International Business

1. International Business Dr Hiranmoy Roy

2. Need For International Business • International Business is exciting because it combines the science and the art of business with many other disciplines as economics, anthropology, geography, history, language, jurisprudence, statistics and demography. • Int. Business is important because economic isolation has become impossible

3. Failure to be a part of global market assures a nation of declining economic influence and a deteriorating standard of living for its citizens. • Successful participation holds the promise of improved quality of life, better society and even a peaceful world. • On an individual level students of IB are likely to work for an MNC such as manufacturing, banks, insurance and consulting firm.

4. There is an unprecedented opportunity for an individual to enter international business. • Speed, creativity and innovation are important for success of IB than size. • Tech. and trade are growing larger than economies • Tech. continues to ease conducting IB pointing for larger potential for future.

5. Therefore IB offer’s more potential for expansion, growth and income than domestic business alone • IB causes flow of ideas, services and capital across the world • Innovation can be better disseminated, human capital can be used better and financing can take place more quickly

6. IB offers consumer’s wider variety of goods both in terms of quality and quantity. • IB offer’s opportunity for movement of factors of production and challenging employment • Relocation of Resources • Open market for competition • IB do not benefit all to same degree • IB offer’s both opportunity and challenge to companies, individuals and countries

7. Defining International Business • IB consists of transactions that are devised to carry out across borders to satisfy objectives of individuals, companies and countries • Primary type of IB are export-import trade and FDI • FDI is carried out by joint ventures and subsidiaries • Other type of IB are franchising, licensing and management contracts

8. Difference between IB and domestic business • New set of Macro environmental factor’s, constraints and conflicts resulting from different cultures, societies and laws • IB also reefer's to international transactions. • Subject to constant change IB is more an art as a science • Success in the art of business depends on firm grounding on scientific aspects

9. Some Issues of IB • How our idea, goods or service fits into int. market? • Enter market through trade or investments? • Should I obtain supply domestically or abroad? • What product adjustment necessary to local conditions? • What threats from global environment and how to counteract?

10. Chapter 2: Culture and International Business • The challenge for manager’s is to handle different values, attitudes and behaviours that govern human interaction • To understand cultural differences and to determine similarities across cultures and exploit them in strategy formulation. • Success in new markets is a function of adaptability, appreciation of other’s belief. • Recognition of different approach may lead to establishing best practice.

11. Cultural competence (flexibility) must be recognized as key management skills. • Cultural risk is just as real as commercial or political risk in International Business area. Culture Defined: Culture includes everything that a group thinks, says, does, and makes- its customs, language, material artifacts, and shared systems of attitudes and feelings. The definition therefore encompasses wide variety of elements from matreialstic to spiritual.

12. Every person is encultured into particular culture, learning the right way of doing things. • Problems arise when a person encultured in certain culture has to adapt to another one. • The process of acculturation – adjusting and adapting to specific culture other than one’s own- is one of the keys to success in international operations. • Cultural differences are based on nationality, religion, race, or geographic areas have resulted in the emergence of distinct subcultures.

13. The international manager’s task is to distinguish relevant cross-cultural and intra cultural differences and then to isolate potential opportunities and problems. • Borrowing and interaction among national cultures leads to narrowing gaps between cultures • IB entity acts as a change agent by introducing new ideas or products and practices. • Social change in manner of consumption (McDonald’s)

14. Some countries are dominant in cultural sector such as US in television programming and movies. Commonly suggested Protectionism may not work. • Elements of Culture: • Language : It is the mirror of culture • Verbal Language- tune of voice, Non-Verbal (Gestures, body positions, eye contacts) • Language mastery is required before acultured.

15. Language serves distinct roles in IB (through gathering information) • Intelligence of a market is gathered by being part of a market, rather observing from outside. • Local manager of MNC is primary source of political information. • Language important for managers in company communications • Difficulty encountered by managers to communicate with employees through interpreters

16. “Tabling a Proposal” delaying decision in US but it implies prompt action in UK. • When British promise at the “end of the day” it do not implies within 24 hours, rather when they complete the job. • British- “Negotiations Bombed”- meaning they were a success, But in US could convey exactly the opposite meaning • Bridge the language gap • Multi lingual- Multi Cultural Format

17. If you want to kill a message translate it. (85% accuracy through software) • Non- Verbal Language- Time, Space, Material Possessions, Friendship Patterns and Business Agreements- a starting pt. from which manager’s begin • Time: In many parts of the world time is flexible, not a limited commodity. Hong – it is futile to set exact meeting time as movement from place to place depend on traffic situation.

18. Showing impatience for such behaviour would astonish an Arab, Latin American and Asian • Understanding national or cultural differences in the concept of time is critical for IB manager. • Extending Social Acquaintance, Personal Rapport, are essential for conducting Business. • Contracts may bound on “Hand Shakes” not lengthy and complex agreements- which makes Western Businessmen Unhappy

19. Space: Arabs, Latin Americans likes to stand close to people when they talk. • In US not comfortable at close range • If backs from Arabs- this may take as –ve reation • Western- Squarely Kissed on the lips by a business partner- regardless of sex – often taken aback. • Int. Body language must be included in non-verbal language of IB. • Finger- and Thumb- OK- In US successful completion of negotiations. • In Southern France manager indicate sales was worthless

20. In Japan a little bribe had been requested • It is insulting in Brazilian • North Europeans are quite reserve in using their hand and maintain a good space • South Europeans involve their bodies to a far greater degree in making a point. • Religion: Religion has an impact on IB. that is seen in cultures values and attitudes. • Dominant Religions- Christianity, Islam, Hinduism, Buddhism, Confucianism

21. Some countries have officially secularism such as Marxism- Leninism e.g., China, Cuba, Vietnam • Holidays – Sunday, Friday • McDonald’s and Coke met with success- but do not imply world becoming westernized. • Universal respect needed in cross cultural negotiations.

