm possesses
some intangible property that might have business
applications, but it does not want to develop those
applications itself.
•
Disadvantages :
•
Licensing is the risk of providing valuable
technological know-how to foreign companies.
•
Technological know-how constitutes the basis of
many multinational firms’ competitive advantage
59
International Business
Mode of Entry
•
Mode of Entry - Franchising
•
Franchising is basically a specialized form of
licensing in which the franchiser not only sells
intangible property (normally a trademark) to the
franchisee.
•
The franchiser will also often assist the franchisee
to run the business on an ongoing basis.
•
Franchising is often suited to the global expansion
efforts of service and retailing.
60
International Business
Mode of Entry
•
The franchisor provided the following services to
the franchisee:
1.
Trade marks,
2.
Operating system,
3.
Product reputations,
4.
Continuous support systems like advertising,
employee training, reservation services, quality
assurance programmes etc.
61
International Business
Mode of Entry
•
Advantages :
•
Franchising has much the same advantages as
licensing.
•
Disadvantages :
•
The big problem a franchiser faces is maintaining
quality control.
•
Foreign franchisees do not always exhibit strong
commitment to consistency and standardization
62
International Business
Mode of Entry
Mode of Entry - Contract Manufacturing
•
Its is the best of both worlds.
•
Instead of simply ordering products as needed, the
company enters into a contract with the foreign
supplier.
•
Company fixes production amounts and delivery
times and allows the supplier to maintain hands-on
management of the production process.
63
International Business
Mode of Entry
•
It gives the importer a greater assurance of supply
and quality control while capitalizing on lower wage
rates and still limiting the company’s commitment to
the manufacturer.
•
This program can be used either to acquire a lower-
cost source of components or for a production base
for final assembly of products.
64
International Business
Mode of Entry
Benefits of Contract Manufacturing
1.
For the principal, contract manufacturing offers
access to raw materials and cheap labour supply,
flexible production planning, and the opportunity
to circumvent restrictive employment legislation in
the host country.
2.
For the sub-contractor, there are a number of
benefits; the opportunity to create and sustain
additional employment, and manufacture to
international standards.
3.
In cases where manufactured products are re-
exported to third markets, contract manufacturing
is encouraged by the host government as it
contributes to improved balance of trade
.
65
International Business
Mode of Entry
Limitations of Contract Manufacturing
1.
The principal may not have direct supervisory
control over the manufacturing process. This can
lead to serious problems of quality control.
2.
Contract execution and supply of merchandise
may be disrupted either by local political
upheavals or industrial relations difficulties in
the host market.
3.
For a sub-contractor largely dependent on the
principal, termination of contract by the
principal could cause short-term difficulties and
might lead to bankruptcy in the long run.
66
International Business
Mode of Entry
Mode of Entry: Turnkey Project
•
Firms that specialize in the design, construction, and
start-up of turnkey plants are common in some
industries.
•
The contractor agrees to handle every detail of the
project for a client, including the training of operating
personnel.
•
At completion of the contract, the foreign client is
handled the “key” to a plant that is ready for full
operation-hence the term turnkey
.
67
International Business
Mode of Entry
A
dvantages of Turnkey Projects
Turnkey projects are a way of earning great
economic returns from the asset. The strategy is
particularly useful where FDI is limited by host-
government regulations.
A turnkey strategy can also be less risky than
conventional FDI. In a country with unstable
political and economic environments, a longer-
term investment might expose the firm to
unacceptable political and/or economic risks.
68
International Business
Mode of Entry
•
Disadvantages of Turnkey Projects
•
The firm that enters into a turnkey deal will have no
long-term interest in the foreign country. This can be a
disadvantage if that country subsequently proves to be a
major market for the output of the process that has been
exported.
•
The firm that enters into a turnkey project with a
foreign enterprise may inadvertently create a
competitor
•
If the firm’s process technology is a source of
competitive advantage, then selling this technology
through a turnkey project is also selling competitive
advantage to potential and/or actual competitors
.
69
International Business
Foreign Direct Investment
•
Foreign direct investment is direct investment into
production in a country by a company located in another
country.
•
Foreign direct investment is done for many reasons.
•
FDI usually involves participation in management, joint-
venture, transfer of technology and expertise.
•
There are two types of FDI:
1.
Inward foreign direct investment and outward foreign
direct investment, resulting in a net FDI inflow (positive
or negative) and
2.
“stock of foreign direct investment”,
70
International Business
Mode of Entry
•
Advantages of FDI
•
The following are the advantage of FDI:
•
1. Mostly the customer on host country prefer the products
produced in their country like: be Indian, buy Indian. In
such cases FDI helps the company to gain market through
this mode rather than other modes.
•
2. Purchase managers of most of the companies prefer to
buy local production in order to ensure certainty of supply,
faster services, quality dependability, and better
communication with the suppliers.
•
3. The company can produce based on the local
environment and changing preference of the customers.
71
International Business
Mode of Entry
Disadvantages of FDI
1.
FDI expose the company to the host country’s
political and economic risk.
2.
FDI expose the company to the exchange rate
fluctuation.
3.
Some countries discourage the entry of foreign
companies though FDI in order to protect the
domestic industry.
4.
Host country government sometimes bans the
acquisition of local companies by foreign
companies; impose restriction on repatriation of
dividends and capital. India has allowed 100%
convertibility.
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International Business
Foreign Direct Investment
Mergers & Acquisition
It refers to the aspect of corporate strategy,
buying and combining of different companies
that can aid a growing company in a given
industry grow rapidly without having to create
another business entity.
Merger is a tool used by companies for the
purpose of expanding their operations often
aiming at an increase of their long term
profitability
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International Business
Foreign Direct Investment
•
Merger is a tool used by companies for the purpose of
expanding their operations.
•
Usually mergers occur in a consensual setting where
executives from the target company help those from the
purchaser in a due diligence process to ensure that the
deal is beneficial to both parties.
•
Historically, mergers have often failed to add
significantly to the value of the acquiring firm’s shares.
•
Corporate mergers may be aimed at reducing market
competition, cutting costs, reducing taxes, removing
management, “empire building” by the acquiring
managers, or other purposes.
•
which may or may not be consistent with public policy or
public welfare.
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Foreign Direct Investment
Joint Ventures
A joint venture entails establishing a firm that is
jointly owned by two or more otherwise independent
firms.
