INTRODUCTION:

Understanding Major Issues in

International Business
A/Prof Sumit Mitra
IIMK
Opening Case: The Globalization of
Health Care There is a shortage of
radiologists in the United
States and demand for their
services is growing twice as
fast as the rate of
graduation
Solution to the problem:
Send images over the
Internet to be interpreted by
radiologists in India

Sumit Mitra IIMK IB
Major events affecting global business
Socio-polical and economic changes
fall of Soviet Block, unification of Germany
Gulf war, formation of EU and Euromoney
Major changes in IT, electronics and other world
industries
Current Crisis in above and more
Noticable is
RAPIDITY of change (subprime-2008)
Regionalism - Trade Blocks like NAFTA,
ASEAN (Asia outside crisis)
Nationalistic character- BRIC
2013-14
Why is all this critical
Because we have globalization
Business operating across national boundaries
Affecting sovereign states
Needing central monitoring- supranational
bodies/ institutions like UN,IMF, WB and now
WTO
Resulting feeling of Regional similarity
Creation of Multinational Corporations
(MNC)
2013-14
Sumit Mitra IIMK IB
Sumit Mitra IIMK IB
Business Problems- International
Dow Chemicals makes cash flow for projects in
India in INR?
Will it give good returns in Dollar ? (x-change rate?)
What happens to Coticorps loans in Peruvian
currency (Soles) if that currency cannot be converted
to dollars ? Tata-Corus needs Euros to pay wages in
France ?
How well will Cokes US CEO manage in Japan ?
How do u consolidate yr global business in US$ ?
How do I realize profits across countries to minimize
tax?
2013-14
Sumit Mitra IIMK IB
Why firms Internationalize ?
Primary reasons for internationalizing
cheap sources of raw material and labour
(Globalization of Production)
large size of markets
(Globalization of Markets)

Internationalizing firms is only a microcosm of IB
2013-14
Sumit Mitra IIMK IB
Types of International Activities
IB does not necessarily involve MNCs operating
across borders. It could be domestic firms
involved in:
Exports/Imports
Direct Investment
Licensing
Portfolio Investment
Loans
Unilateral Transfers
It is about seamless linkage of business across the
world- The World is Flat

2013-14
History
Historically it is about trade across the
world:
China to Europe via Venice Silk Route
Rise of European trading cos. Like Dutch and
English East India Company
Barter followed by trade in bullionin sources
of comparative advantage
Indian-spices, muslin, Chinese-silk/tea
English East India Co. May be first MNC
with a BOD, stock trading

2013-14
Sumit Mitra IIMK IB
Sumit Mitra IIMK IB
Domestic versus International Business (IB)
Product, price, competition & Quality common
across markets expected else Arbitrage
In IB managers need to cope with
different currencies whose value change
different government policies
cultural differences across countries
Complex decisions
Even in domestic business need to be international
as competitors MNCs having above characteristics
2013-14
Sumit Mitra IIMK IB
Definition
Latest waves of MNCs from Europe, US, Japan,
Korea, BRIC in that order.
Transnational Corporations/Multinational
Companies (MNC) as defined by Vernon and
Wells have the following characteristics:
1. They are linked by ties of common ownership
2. They draw on a common pool of resources, such
as money, credit, IT, patents.
3. They respond to some common strategy.

2013-14
Sumit Mitra IIMK IB
Theory of IB
International Product Cycle Theory: (R.Vernon)
1
st
stage: New products would first be introduced in
developed demanding and large markets with highest per
capita income.
2nd stage: product will need more customers, dd from similar
markets thru exports
3rd stage: foreign production to discourage local production
abroad (MNC)
4th stage: Highly standardized product, high vol, low margins
so go to LDCs for cheap inputs like labour. Export back to
DC cheap. New innovations
2013-14
Globalization of Production
Historically this has been primarily confined to
manufacturing enterprises
Increasingly companies are taking advantage of
modern communications technology, and particularly
the Internet, to outsource service activities to low-cost
producers in other nations
2013-14
Sumit Mitra IIMK IB
Sumit Mitra IIMK IB
Theory of IB
Current reasons for Globalization:
High R&D, market search cost, short PLC so
recover cost faster
Unification of global markets through IT,
transportation and mobility of labour and capital
Competitive positioning and cross subsidization of
markets
Tastes and preferences worldwide are becoming
uniform.
2013-14
The Role of Technology
Lowering of trade
barriers made
globalization
possible; technology
has made it a reality
Since the end of
World War II the
world has seen
advances in
Communication
Information processing
Transportation technology
Trade: Average Tariff Rates on
Manufactured Products
1913 1950 1990 2002
France 21 % 18 % 5.9 % 4.0 %
Germany 20 % 26 % 5.9 % 4.0 %
Italy 18 % 25 % 5.9 % 4.0 %
Japan 30 % -- 5.3 % 3.8 %
Holland 5 % 1 % 5.9 % 4.0 %
Sweden 20 % 9 % 4.4 % 4.0 %
Great Britain -- % 5.9 % 4.0 %
United States 44 % 14 % 4.8 % 4.0 %
2013-14
Sumit Mitra IIMK IB
Changing Nature of
Multinationals