22. Politics and Law • Economic Risk: Exchange controls • Tax policy to control MNC’s • Price controls- to control prices of imports such as foods and health care • Managing Risks: Ways exist to lessen risk • Manager’s action can reduce risk provided they understand root causes of host countries policies • Close montiring of political situations • Insurance cover to cover political and economic risks

23. IB Follows two types of laws as follows- • Common Law- based on tradition • Code law based on statutes

24. Chapter 5: Theory of International Trade and Investment • Mercantilism: Feudal states were self sufficient • Food, Shelter – available human labour • Basic needs met. • Merchants startrted visiting market place. • Traveler's began exchanging goods • Trade become useful • Industrial Revolution • Govt. regulation of International Commerce • Mixed exchange of trade with accumulation of wealth.

25. Govt. identified strength with accumulation of gold and silver • Policy of Exports dominating imports • Restriction on importation of many goods. • Laws passed to making it illegal export of gold and silver, even if such were required to importation • Power and influence in the conduct of trade.

26. Evolution of trade- Classical- The0ry of Absolute advantage (Adam Smith) • Theory of Comparative advantage- David Ricardo • Theory of Factor Proportions- Eli Heckscher and Bertil Ohlin • The Leontief Paradon- Wassily Leontief • Overlapping Product Ranges Theory- Staffan Brunestam Lindere • Product Cycle Theory- Raymond Veron • Imperfect Market and Trade theory- Paul Krugman • The competitive advantage of nations- Michael Porter.

27. Chapter 5: Theory of International Trade and Investment • Few Questions of International Trade: • Why countries trade? • Do countries trade or do firms trade? • Do the elements of Competitiveness of a firm, industry or countrty arise from some inherent endowment of the country or they change with time and circumstances? • Once identified can these sources be manipulated or managed by firms or Govt. to the benefit of traders

28. Mercantilism • The evolution of trade today reflects three events • The collapse of feudal society (Autarky- did not trade because its own needs met internally) • The feudal society was self sufficient although hardly sufficient in modern terms • Only basic needs were fulfilled • Mercantilism mixed exchange through trade with accumulation of wealth. • Accumulation of Silver and Gold

29. Classical Theory • The question that why countries trade has proven difficult to answer • Evolution of trade theories: Theory of Absolute advantage (Adam smith) • The theory of Comparative advantage (Ricardo) • The theory of factor proportions ( Eli Heckscher & Bertil Ohlin) • Leontief Paradox (Wassily Leontief) • Overlapping Product Ranges Theory (Staffan Burenstam Linder) • Product Cycle Theory (Raymond Vernon) • Imperfect Markets and Trade Theory (Paul Krugman)

30. Classical Theory • Theory of Absolute and Comparative advantage • Absolute advantage and Division of labour fundamental to trade theory • Each country would specialize in a product for which it was uniquely suited • Each country would specialize in products for which it possessed absolute advantage • Countries would produce more and exchange products for goods that were cheaper in price than those produced at home

31. Country wheat cloth _______________________________________ England 2 4 forgo 2/4 of C France 4 2 forgo 4/2 of C *Labour hours England has absolute advantage in the production of wheat and France has absolute advantage in the production of cloth

32. England has comp. adv. in production of wheat. If England produces one unit of wheat, it is forgoing the production of 2/4 (= 0.50) of a unit of cloth. If France produces one unit of wheat it is forgoing the production of 4/2 (=2) units of a cloth. Eng. Thus has lower opportunity cost in the production of wheat. France has comparative advantage in the production of cloth. If Eng. Produces 1 unit of cloth, it is forgoing the production of 4/2 (= 2)units of a wheat. If France produces 1 unit of cloth, it is forgoing the production of 2/4 (=0.50) units of wheat. France therefore has lower opportunity cost of producing cloth.

33. Factor Proportions Trade Theory • The HO theory considered two factors of production, labour and capital. • Different goods required different proportions of two factors (technology determines) • Production of 1 unit of good X requires 4 units of labour and 1 unit of cap. • To produce 1 unit of good Y requires 4 units of lab. and 2 units of cap. • X is thus relatively labour intensive product and Y is relatively capital intensive product.

34. Capital 1 unit of Good Y Relatively Capital-Intensive 2 1 1 unit of Good X Relatively Lbour- Intensive Labour 1 2 3 4

35. According to HO (FP) theory factor intensity • Depend on the state of technology –(current method of production) • This theory assumes same technology of production for would be used for the same goods in all countries • It is not, therefore, differences in the efficiency of production that will determine trade between countries as it did in classical theory. • Classical theory assumed differences in technology and productivity of labor. • If there is no difference in technology or productivity of labor across countries then what determines the comp. advantage in prod. And export? • The answer is factor prices determine cost difference.

36. And prices are determined by the endowments of labor and capital the country posses. • The theory assumes factors are immobile across borders, therefore differences in endowments determines the relative costs of labor and capital • Using these assumptions ,the FP theory stated that a country should specialize in the production and export of those products that use intensively its relatively abundant factor. • Relatively Lab. Abundant Country should specialize in lab. Intensive goods. It should export lab. Intensive goods in exchange for cap. intensive goods and vice-versa.

37. Assumptions: The theory assumes two country, two factor and two goods model 2 x 2 x 2 assumption • Markets for inputs and outputs are perfectly competitive • Increasing production of a products experiences diminishing returns • Both countries are using identical technologies • Leontief Paradox: • Wassily Leontief - 1947 (USA) , 1950 (applicability of FP theory in case of USA) • Input Output Analysis.