There are mainly three reasons for JV formation and
these are:
1.
Internal Reasons.
2.
External Reasons.
3.
Strategic Reasons.
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Foreign Direct Investment
Advantages of Joint Ventures
1.
First, a firm benefits from a local partner’s
knowledge of the host country’s competitive
conditions, culture, language, political systems and
business systems.
2.
Second, when the development costs and/or risks of
opening a foreign market are high, a firm might gain
by sharing these costs and/or risks with a local
partner.
3.
Third, in many countries, political considerations
make joint ventures the only feasible entry mode.
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International Business
Foreign Direct Investment
•
Disadvantages of Joint Ventures
•
As with licensing, a firm that enters into a joint venture
risks giving control of its technology to its partner.
1.
A joint venture does not give a firm the tight control
over subsidiaries that it might need to realize
experience curve or location economies. Nor does it
give a firm the tight control over a foreign subsidiary
that it might need for engaging in coordinated global
attacks against its rivals.
2.
Shared ownership arrangements can lead to conflicts
and battles for control between the investing firms in
their goals and objectives change or if they take
different views as to what the strategy should be
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Syllabus
•
MODULE IV
•
Foreign Exchange:
Meaning and need; Theories
for exchange rate determination-Mint parity
theory; Purchasing Power parity Theory, Interest
Parity theory, Balance of Payment Theory or
demand and supply theory
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International Business
Foreign Exchange
•
Foreign exchange refers to exchanging the currency
of one country for another at prevailing exchange
rates
•
Foreign exchange is also called forex in short.
•
Foreign exchange is required for international trade.
•
When India is trading with the United States (US)
both INR and USD are involved.
•
If India is importing from the United States, it needs
to pay in dollars. When the US is importing from
India it would need to pay in rupees
•
Foreign exchange is also important when a country is
investing in another.
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International Business
Foreign Market
•
Different countries have different currencies
•
In foreign exchange markets, currencies are bought
and sold. In reality, foreign exchange is traded
virtually 24X7.
•
A country's currency is valued according to the laws
of supply and demand
•
Many countries float their currencies freely against
those of other countries.
•
A country's currency value may also be set by the
country's government.
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Factors Affecting Currency Value
•
The value of any particular currency is determined by
market forces based on trade, investment, tourism,
and geo-political risk.
•
It would also depend on political conditions, both
internally and internationally.
•
Inflation can have a major effect on the value of a
country's currency and its foreign exchange rates
with other currencies.
•
There is also a speculative element in the price.
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International Business
.
Types of Exchange Rate Systems
•
There are three types of exchange rate systems that
are in effect in the foreign exchange market and
these are as follows:
1.
Fixed exchange rate System or Pegged exchange
rate system:
2.
Flexible or Floating Exchange Rate System
3.
Managed floating exchange rate system
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International Business
Types of Exchange Rate Systems
Fixed exchange rate System or Pegged exchange
rate system
•
It is referred to as the system where the weaker
currency of the two currencies in question is pegged
or tied to the stronger currency.
•
Determined by the government of the country or
central bank.
•
This
maintain the stability in the currency rate.
•
This maintain the stability in the currency rate
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Foreign Exchange
Flexible or Floating Exchange Rate System
•
This system as it is dependent on the market forces of
supply and demand
.
•
There is no intervention of the central banks or the
government in the floating exchange rate system.
Managed floating exchange rate system:
Managed floating exchange rate system is the
combination of the fixed (managed) and floating
exchange rate systems.
Under this system the central banks intervene or
participate in the purchase or selling of the foreign
currencies.
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International Business
Theories for Exchange Determination
Mint P
arity Theory
•
The earliest theory of foreign exchange has been the
mint parity theory.
•
This theory was applicable for those countries which
had the same metallic standard (gold).
•
Countries had their standard currency unit either of
gold or it was freely convertible into gold of a given
purity.
•
The value of currency unit under gold standard was
defined in terms of weight of gold of a specified
purity contained in it.
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International Business
Theories for Exchange Determination
•
This rate of exchange determined on weight-to-
weight basis of the metallic contents of currencies of
the two countries was called mint par of exchange or
the mint parity.
•
Under the gold standard, the balance of payments
adjustments were made through the free international
flows of gold.
•
the actual rate of exchange between two currencies
could vary above and below the mint parity by the
extent of cost of gold export.
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International Business
Theories for Exchange Determination
The Purchasing Power Parity Theory
•
Although this theory can be traced back to Wheatley
and Ricardo, yet the credit for developing it in a
systematic way has gone to the Swedish economist
Gustav Cassel.
•
The purchasing power parity theory enunciates the
determination of the rate of exchange between two
inconvertible paper currencies.
•
This theory states that the equilibrium rate of
exchange is determined by the equality of the
purchasing power of two inconvertible paper
currencies.
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International Business
Foreign Exchange
•
There are two versions of the purchasing power parity
theory:
1.
The Absolute Version and
2.
The Relative Version.
The Absolute Version
•
The rate of exchange should normally reflect the relation
between the internal purchasing power of the different
national currency units.
•
the rate of exchange should normally reflect the relation
between the internal purchasing power of the different
national currency units
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International Business
Foreign Exchange
The Relative Version:
The relative version of purchasing power parity
theory attempts to explain the changes in the
equilibrium rate of exchange between two
currencies.
It relates the changes in the equilibrium rate of
exchange to changes in the purchasing power
parities of currencies.
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International Business
Foreign Exchange
•
The central bank of the country was always willing to
buy and sell gold upto an unlimited extent at the
given price.
•
The price at which the standard currency unit of the
country was convertible into gold was called as the
mint price.
•
This rate of exchange determined on weight-to-
weight basis of the metallic contents of currencies of
the two countries was called mint par of exchange or
the mint parity
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International Business
Theories for Exchange Determination
The Balance of Payments Theory
The balance of payments theory of exchange rate
maintains that rate of exchange of the currency of
one country with the other is determined by the
factors which are autonomous of internal price level
and money supply.
It emphasizes that the rate of exchange is
influenced, in a significant way, by the balance of
payments position of a country.
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International Business
Theories for Exchange Determination
•
A deficit in the balance of payments of a country
signifies a situation in which the demand for foreign
exchange (currency) exceeds the supply of it at a
given rate of exchange.
