International Business 3
International Business 3
International Business 3
Business
The various approaches to international business are:
• Ethnocentric Approach:
• a company operating its business activities in domestic market may
enter into the foreign market without any change in its marketing
strategies.
• The excessive production more than the demand for product may
compel the co to sell the product in the foreign market.
• The top mgt of the company makes the decision relating to export
and the marketing personnel of the company monitor the export
operations with the help of export department. Such approach of
international business is called ethnocentric approach.
Polycentric Approach
• Refers to the different approaches of marketing in
different countries. When a company has entered into
the foreign market and feels that its ethnocentric
approach is not effective to influence the consumers of
the other countries, then it is essential to make required
changes in the marketing mix. Instead of depending on
centralized policies, the company establishes a
subsidiary unit in the foreign country and decentralize all
the operations and delegates decision making authority
to its executives. The parent co appoints the required
staff in the foreign subsidiary. The co appoint key
personnel from the host country and other staff from the
host country. The staff members in consultation with the
MD takes necessary marketing decisions according to
the market requirement of the host country.
Regiocentric Approach
• A co managing its business at international level
has successfully established in a foreign country
while it is using polycentric approach and feels
that regional environment of the neighbouring
countries is much similar to that of the host
country, the co may start exporting product to
the neighbour countries. This approach is known
as the regiocentric approach.
• As for example a Japan based co has
successfully established in India. This practice
will certainly be considered as the regiocentric
approach though the co market more or less the
same product, designed under the polycentric
approach, in other countries of the region, the
marketing strategies may be different for the
neighbouring countries.
Geocentric Approach
•A Co. using the geocentric approach
considers the whole world as a single
country. The employees are selected in
different countries. The headquarter co-
ordinates the activities of each subsidiary
which function like an independent and
autonomous co in carrying out managerial
practices like strategy formulation, product
design HR policy formulation etc.
FDI
• The investment made by a Co in new manufacturing and
or marketing facilities in a foreign country is referred to
as FDI. Investment made by Enron in power plant in
India is an example of FDI.
• The total investment made by company in foreign
country up to given time is called “ The stock of foreign
direct investment”
• US government statistics defines FDI as “ ownership or
control of 10% or more of an enterprise’s voting
securities or the equivalent interest in an unincorporated
US business”
• Generally it is stipulated that ownership of a minimum of
10- 25% of the voting share in a foreign co allows the
investment to be considered direct.
Forms of FDI
• Purchase of existing assets in a foreign
country.
• New investment in property
• Participation in joint venture with a local
partner.
• Transfer of many assets like human
resource, system, technology
• Exports of goods for equity
Factors influencing
•
FDI
Supply factors: production cost
• Logistics
• Resource availability
• Access to technology
• Demand factor: customer access
• Marketing advantages
• Exploitation of competitive advantages
• Customer mobility
• Political factor : avoidance of trade barriers
• Economic development incentives
Reasons for FDI
• To increase sales and profits( Toyota, Suzuki
in US
• To enter fast growing markets (IBM in Japanese
laptop market 40%)
• To reduce costs (US firms in India)
• To consolidate trade blocs (to access wider
market)
• To protect domestic market
• To protect foreign market (British petroleum in
USA)
• To acquire technological and managerial know
how. ( US co Kodak invested in Japan to acquire
technology)
Benefits of FDI
• Benefits to Home Country: inflow of foreign
currencies in the form of dividend interest.
Nissan’s profit repatriated to Japan are from FDI
in the UK. It helped Japan for positive BOP.
• FDI increases export of machinery, equipments,
technology from the home country to the host
country. This enhances the industrial activity of
home country.
• The increased industrial activity in the home
country enhances employment opportunities.
• The firm and other home country firms can learn
skills from its exposure to the host country and
transfer those skills to the industry in the home
country.
Costs to Home Country
• Home country’s industry and employment
position are at stake when the firms enter
foreign market due to low cost labor. The
US textiles moved to central America. This
resulted in retrenchment in the USA.
• Current account position of the home
country suffers as FDI is a substitute for
direct exports.
Benefits to host country
• Resource transfer effects
• Employment effect
• Balance of payment effect
• Dispersing with the bureaucratic rules and regulation which caused delays
and created hurdles for the FDI
• Allowing the MNCs to use trade marks in India with effect from May14,1992.
