Introduction on International business

What is International Business?
Any Commercial transaction between two or more countries is known as International Business. The parties of the transaction could be either companies or Governments.
Necessity of International Business:

• Raw Materials required from abroad
• Processes acquired from abroad. Eg-WalMart
• Advanced technologies required from abroad
• Competition-There will always be competition. Even if the company does not enter into foreign territory, foreign companies will enter into the host country.

So baring some very local businesses, it is not possible to stay insulated from international business because of the above mentioned reasons.

Features of International Business (Distinction b/w Domestic and IB):

• World is the Market
• Global scale of operation
• Ample number of opportunities
• World class products/services
• International level of productivity
• Efficient/Productive value chain

International Business by its very nature is a primary determinant of International Trade. One of the reasons of the increasing success of international business ventures is globalization.
Competitions due to global Opportunities
There are four level of competitions due to global opportunities
1. From host country suppliers- If a company from india wants to manufacture or export its products to US then the existing US suppliers will have advantage over the indian company in terms of zero custom tax, minimum transportation cost and a popular brand name.

2. From domestic players of home countries - In home country multiple companies with similar products having same pricing start competing.
3. Free trade agreements/ trade blocks - The advantages of Manufacturers belonging to a trade block is they don't have to pay any custom duty. The only cost incurred by them is the transportation cost. Eg-NAFTA.
4. International Players - apart from the company from home country, a number of other companies across the world would also like to sell their product in a particular host country. So there exists competition from international players.

Why Companies engage in International Business
The following are the factors for companies engaging in International Business

1. To increase sales

• Scale Economy
• International Product Life Cycle--IPLC stages followed by a product are different in different countries. These differences provide different market opportunities in different countries.
• Lead Market--companies want to be leaders in some market and just want to present in some other lead markets. If a company wants to be global, then it has to know what is happening in the lead market for its product. For this the compny needs to have a presence in the lead market.
• Following the Customer -- Every company has some core customers. Companies follow their core customers whereever they go in the international arena.

2. To acquire resources

• Better quality or competitive resources at lower cost
• Global sourcing-- not to depend on a few countries. companies want to spread risks in acquiring resources.

3. Reducing Risk-- companies try to reduce risk by spreading operations around the world .

Modes of International Business
There are basically two aspects of international business

1. Supplying to host country
2. Manufacturing in host country

1. Supplying to host country -- In this case the products are manufactured in home country and then exported to host country. It is feasible when the labor costs are low in home country, transportation costs are not high and no tariff barriers to exports.The advantage of this method is scale economy and excess capacity utilization.

2. Manufacturing in host country -- The manufacturing in the host country can be done either by contract manufacturing or by licensing.

• contract Manufacturing-- In contract manufacturing the company gives a contract to local manufacturers instead of setting up a factory. The advantage is the companies will have low level of involvement and in turn get a taste of the market first. The disadvantages being sharing of profits and the manufacturers might take over the market.
• Licensing-- In licensing the licensor permits the use of technology for a certain period of time to the licenseefor the manufacturing of licensed products and sale in the licensed territories. Here the licensor owns the technology. The licensee is permitted to use the technology. For this the licensee pays down payment as well as royalty to the licensor.

Foreign Country Entry Strategies

1. Exports
2. Contract Manufacturing
3. Licensing
4. Assembly
5. Joint Venture
6. Wholly owned subsidiary
7. Acquisition

1.Exports
The company goes for exports because it has higher competitive advantage. The transportation costs are low. The tariff rates are also low.
2. Contract Manufacturing
In contract manufacturing the parent/hiring company approaches a firm known as contract manufacturer with a design/formula. Once the contract is finalised then the contract manufacturer manufactures the components/products for the hiring company.
3. Licensing
In licensing, first the licensor searches for a potential licensee. Then the licensor permits the use of technology for manufacturing a component/product to the licensee for a definite period at a certain location.
A contract manufacturer only produces products where as a licensee produces as well as sells for the licensor. The advantage in licensing being the licensor gets tie ups with best distributors, knows local market and has cost advantage.The disadvantage is at the expiry of the licensing agreement the licensee will become the competitor to the licensor. So the market presence increases with licensing.

4.Assembly

In case of assembly, different parts of the product are manufactured in different countries. The assembly of the parts takes place in the host country. Over a period of time the product becomes local to the host country.
5.Joint Venture
In a Joint Venture, both the parties contribute a certain amount of equity and form a new company.
Reasons for forming Joint Venture:

• To enter into a foreign country
• Sharing risks as well as costs
• Good brand name and relations
• Suppliers, distributors and established channel partners
• Cultural bridge
• Unable to get 100% FDI since government restrictions
• Joint ventures are a necessity by government
• Profit sharing/market sharing

Why Joint Ventures Fail

• Change in external environment
• Conflict of vision/interest
• Both parties not contributing equally
• sharing or market, there by Market contraction
• Global competitiveness requires control, which is not entirely present with either party.
• JV might be due to govt. regulations so might be a compulsion.

6.Wholly Owned Subsidiary
A wholly owned subsidiary is a subsidiary whose parent company owns 100 percent of its common stock and there are no minority owners.
Advantages

• Freedom in designing the plant
• No dilution of brand image
• No dilution of profits
• Total control over operations
• No dilution of system processes
• Processes are standardised

Disadvantages

• Total risk ownership. No risk sharing
• Less knowledge of the market
• Degree of competition increases

7. Acquisition
Acquisition may be defined as a corporate action in which a company buys most, if not all, of the target company’s ownership stakes in order to assume the control of the target firm.
Advantages

• Acquiring the entire target company
• Saves time
• Quick to the market-due to well established distribution and sales channel
• The competition in the market remains unchanged

Disadvantages

• Obsolete technology
• Resources might not be best in class
• Processes and practices might not be world class

Expropriation vs. Nationalisation
If the government of any country takes over any foreign company, then it is known as expropriation where as if the government takes over any localised company, then it is known as Nationalisation.
Wholly owned subsidiaries are exposed to expropriation where as joint venture agreements protect firms from expropriation.

International Business vs. Domestic Business
The following factors distinguish International business from domestic business

• World market
• Political environment
• Legal system
• Cultural difference
• Communication
• Distance are higher
• Diversity
• Uncertainty-Political, economical and currency risks
• Uncontrollability-The degree of Uncontrollability is higher in host countries
• Competitions
• Competence-people in different countries are at different levels of competence.

Multinational Enterprises (MNE)
Multinational Enterprise is a firm that has engaged in foreign direct investment (FDI). Equivalently, an MNE is a company that owns (a significant part of) and operates facilities in nations other than the one in which it is based.
Multinational company (MNC)
A MNC is a company which has its own presence in at least two countries. MNEs are partnerships. MNEs include MNCs but not viceversa.
Types of MNEs

• Global
• Multi-domestic
• Transnational

Global Company

• Integrates its operations around the world
• Produces for the world market
• Utilises best resrouces
• Operates on scale economies
• It has a global brand
• The dark side is- no customization of global brands so might lose some segment of the market
• Eg-Mc Donalds, intel

Multi Domestic Company

• Operates in different countries
• Customises its product for different countries
• Better customer loyalty
• Larger scales and better margins/profitability.
• Takes into account cultural differences, temperature variations
• Products are customized to the extent necessary
• Advantages are- greater market share, client loyalty, long term market share, better margins
• Eg-Unilever, P&G

Transnational Company

• World is the market
• Learns the best practices from anywhere in the worldwide operations
• Leverages learning
• Integrates operations worldwide to reduce cost.
• lower the cost of customization
• Eg-Caterpillar, GE