•
T
he excess of demand for foreign exchange over the
supply of foreign exchange is coincidental to the BOP
deficit.
•
The demand pressure results in an appreciation in
the exchange value of foreign currency. As a
consequence, the exchange rate of home currency to
the foreign currency undergoes depreciation.
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International Business
Theories for Exchange Determination
•
A balance of payments surplus signifies an excess of
the supply of foreign currency over the demand for
it. In such a situation, there is a depreciation of
foreign currency but an appreciation of the currency
of the home country.
•
The equilibrium rate of exchange is determined,
when there is neither a BOP deficit nor a surplus. In
other words, the equilibrium rate of exchange
corresponds with the BOP equilibrium of a country.
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International Business
Theories for Exchange Determination
Interest Rate Parity Theory
It is a theory in which the differential between the
interest rates of two countries remains equal to the
differential calculated by using the forward exchange
rate and the spot exchange rate technique.
Interest rate parity connects interest, spot exchange,
and foreign exchange rates.
RP theory comes handy in analyzing the relationship
between the spot rate and a relevant
forward (future) rate of currencies.
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International Business
Theories for Exchange Determination
•
According to this theory, there will be no arbitrage in
interest rate differentials between two different
currencies and the differential will be
reflected in the discount or premium for the forward
exchange rate on the foreign exchange.
•
The theory also stresses on the fact that the size of
the forward premium or discount on a
foreign currency is equal to the difference between
the spot and forward interest rates of the
countries in comparison.
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International Business
Syllabus
•
MODULE V
•
Exim Trade -
Direction and Composition of
India’s foreign trade, recent trends; Export Trade,
Procedure, Steps & Documentation, Export
Financing, Export Promotion, Import Trade,
Procedure, Steps, Documentations and Problems -
EXIM Policy - Balance of Payment –
Disequilibrium and Measures for Rectification -
Institutions connected with EXIM Trade.
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International Business
Foreign Trade of India
•
Foreign Trade or International Trade is all about
Exports and Imports.
•
Trade with foreign nations is not a new phenomenon
in India. India is used to trade with foreign nations
even in BC.
•
The Periplus of the Erythraean Sea
is a document
(written by an anonymous sailor from Alexandria
about AD 100) describing trade between countries,
including India.
•
Since 1498, Europeans did trade with the rulers of
India using the sea route
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International Business
Foreign Trade of India
•
From 1947-1991, the Indian economy remained
largely as a closed economy.
•
High taxes were levied on import of goods. Foreign
investments like FDI were restricted.
•
However, after the liberalization in 1991, foreign
trade improved significantly.
•
India exports around 7500 commodities to about 190
countries, and imports around 6000 commodities
from 140 countries.
•
Exports and Imports are not only restricted to
commodities (merchandise).
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International Business
Foreign Trade of India
•
Service is also a major export/import item.
•
To make it simple, let’s summaries foreign trade
of India as below:
1.
Export of goods (merchandise/commodities)
2.
Export of services
3.
Import of goods (merchandise/commodities)
4.
Import of services
(Merchandise: goods to be bought and sold. &
Commodities: a raw material or primary
agricultural product)
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International Business
Exports of India
•
Petroleum products, precious stones, drug
formulations & biologicals, gold and other
precious metals are the top exported commodities.
•
India’s merchandise exports are less than its
merchandise imports.
•
Still, India’s merchandise trade balance has
improved from 2009-14 to 2014-19 although most
of the improvement in the latter period was on
account of more than fifty per cent decline in
crude prices in 2016-17.
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International Business
Exports of India
Top 10 Export Commodities
1.
Petroleum Products
2.
Pearl, Precious, Semiprecious Stones
3.
Drug Formulations, Biologicals
4.
Gold and Other Precious Metal Jewellery
5.
Iron and Steel
6.
Electric Machinery and equipment
7.
Organic Chemicals
8.
RMG Cotton including Accessories
9.
Motor Vehicles/ Cars
10.
Marine Products
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International Business
Imports of India:
•
Crude petroleum, gold, petroleum products, coal,
coke & briquettes constitute top import items.
•
India’s service exports are more than its service
imports. This means that India has a net service
surplus.
•
However, India’s net services surplus has been
steadily declining in relation to GDP.
•
Now, India’s service surplus finance about 50 per
cent of the merchandise deficit (the trade
balance)
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International Business
Imports of India:
Top 10 Import Commodities:
1.
Petroleum: Crude
2.
Gold
3.
Petroleum Products
4.
Coal, Coke and Briquettes, etc.
5.
Pearl, Precious, Semiprecious Stones
6.
Electronic Components
7.
Telecom Instruments
8.
Organic Chemicals
9.
Industrial Machinery for Dairy etc.
10.
Iron and Steel
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International Business
Service Exports: Top Services
•
The composition of service exports has remained
largely unchanged over the years.
•
Software services constitute the bulk of it at around
40-45 per cent, followed by business services at about
18-20 per cent, travel at 11-14 per cent and
transportation at 9-11 per cent.
•
India’s Services exports for the first time achieve the
targeted $ 250 Billion during April-March 2021-22,
exhibiting a positive growth of 21.31 per cent over
the fiscal 2020-21
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International Business
Top Trading Partners of India
•
India’s top five trading partners continue to
be
•
The
United States of America
(
U.S.A.)
•
People's Republic of China or Chinese
•
The United Arab Emirates (UAE)
•
Saudi Arabia and
•
Hong Kong.
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International Business
Direction of India Foreign Trade
•
We list India’s export import trends for merchandise
goods in FY 2021-22. India’s merchandise exports
soared to a record high of US$417.81 billion during FY
2021-22, surpassing the government’s target of
US$400 billion.
•
The export growth was mainly driven by a surge in
demand for products like petroleum, cotton yarn,
textiles, chemicals, and engineering goods. At the same
time,
•
Indian goods imports also surged at US$610.22 billion,
mainly driven by increase in imports of crude, coal,
gold, and electronics
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International Business
Direction of India Foreign Trade
•
India
merchandise exports from India reached
a new high at US$ 417.81 billion during the
FY- 2021-22, marking a surge of 43.18 percent
over the US$291.18 billion recorded in the
previous fiscal, and an increase of 33.33
percent over US$313.36 billion during FY -
2019-20.