• Allowing 100% foreign equity for setting up of power plants with free
repatriation of profits.
• Allowing 100% equity contribution by the NRI and the corporate bodies
owned by NRI in high priority industries
• The holding non banking financial co can hold foreign equity up
to100%
• Foreign investors are allowed to establish 100% operating
subsidiaries and should bring at least US $ 50 million for this
purpose.
• 100% FDI is permitted in B2B ecommerce power sector and oil
refining.
• Manufacturing activities in all special economic zones can have
100% automatic route except few.
• 74% FDI is allowed subject to licensing and security norms in
internet service providers and 74% in other telecommunication
• projects.
Off shore venture capital fund can use automatic route subject to
SEC regulations.
• Insurance co can have FDI upto 26% subject to IRDA
Regulations.
• 1oo% FDI in airports courier services hotels and tourism drugs and
• pharmaceutical
Theories of International Trade
• Mercantilism is the oldest international trade theory that
formed the foundation of economic thought during about
1500 to 1800.
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20
15
10
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tape recor pens
Japan 3 10
Ph 1 30
Production possibility of countries
60
50
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tape record. pens
japan 6 20
Ph 2 60
Implications of theory
• By trading two countries can have more
quantities of both the products.
• Living standard of the people of both the
countries can be increased by trading between
the countries.
• Inefficiency in producing certain countries can
be avoided.
• Global efficiency and effectiveness can be
increased by trading.
• Global labor productivity and other resources
productivity can be maximized.
Criticism of the
• theory
No absolute advantage
• Country size
• Variety of resources
• Transport cost
• Scale economies
Portugal 90 80 1 wine = .
88 cloth
• From the above example it is evident that
Portugal has an absolute superiority of
production. However a comparison of the ratio of
the cost of wine production ( 80/120 ) with ratio
of the cost of cloth production (90/100) in both
the countries reveals that Portugal has an
advantage superiority in both the branches of
production. It will concentrate on the production
of wine in which it has comparative advantage
over England, while importing cloth from
England which has a comparative advantage in
cloth production. England will gain by
specialization in producing cloth and selling it to
Portugal in exchange for wine.
• In the event of trade taking place under
the assumption that within each country
labor is perfectly mobile between various
industries, Portugal will gain if it can get
anything more than .88 units of cloth in
exchange for one unit of wine and
England will gain if it has to part with less
than 1.2 units of cloth against one unit of
wine. Hence any exchange ratio between
0.88 units and 1.2 units of cloth against
one unit of wine represents a gain for both
the countries. The actual rate of exchange
will be determined by reciprocal demand
• Thus according to the comparative cost theory
free and unrestricted trade among countries
encourage specialization on a large scale. It
thereby tends to bring about:
• The most efficient allocation of world resources
as well as maximization of world production.
• A redistribution of relative product demands
resulting in greater equality of product prices
among trading nations and
• A redistribution of relative resource demands to
correspond with relative product demands,
resulting in relatively greater equality of resource
prices among trading nations.
Implications of the theory
• Efficient allocation of global resources
• Maximization of global production at the
least possible cost
• Product prices become more or less
equal among world market
• Demand for resources and products
among world nations will be maximized
• It is better for the countries to specialize in those
products which they relatively do best and export
them
• It is better for the countries to buy other goods
from other countries who are relatively better at
producing them
• Comparative cost theory is really an
improvement over absolute cost
advantage. This theory is not only an
extension to the principle of division of
labor and specialization but applies the
opportunity cost concept. It is also argued
that lower labor cost need not be a source
of comparative advantage.
• However Ricardo fails to consider the
money value of cost of production.
• F.W.Taussig bridged this gap in
comparative cost advantage theory.
Criticism of theory
• Two countries
• Transportation cost
• Two products
• Full employment
• Economic efficiency
• Division of gains
• Mobility servies
Product life cycle theory
• Raymond Vermon of the Harvard Business
school developed the Product Life cycle theory.
International product life cycle theory traces the
roles of innovation market expansion
comparative advantage and strategic response
of global rivals in international manufacturing
trade and investment decision.
• International product life cycle consists of four
stages:
• New product innovation
• Growth
• Maturing stage
• decline
Basis Introduction Growth Maturity Decline