Non-U.S. Multinationals
In the 1960s global business
activity was dominated by
large U.S. multinational
corporations
In 1973 48.5% of
multinationals were U.S. firms
In 2002 28% of largest
multinationals were U.S. firms
Globalization of the world
economy has resulted in a
relative decline in the
dominance of U.S. firms in the
global marketplace
Rise of Mini-Multinationals
Growth of medium-size and
small multinationals has
become a trend in
international business
Consider Lubricating Systems
Inc. which employs 25 people
and generates sales of $6.5
million, of which $2 million are
from global sales
International business is
conducted not just by large
firms but also by medium-size
and small enterprises
Return
2013-14
Sumit Mitra IIMK IB
The Globalization Debate
Pro Factors
Lower prices for goods and
services
Economic growth
stimulation
Increase in consumer
income
Creates jobs
Countries specialize in
production of goods and
services that are produced
most efficiently
Con Factors
Destroys manufacturing
jobs in wealthy, advanced
countries
Wage rates of unskilled
workers in advanced
countries declines
Companies move to
countries with fewer labor
and environment
regulations
Loss of sovereignty

2013-14
Sumit Mitra IIMK IB
Sumit Mitra IIMK IB
Theory of IB
Multinationality as a state of mind:
Belief of managers that
degree of multinationality affects viability of firm
MNCs are new kind of institutions for 21st century
Home country superiority:
Ethnocentricity: Accept our methods of business
Host coutry attitude
Polycentricity: Host country cultures different , manage
locally.
Geocentrism: Unileverize Indians & Indianize Unilevers
2013-14
Wave of MNCs
First from colonial origins: Unilever, Nestle
Post WW-II US MNCs: P&G, Caterpillar,
Coke
Japanese and Korean: Post-technology leap-
Matsushita, Toyota, Hyundai, Samsung
MNCs from Emerging economies: Haier
from China, Tata Corus from India and
Cemex from Mexico
2013-14
Sumit Mitra IIMK IB
Sumit Mitra IIMK IB
Theory of IB
Impact of Culture on IB
Culture plays an important role by influencing assumptions,
beliefs and values of individual e.g
Affects way people dress, food habits etc.

Therefore for MNCs it is frequently required to modify their
global strategies to meet local needs
e.g Britishers take tea hot, US use it as summer drink to be
served with ice.
Balancing local and global needs
2013-14
Sumit Mitra IIMK IB

Industry competitiveness
Determinants of national competitive advantage:
Industry structure
Demand condition
Related &
Supporting Ind.
Factor conditions
2013-14
Sumit Mitra IIMK IB
Service industry characteristics
Deals with intangible products
Producttion and consumption instantaneous and
hence at same place
Perishable
Historically thought as non-productive activity.
High international trade through electronic media
and IT.
As labour intensive so shift to LDCs.
Customer focus very important.
Standardization difficult
2013-14
Rise of China
Dominance of manufacturing industry-
cheap labour
Artificially low xchange rate with
USD/Yuan
Closer to markets
2013-14
Sumit Mitra IIMK IB
Major Issue
Need to exploit economies of scale Vs
Need to be locally responsive.
But Ghemawat says in his AAA model
Economies of scale is Aggregation
Local Responsiveness is Adaptation
Exploiting difference between national and
regional markets is Arbitrage
Companies stress different As at different stages of
lifecycle e.g. IBM India-Global services
2013-14
Sumit Mitra IIMK IB
Sumit Mitra IIMK IB


THANK YOU

2013-14