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International Business
Direction of India Foreign Trade
•
At the same time, India’s merchandise
imports in FY 2021-22 soared to US$610.22
billion, an increase of 54.71 percent over the
U$394.44 billion registered during FY 2020-21,
and an increase of 28.55 percent over
US$474.71 billion in FY 2019-20.
•
India’s trade deficit widened to 87.5 percent
to US$192.41 billion in FY 2021-22 as against
US$102.63 billion in the previous fiscal.
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International Business
Direction of India Foreign Trade
•
India’s import of merchandise goods has surged
even higher than its export target, resulting in a
high trade deficit at 87.5 percent.
•
Major factors contributing to this soaring import
bill include sharp growth in imports of crude oil,
coal, gold, electronics, and chemicals as the
economy reopened and business and consumption
activity stabilized.
•
Rising prices of commodities, including crude oil
and coal, have played a significant role in adding
to India’s import valuation.
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International Business
Direction of India Foreign Trade
•
China remained the top source for Indian
imports during FY 2021-22, followed by the
UAE, USA, Saudi Arabia, Iraq, and
Switzerland. Other important countries
contributing to India’s import basket during
FY 2021-22 were Hong Kong, Singapore,
South Korea, and Germany.
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International Business
Export Trade
Export Trade – Procedure:
•
Exports, is one of the major components of
international trade.
•
Exporting done by the country is bound to
many formalities both legal and compulsory
made by the exported nation
•
An export procedure initiates with the
willingness to send the goods and services to
other foreign nations at some price
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International Business
Export Trade
•
Step 1: Receipt Order.
•
Step 2: Obtaining License and Quota
•
Step 3: Letter of Credit
•
Step 4: Fixing the Exchange Rate
•
Step 5: Foreign Exchange Formalities
•
Step 6: Preparation for Executing the Order
•
Step 7: Formalities by a Forwarding Agent
•
Step 8: Bill of Lading
•
Step 9: Shipment Advice to the Importer
•
Step 10: Presentation of Documents to the Bank
•
Step 11: The Realization of Export Proceeds
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International Business
Export Trade
Documents Required for Exporting
•
When deciding which documents are necessary for an
export procedure, the best place to start is with your
overseas customer/importer or a freight forwarder.
•
You may help your customer in clearing items with
customs in the target market by gathering precise
information.
•
Commonly used expert documents are:
1.
Pro Forma Invoice.
2.
Commercial Invoice
3.
Packing List
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International Business
Export Trade
4. Air Waybill
5. Export Licenses
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International Business
Export Trade
Preparation for Executing an Order
•
The exporter must make the following arrangements in order
to carry out the order
1.
Marking and packaging of products to be exported in
accordance with the importer's standards.
2.
Obtaining an inspection certificate from the Export
Inspection Agency after scheduling a pre-shipment
inspection.
3.
Getting an insurance policy from the Export Credit
Guarantee Corporation to safeguard against credit risks.
4.
Obtaining the necessary marine insurance coverage.
5.
Appoint a forwarding agent, often known as a custom house
agent, to handle customs and other related issues.
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International Business
Export Financing
•
Institutional framework for providing finance
comprises Reserve Bank of India, Commercial
Banks, Export Import Bank of India and Export Credit
and Guarantee Corporation.
•
Export finance short or medium term, is provided
exclusively by the Indian and foreign commercial
banks which are members of the Foreign
Exchange Dealer's Association.
•
ECGC also plays an important role
through its various policies and guarantees providing
cover for commercial and political risks
involved in export trade
.
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International Business
Export Finance
Pre-shipment Finance
•
Pre-shipment finance is provided to the exporters
for the purchase of raw materials,
processing them and converting them into
finished goods for the purpose of export.
Post-shipment Finance
"any loan or advance granted or any other credit
provided by a bank to
an exporter of goods from India from the date of
extending the credit after shipment of goods
to the date of realization of export proceeds.
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International Business
Export Finance
Pre-shipment Finance
•
Pre-shipment finance is provided to the exporters
for the purchase of raw materials,
processing them and converting them into
finished goods for the purpose of export.
Post-shipment Finance
"any loan or advance granted or any other credit
provided by a bank to
an exporter of goods from India from the date of
extending the credit after shipment of goods
to the date of realization of export proceeds.
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Import Trade
119
International Business
Import Trade
•
A very important role is played by the Import and
Customs authorities.
•
The era of globalization ushered in more and
more interactions between different countries of
the world.
•
Era of globalization leading to an increase in the
masses of imports and exports.
•
Import procedures and documentation are
required for any good that crosses the
international borders
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International Business
Import Trade
Steps for the Process of Import Procedure:
•
The following steps can adequately explain the process of
import procedure and documentation:
1.
First and foremost, before anything can enter the
country, a comprehensive list of what item is being
imported and for what purpose needs to be updated and
registered. Data like this can be obtained from trade
associations and trade organizations.
2.
The EXIM Policy is then consulted by the Importer to
make sure that all rules and regulations are followed and
standards are met.
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Import Trade
3. Then the request of the installment of foreign
cash takes place which includes the trading of
Indian Currency into foreign notes. In this matter,
The Exchange Control Department of the RBI
manages foreign trade exchange in India.
4. The importer then puts in an import request with
the exporter for the supply of merchandise.
5. Once the payments are settled between the
importer and the seller, a letter of credit is issued
to the importer.
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Import Trade
6. The importer arranges for the payment of the
advance money on arrival of the goods at the port.
This saves the importer from the high penalties.
7. The overseas supplier after in-loading the
merchandise on the ship dispatches the “Shipment
Advice” to the importer to give information with
respect to the shipment of goods.
8. Dock charges are also paid out by the importer
once the goods are received and all inspections
are completed.
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International Business
Import Trade
•
In India, the procedure of imports usually
follows this outline, unless the goods are
otherwise specified as hazardous or are
specially requested by the government of the
country.
•
A number of documents are required to make
sure that this process takes place seamlessly
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International Business
Import Trade
•
These Documentations Include
1.
All invoices, packing lists, certificates
specifying the origins of the product and its
description, GATT declaration, IET
documents and any other document that the
government specifies.
2.
Catalogue, Technical Write ups – required for
import of machinery and equipment.
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International Business
Import Trade
3. Chemical Composition, Test bond required by the
respective customs – all are needed in case of
Chemical Import.
4. Phytosanitary Certificate with Fumigation,
Certificate of Origin – required for un-processed
food, plant products, wood imprints, fruits and
seeds import.
5. Test Report and Composition – for processed
food product import.
6. Azo Dye Inspection Certificate – in Import of
Fabric.
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International Business
Import Trade
7. PLAT T essential for valuation – In case of import
of Plastic Granules.
8. Registered EPCG License, Panelised Undertaking
by Importer, Bond com BG Bank Covering Letter,
Signature Attestation from Bank, Copy of Board
of Regulation, Particles of Memorandum, and
Detail of Previous License – Import under EPCG
license.
9. Form necessary from Supplier for customs duty
advantage – Import of Ceramic Tiles.
10. Test Certificate – Import of Wine and Whiskey.
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International Business
Import Trade
Import Procedure:
•
Import procedure means all the steps involved in purchase
of goods from any foreign country.
•
The procedural steps involved in import trade differ from
country to country in respect of their import policy,
statutory requirements.
•
In majority of the countries import trade is being controlled
by the government.
•
The objective of empowering the government in the import
trade is to keep a strict restriction policy in regards of
foreign exchange, protection of Indigenous industries etc.
•
For importing goods, a specified and regulated procedure is
to be followed.
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International Business
Import Trade
•
The procedure is summed into quick steps as below:
1.
Trade Enquiry
2.
Procurement of Import License and Quota
3.
Obtaining Foreign Exchange
4.
Placing the Order
5.
Dispatching a letter of Credit
6.
Obtaining Necessary Documents
7.
Customs Formalities and Clearing of Goods
8.
Making the Payment
9.
Closing the transactions
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International Business
EXIM Policy
•
Export Import Policy or better known as Exim
Policy is a set of guidelines and instructions
related to the import and export of goods.
•
The Government of India notifies the Exim
Policy for a period of five years under Section
5 of the Foreign Trade (Development and
Regulation Act), 1992.
•
The Current EXIM policy 2015-20 is valid
upto to September 2022.
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International Business
EXIM Policy
•
Highlight of Foreign Trade Policy- 2015-20
1.
Merchandise Exports from India Scheme (MEIS)
2.
Service Exports from India Scheme (SEIS)
•
Extension of incentive Scheme (MEIS & SEIS):
–
It is now proposed to extend Chapter-3 Incentives
(MEIS & SEIS) to units located in SEZs also.
•
Trade Facilitation and Ease of doing Business
1.
Online filing of documents/applications-
2.
Online inter-ministerial consultation-
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International Business
EXIM Policy
•
Simplification of procedures/processes, digitization
and e-governance
•
EPCG Authorization
•
Record Maintenance:-
•
Exporter Importer Profile: –
•
Communication with Exporters/Importers
•
Online message exchange with CBDT & MCA
•
Communication with Committees of DGFT
•
Online application for refunds:-
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International Business
EXIM Policy
•
Facilitating & Encouraging Export of dual use items
(SCOMET)
•
Validity of SCOMET export authorization has been
extended from the present 12 months to 24 months.
•
Authorization for repeat orders will be considered on
automatic basis subject to certain conditions.
•
Verification of End User Certificate (EUC) is being
simplified if SCOMET item is being exported under
Defense Export Offset Policy
•
Outreach programmes will be conducted at different
locations to raise awareness among various stakeholders.
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International Business
EXIM Policy
•
E-commerce Exports
•
Goods falling in the category of handloom products, books/
periodicals, leather footwear, toys and customized fashion,
having FOB value up to Rs 25000/consignment shall be eligible
for benefit under FTP.
•
Such goods can be exported in manual mode through Foreign
Post offices at New Delhi, Mumbai & Chennai
•
Export of such goods under Courier Regulations shall be
allowed manually on pilot basis through Airports at Delhi,
Mumbai and Chennai as per appropriate amendments in
regulations to be made by Department of Revenue.
Department of Revenue shall fast track the implementation of
EDI mode at courier terminals.
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International Business
EXIM Policy
•
Duty Free tariff Preference (DFTP) Scheme:-
India
has already extended duty free tariff preference to
33 Least Developed Countries (LDCs) across the
globe. This is being notified under FTP.
•
Vishakhapatnam & Bhimavaram added as Town of
Export Excellence: –
Government has already
recognized 33 towns as export excellence towns. It
has been decided to add Vishakhapatnam and
Bhimavaram in Andhra Pradesh as towns of export
excellence (Product Category– Seafood)
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International Business
Balance of Payments
136
International Business
Balance of Payments
•
Balance of Payments statistics systematically
summarize, for a specific period, the economic
transactions of an economy with the rest of the world.
•
The compilation and dissemination of BoP data is the
prime responsibility of RBI.
•
BoP = Net credit in ( Current Account + Capital
Account and Financial Account).
•
India’s Balance of Payments position witnessed great
improvement since liberalization in 1991.
•
India’s foreign reserves stood at US$ 572 billion as
on November 2020.
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International Business
Balance of Payments
•
Foreign Exchange (Forex) Reserves include
Foreign Currency Assets, Gold, Special Drawing
Rights (SDRs), and Reserve Position in the IMF
(Gold Tranche or Reserve Tranche).
•
Net Remittances are part of the Current Account
in the Balance of Payments statement published
by RBI.
•
Net remittances from Indians employed overseas
has been constantly increasing year after year.
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International Business
Balance of Payments
Methods to Correct Disequilibrium in Balance of
Payments (BOP)
1.
Monetary Policy (Deflection)
2.
Exchange Depreciation.
3.
Devaluation.
4.
Exchange Control.
5.
Fiscal Policy- Import Duties.
6.
Import Policy (Import Quotes)
7.
Stimulating/Improving Export.
8.
Foreign Loans.
139
International Business
Institutions Connect with EXIM Trade
•
The aim of set up machinery for consultation
is to create the required forum and
environment for consulting various quarters
interested and engaged in foreign trade.
•
140
International Business
Institutions Connect with EXIM Trade
Export Promotion Councils (EPC)
•
Export Promotion Councils are registered as non
-profit organizations under the Indian Companies
Act.
•
At present there are eleven Export Promotion
Councils under the administrative control of the
Department of Commerce and nine export
promotion councils related to textile sector under
the administrative control of Ministry of Textiles.
•
The Export Promotion Councils perform both
advisory and executive functions.
141
International Business
Institutions Connect with EXIM Trade
Federation of Indian Export Organisations
•
FIEO was set up jointly by the Ministry of
Commerce, Government of India and private
trade and industry in the year 1965.
•
FIEO is thus a partner of the Government of
India in promoting India’s exports
142
International Business
Institutions Connect with EXIM Trade
Commodity Board
•
Commodity Board is registered agency
designated by the Ministry of Commerce,
Government of India for purposes of export-
promotion and has offices in India and abroad.
•
There are five statutory Commodity Boards,
which are responsible for production,
development and export of tea, coffee, rubber,
spices and tobacco.
143
International Business
Institutions Connect with EXIM Trade
Indian Institution of Packaging (IIP)
•
The Indian Institute of Packaging or IIP in short was
established in 1966 under the Societies Registration Act
(1860).
•
Headquartered in Mumbai,
•
IIP also has testing and development laboratories at
Calcutta, New Delhi and Chennai.
•
The Institute is closely linked with international
organizations and is recognized by the UNIDO (United
Nations Industrial Development Organisation) and the ITC
(International Trading Centre) for consultancy and training.
The IIP is a member of the Asian Packaging Federation
(APF),
144
International Business
Institutions Connect with EXIM Trade
Export Inspection Council (EIC)
•
The Export Inspection Council or EIC in short,
was set up by the Government of India under
Section 3 of the Export (Quality Control and
Inspection) Act, 1963 in order to ensure sound
development of export trade of India through
Quality Control and Inspection
145
International Business
Institutions Connect with EXIM Trade
Export Inspection Council (EIC)
•
The Export Inspection Council or EIC in short,
was set up by the Government of India under
Section 3 of the Export (Quality Control and
Inspection) Act, 1963 in order to ensure sound
development of export trade of India through
Quality Control and Inspection
146
International Business
Institutions Connect with EXIM Trade
Indian Council of Arbitration (ICA)
•
The Indian Council for Arbitration (ICA) was
established on April 15, 1965.
•
ICA provides arbitration facilities for all types
of Indian and international commercial
disputes through its international panel of
arbitrators with eminent and experienced
persons from different lines of trade and
professions.
147
International Business
Institutions Connect with EXIM Trade
•
India Trade Promotion Organisation (ITPO)
•
ITPO is a government organisation for promoting
the country’s external trade. Its promotional tools
include organizing of fairs and exhibitions in India
and abroad, Buyer-Seller Meets, Contact
Promotion Programmes, Product Promotion
Programmes, Promotion through Overseas
Department Stores, Market Surveys and
Information Dissemination.
148
International Business
Institutions Connect with EXIM Trade
•
India Trade Promotion Organization (ITPO)
•
ITPO is a government organization for promoting
the country’s external trade. Its promotional tools
include organizing of fairs and exhibitions in India
and abroad, Buyer-Seller Meets, Contact
Promotion Programmes, Product Promotion
Programmes, Promotion through Overseas
Department Stores, Market Surveys and
Information Dissemination.
149
International Business
Institutions Connect with EXIM Trade
•
India Trade Promotion Organization (ITPO)
•
ITPO is a government organization for promoting
the country’s external trade. Its promotional tools
include organizing of fairs and exhibitions in India
and abroad, Buyer-Seller Meets, Contact
Promotion Programmes, Product Promotion
Programmes, Promotion through Overseas
Department Stores, Market Surveys and
Information Dissemination.
150
International Business
Institutions Connect with EXIM Trade
Marine Products Export Development Authority
(MPEDA)
•
The Marine Products Export Development
Authority (MPEDA) was constituted in 1972
under the Marine Products Export Development
Authority Act 1972 and plays an active role in the
development of marine products meant for
export with special reference to processing,
packaging, storage and marketing etc
151
International Business
Institutions Connect with EXIM Trade
Directorate General of Foreign Trade (DGFT)
•
DGFT or Directorate General of Foreign Trade
is a government organization in India
responsible for the formulation of guidelines
and principles for importers and exporters of
country.
152
International Business
Institutions Connect with EXIM Trade
Export and Import Bank of India
•
The Export and Import Bank of India, popularly
known as the EXIM Bank was set up in 1982
India
post liberalization and globalization, the
import and export industry became a huge sector
in our economy.
T
o provide financial support to importers and
exporters the government set up the EXIM Bank
153
International Business
Institutions Connect with EXIM Trade
•
It is the principal financial institution in India
for foreign and international trade.
•
It oversees and coordinates the working of
other institutions that work in the import-
export sector.
•
The ultimate aim is to promote foreign trade
activities in the country
154
International Business
Thank You
International Business
155
International Business involves transactions across national borders to fulfill various objectives. It encompasses activities like exporting goods, licensing production, joint ventures, and more. The concept extends beyond trading goods and services between countries, aiming to cater to international customers and expand market reach by adapting business operations to different countries' needs and preferences.
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Presentation Transcript
International Business International Business By Dr. Madhu V Menon Mats School of Management Studies & Research International Business 1
Syllabus MODULE I Introduction Meaning, need for International Business, Evolution of international Business; distinction between international Business and domestic Business, Stages of Globalization- Meaning, Production, Investment Advantages and Disadvantages, MNC s and International Business to International Business: Internationalization, Features, and Technology, Stages- International Business 2
What is International Business International business consists of transactions that are carried out across national borders to satisfy the objectives of individuals, companies, and organizations. International Business transactions all over the world. These transactions include the transfer of goods, services, technology, managerial knowledge, and capital to other countries. conducts business International Business 3
What is International Business An international business has many options for doing business, it includes, 1. Exporting goods and services. 2. Giving license to produce goods in the host country. 3. Starting a joint venture with a company. 4. Opening a branch for producing & distributing goods in the host country. 5. Providing managerial services to companies in the host country. International Business 4
Definition of International Business Cambridge business as: the activity of trading goods and services between countries. However, international business is beyond this definition. International business is a cross- border transaction businesses, or government entities dictionary defines international between individuals, International Business 5
Definition of International Business Some more Definition: 1. The process of extending the business activities from domestic to any foreign country with an intention of targeting international customers. 2. The conduction of business activities by any company across the nations. 3. The expansion of business functions to various countries with an objective of fulfilling the needs and wants of international customers International Business 6
Need of International Business The needs of International Business: 1. Market Expansion. 2. Non- availability of Product. 3. Cost Advantage 4. Economic recession in home market. 5. Low domestic demand. 6. Excess production capacity 7. Greater Purchasing Power International Business 7
Scope of International Business The scope of international businesses are: 1. Importing and Exporting 2. Licensing 3. Franchising 4. Contract Manufacturing/Outsourcing 5. Joint Ventures 6. Foreign Direct Investment 7. Growth Opportunities 8. Integration of Economies International Business 8
Evaluation Of International Business Global trade is as old as human history Every country is not self Sufficient. In olden times, People uses bartered goods & services with each other. One could trace International Trade back in 3000 B.C. The origin of International Business is International Trade. International Business 9
Evaluation Of International Business One of the oldest known trading routes and perhaps the longest and most successful in the history was the Silk Road. The Silk Road was a network of many trading routes that originated in China and ended at the Mediterranean Sea and Europe. Silk road was used between 50 BCE to 250 CE is perhaps the most well-known example of IT. International Business 10
Evaluation Of International Business The 17 Century so Industry Revolution in Europe. International Business 11
Distinction Between International Business Domestic business involves those transactions that take place within the boundaries of a country. The Buyer and seller belong to the same country in DB DB deal with the same currency since both the buyer and seller are from the same country. Domestic Business International business (IB) involves those transactions that take place outside the boundaries of a country. The buyer and seller belong to different countries in IB IB deal with currencies since the buyer and seller are not from the same country. (DB) economic economic geographical geographical different International Business 12
Distinction Between International Business Domestic Business There is greater homogeneity in terms of the nature of customers of DB There is greater heterogeneity in terms of the nature of customers of IB Geographical boundaries limit DB Geographical boundaries do not limit IB Capital investment is lower for companies that are involved in DB Capital investment is higher for companies that are involved in IB The DB has greater mobility of factors of production compared to IB The IB has lesser mobility of factors of production compared to IB International Business 13
Stages in Internationalization Internationalization is the process of increasing involvement of enterprises in international markets. Reach out to the international market more often than not is faced with hitches and challenges one. The optimal strategic attractive available to firms depend upon different internationalization. Most companies view foreign operations as riskier than domestic ones because they must operate in environments which are less familiar to them. levels of International Business 14
Stages in Internationalization Enterprises undertake international activities reluctantly and follow practices to minimize their risks. Stages of internationalization can be followed: 1. Domestic Company. 2. International Company 3. Multinational Company 4. Global Company: 5. Transnational Company: International Business 15
Stages in Internationalization Domestic Company: It limits its operations, mission and vision to the national political boundaries. These companies focus its view on the domestic market opportunities, domestic financial customers etc. These companies environment of the country, formulate the strategies to exploit the opportunities offered by the environment. domestic companies, suppliers, domestic analyze the national International Business 16
Stages in Internationalization International Company: These companies select the strategy of locating the branch in the foreign market and extend the same domestic operations into foreign markets. These companies remain ethnocentric or domestic country oriented. Normally internalization process of most of the global companies starts with this stage of two processes. Many of the companies follow this strategy due to limited resources and also to learn from the foreign market gradually before becoming a global company without much risk. International Business 17
Stages in Internationalization Multinational Company: This stage of multinational company is also referred as multi-domestic company It formulates different strategies for different market thus the orientation shift from ethnocentric to polycentric. Under polycentric orientation the offices/branches/ subsidiaries of a MNC work like a domestic company in each country where they operate with distinct policies and strategies suitable to that country concerned. International Business 18
Stages in Internationalization Global Company: An International Company that centralizes management and other decisions in the home country. It is the one which has either produces in home country or in a single country and focuses on marketing these products globally and focuses on marketing these products domestically. International Business 19
Stages in Internationalization Transnational Company: A commercial enterprise that runs several facilities and conducts business in multiple countries. These company produces, market, invests and operate across the world. It is an integrated global enterprise which links global resources with global market at profits. There is no such pure transnational corporation. International Business 20
Stages in Internationalization Characteristics of a Transnational Company This company thinks globally and acts locally. This company adopts global strategy but allow value addition to the customer of a domestic country. The assets of a transnational company are distributed throughout the world, independent and specialized. The R&D facilities of a transnational company are spread in many countries International Business 21
Globalization The term globalization refers to the integration of the economy of the nation with the world economy. Globalization is the free movement of goods, services and people across the world in a seamless and integrated manner. Globalization can be thought of to be the result of the opening up of the global economy and the concomitant increase in trade between nations. International Business 22
Globalization Production & Investment The barriers on foreign trade and foreign investment were removed to a large extent. This meant that goods could be imported and exported easily and also foreign companies could set up factories and offices here. Removing barriers or restrictions set by the government is what is known as liberalization. With liberalization of trade, businesses are allowed to make decisions freely about what they wish to import or export.. International Business 23
Globalization Factors that have Enabled Globalization Technology Rapid improvement in technology has been one major factor that has stimulated the globalization process. This has made possible much faster delivery of goods across long distances at lower costs. The developments in information and communication technology have made accessible. . information instantly International Business 24
Globalization 1. Transfer of Technology 2. Better Services 3. Standardization of Living 4. Development of Infrastructure 5. Foreign Exchange Reserves 6. Economic Growth 7. Affordable Products 8. Contribution to World GDP Growth Rate 9. Extensions of Market . Advantages of Globalization International Business 25
Globalization Disadvantages of Globalization 1. Growing Inequality: 2. Increasing of the Unemployment rate: 3. Trade Imbalance: 4. Environmental Loots: International Business 26
MNC & International Business A multinational corporation (MNC) has facilities and other assets in at least one country other than its home country. MNC generally has offices and/or factories in different countries and a centralized head office where they coordinate global management. Having a presence in a foreign country such as China allows a corporation to meet Chinese demand for its product without the transaction costs associated with long-distance shipping. International Business 27
MNC & International Business MNC tend to establish operations in markets where their capital is most efficient or wages are lowest. By producing the same quality of goods at lower costs, multinationals reduce prices and increase the purchasing power of consumers worldwide. Establishing operations in many different countries, a multinational is able to take advantage of tax variations. The other benefits include spurring job growth in the local economies, potential increases in the company's tax revenues, and increased variety of goods. International Business 28
MODULE - II MODULE II Theories of International Trade: Classical and Neo-classical theories, Mercantilism, Absolute Cost Advantage theory, Comparative advantage theory, Factor-proportions theory, Product Life Cycle theory. International Business 29
Theories of International Trade International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries. People or entities trade because they believe that they benefit from the exchange. They may need goods or services. While at the surface, this many sound very simple, there is a great deal of theory, policy, and business strategy that constitutes international trade. or want the International Business 30
Theories of International Trade Classical theories: 1. Mercantilism, 2. Absolute Cost Advantage theory, 3. Comparative advantage theory, 4. Factor-proportions theory Neo-classical theories: 1. Product Life Cycle theory. International Business 31
Theories of International Trade Mercantilism: Developed in the sixteenth century & was one of the earliest efforts to develop an economic theory. This theory stated that a country s wealth was determined by the amount of its gold and silver holdings. In it s simplest sense, mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports. International Business 32
Theories of International Trade The objective of each country was to have a trade surplus or a situation where the value of exports are greater than the value of imports. A closer look at world history from the 1500s to the late 1800s helps explain why this theory flourished. This strategy is called protectionism and is still used today Nations expanded their wealth by using their colonies around the world in an effort to control more trade and amass more riches. International Business 33
Theories of International Trade Although mercantilism is one of the oldest trade theories, it remains part of modern thinking. Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and discourage imports Mercantilism s protectionist policies only benefit select industries, at the expense of both consumers and other companies, within and outside of the industry International Business 34
Theories of International Trade Absolute Advantage: In 1776, Adam Smith questioned the leading mercantile theory Smith offered a new trade theory called absolute advantage, which focused on the ability of a country to produce a goods more efficiently than another nation. Smith reasoned that trade between countries shouldn t be regulated or restricted by government policy or intervention. International Business 35
Theories of International Trade By efficiencies, because their labor force would become more skilled by doing the same tasks. Therefore, production would also become more efficient. Smith s theory reasoned that with increased efficiencies This theory stated that a nation s wealth shouldn t be judged by how much gold and silver it had but rather by the living standards of its people. specialization, countries would generate International Business 36
Theories of International Trade Comparative Advantage: The challenge to the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage in many areas. In contrast, another country may not have any useful absolute advantages. To answer this challenge, David Ricardo, an English economist, introduced the theory of comparative advantage in 1817. International Business 37
Theories of International Trade Ricardo reasoned that even if Country A had the absolute advantage in the production of both products, specialization and trade could still occur between two countries. Comparative advantage occurs when a country cannot produce a product more efficiently than the other country; However, it can produce that product better and more efficiently than it does other goods. International Business 38
Theories of International Trade However, it can produce that product better and more efficiently than it does other goods. The difference between these two theories is subtle. Comparative advantage focuses on the relative productivity differences, advantage looks at the absolute productivity. whereas absolute International Business 39
Theories of International Trade Case Study Let s look at a simplified hypothetical example to illustrate the subtle difference between these principles. Miranda is a Wall Street lawyer who charges $500 per hour for her legal services. It turns out that Miranda can also type faster than the administrative assistants in her office, who are paid $40 per hour. Even though Miranda clearly has the absolute advantage in both kill sets, should she do both jobs? No. For every hour Miranda decides to type instead of do legal work, she would be giving up International Business 40
Theories of International Trade $460 in income. Her productivity and income will be highest if she specializes in the higher-paid legal services and hires the most qualified administrative assistant, who can type fast, although a little slower than Miranda. By having both Miranda and her assistant concentrate on their respective tasks, their overall productivity as a team is higher. This is comparative advantage. A person or a country will specialize in doing what they do relatively better. International Business 41
Theories of International Trade In reality, the world economy is more complex and consists of more than two countries and products. Barriers to trade may exist, and goods must be transported, stored, and distributed. However, this simplistic example demonstrates the basis of the comparative advantage theory. International Business 42
Theories of International Trade Heckscher-Ohlin Theory or Factor Proportions Theory The theories of Smith and Ricardo didn t help countries determine which products would give a country an advantage. Both theories assumed that free and open markets would lead countries and producers to determine which goods they could produce more efficiently. In the early 1900s, two Swedish economists, Eli Heckscher & Bertil Ohlin, focused their attention on how a country could gain comparative advantage by International Business 43
Theories of International Trade producing products that utilized factors that were in abundance in the country. Their theory is based on a country s production factors land, labor, and capital, which provide the funds for investment in plants and equipment. They determined that the cost of any factor or resource was a function of supply and demand. Factors that were in great supply relative to demand would be cheaper; factors in great demand relative to supply would be more expensive. International Business 44
Theories of International Trade Their theory, also called the factor proportions theory, stated that countries would produce and export goods that required resources or factors that were in great supply and, therefore, cheaper production factors. In contrast, countries would import goods that required resources that were in short supply, but higher demand. For example, China and India are home to cheap, large pools of labor. Hence these countries have become the optimal locations for labor-intensive industries International Business 45
Theories of International Trade Their theory, also called the factor proportions theory, stated that countries would produce and export goods that required resources or factors that were in great supply and, therefore, cheaper production factors. In contrast, countries would import goods that required resources that were in short supply, but higher demand. For example, China and India are home to cheap, large pools of labor. Hence these countries have become the optimal locations for labor-intensive industries International Business 46
Theories of International Trade Neo Classical Theory Product Life Cycle Theory: Raymond Vernon, US Management Guru, developed this theory in the 1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct stages: 1. New product, 2. Maturing product, and 3. Standardized product. International Business 47
Theories of International Trade The theory assumed that production of the new product will occur completely in the home country of its innovation. It has also been used to describe how the personal computer (PC) went through its product cycle. The product life cycle theory has been less able to explain current trade patterns where innovation and manufacturing occur around the world. For example, global companies even conduct research and development in developing markets where highly skilled labor and facilities are usually cheaper. International Business 48
Theories of International Trade Even though research and development is typically associated with the first or new product stage and therefore completed in the home country, these developing or emerging-market countries, such as India and China, offer both highly skilled labor and new research facilities at a substantial cost advantage for global firms. International Business 49
Syllabus MODULE III Modes of Entry in International Business: Mode of Entry: Exporting, Licensing, Franchising, Contract Manufacturing, Turn Key Projects, Foreign Direct Investment Mergers, Acquisitions and Joint Ventures, Comparison of different modes of Entry. International Business 50
