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Question-1

What is the meaning of International Business?

Solution:
Meaning of International Business

National or Domestic Business can be defined as a transaction taking place within the geographical boundaries of a nation. It is also called as internal business or home trade. Manufacturing and trade outside the boundaries of one’s own country is referred to as international business. International business has ventured into a new age of reforms. India too was not cut off from this. It was under a severe debt trap and was having a huge burden of payment crisis. In 1991, when India seeked International Monetary Fund (IMF) for raising funds to cope up and clear its debts and payment deficits. IMF though agreed to lend money to India laying a condition that India would undergo major changes in its structure to guarantee repayment of borrowed funds. India had no alternate option but to agree to the proposal. It was the this condition laid by IMF which forced India to widen its economic policies. Since then a good amount of liberalisation at the economic front happened. Though the process of reforms has somewhat slowed down, India is very much on the path to globalisation and integrating with the world economy. While, on the one hand, many multinational corporations (MNCs) have ventured into Indian market for selling their products and services and as a result many Indian companies had to step out of the country to market their products to customers abroad. It includes not only the international movements of goods and services, but also of assets and resources, personnel, technology and intellectual property like patents and trademarks. It may be noted here that mos people assume international business as international trade which is a misconception. Undoubtedly, international trade that includes exports and imports of goods, has historically been acknowledged as an important module of international business. But now, the scope of international business has considerably expanded. International trade related to services such as international travel and tourism, transportation, communication, banking, warehousing, distribution and advertising has significantly grown. The other important developments are increased foreign investments and foreign goods and services produced. Companies have started progressively making investments into foreign countries and are undertaking production of goods and services in foreign countries to become close to foreign customers that would enable them serve more effectively at lower costs. These activities form part of international business. We can conclude by saying that international business is a much wider term and includes both trade and production of goods and services across frontiers.

Question-2

What are the benefits of international business to nations?

Solution:
Benefits to Nations

(i) Earning of Foreign Exchange: International business helps a country to earn foreign exchange which it can later use for meeting its imports of capital goods, technology, petroleum products and fertilisers, pharmaceutical products and a host of other consumer products which otherwise might not be available domestically.

(ii) More Efficient Use of Resources: As stated earlier, international business operates on a simple principle produce what your country can produce more efficiently, and trade the surplus production so generated with other countries to procure what they can produce more efficiently. When countries trade on this principle, they end up producing much more than what they can when each of them attempts to produce all the goods and services on its own. If such an enhanced pool of goods and services is distributed equitably amongst nations, it benefits all the trading nations.

(iii) Improving Growth Prospects and Employment Potentials: Producing solely for the purposes of domestic consumption severely restricts a country’s prospects for growth and employment. Many countries, especially the developing ones, could not execute their plans to produce on a larger scale, and thus create employment for people because their domestic market was not large enough to absorb all that extra production. Later on a few countries such as Singapore, South Korea and China which saw markets for their products in the foreign countries embarked upon the strategy ‘export and flourish’, and soon became the star performers on the world map. This helped them not only in improving their growth prospects, but also created opportunities for employment of people living in these countries.

(iv) Increased Standard of Living: If it was not for the international trade of goods and services, it would not have been possible for the world community to enjoy the goods and services produced in other nations that the people in these countries are able to consume and enjoy a higher standard of living.

Question-3

What are the benefits of International business to firms?

Solution:
Benefits to Firms

(i) Prospects for Higher Profits: International business could be more fruitful than the domestic business. When the domestic prices are cheaper, business establishments can make more profits by selling their products in countries where they get a good price for their products.

(ii) Increased Capacity Utilisation: Many companies set up manufacturing capacities for their products which are in greater demand in the domestic market. By planning foreign expansion and obtaining orders from customers abroad, they can think of making use of their excess production capacities and also improve the profitability of their ventures. Manufacturing on a larger scale often leads to economies of scale, which thereby lowers manufacture cost and enhances per unit profit margin.

(iii) Prospects for Growth: It is quite annoying for the business merchants when demand for their products reaches a plateau in the domestic market. Such firms can significantly enhance prospects of their growth by getting involved with foreign markets. This is exactly what has driven most of the multinationals from the developed nations to enter into markets of developing nations. While demand in their home countries has reached a plateau, they realised their products were in demand in the developing nations and that demand was picking up quite fast.

(iv) Way Out to Intense Competition in Domestic Market: With increasing competition in the domestic market internationalization seems to be the only way to achieve considerable growth. This is the drive for many companies to go global in the search of markets for their products. Thus, international business serves as a medium of growth for companies facing tough market conditions on the domestic grounds.

(v) Improved Business Vision: The advancement of international business of many firms is basically a part of their business policies or strategic management. The vision to go global comes from the need to grow, the urge to become more competitive, the need to diversify and to gain strategic benefits of going global.

Question-4

Write short notes on exporting and importing.

Solution:
Exporting and Importing

Exporting refers to sending of goods and services from the home country to a foreign land. Similarly, importing is procuring foreign goods and bringing them into one’s home country. There are two major ways in which a company can export or import products: direct and indirect exporting/importing. As regards direct exporting/importing, a company itself approaches the foreign customers /suppliers and looks after all the formalities related to exporting/ importing activities including those associated with transportation and financing of goods and services. On the other hand, Indirect exporting/importing, is one where the company’s participation in the export/import operations is minimum, and most of the tasks relating to export/import of the goods are done by some middle men such as buying offices or export houses of customers abroad located in the home country or wholesale importers in the case of import operations. Such companies indirectly deal with foreign customers in the case of exports and suppliers in the case of imports.

Question-5

Write short notes on Contract Manufacturing.

Solution:
Contract Manufacturing

Contract manufacturing refers to a kind of international business where a company get certain components or goods produced as per its specifications by entering into a contract with one or a few local manufacturers in foreign countries. There are three major forms of Contract manufacturing, also known as outsourcing:

Manufacture of certain components/parts including automobile components or shoe uppers that are used later for producing final products such as cars and shoes;
  Assembly of components into final products such as assembly of hard disk, floppy disk, mother board, drive and modem chip into computers; and
  Complete production of the products such as garments and textiles. These goods are manufactured or assembled as per the technology and management guidance provided to them by the foreign company. The goods thus produced or assembled by the local producers are delivered to the international company for use in its final products or out rightly sold as finished products by the overseas company under its brand names in different countries including the home, host and other countries. Today the developing countries under contract manufacturing manufacture products or components for all the major international companies such as Nike, Reebok, Levis and Wrangler.

Question-6

What is a joint venture and what are their advantages and disadvantages?

Solution:
Joint Ventures

Joint venture is a very common policy for getting into overseas markets. A joint venture means setting up a company that is jointly owned by two or more independent companies. In the other words, it can also be explained as any form of connection which implies teamwork for more than a transitory period. A joint ownership venture may be brought about in three main modes:

(i) Local firm obtaining an interest in an existing foreign company

(ii) Foreign investor buying an interest in a local firm

(iii) Both the foreign and local entrepreneurs together forming a new venture

 

Advantages

Main advantages of joint venture comprise:

The overseas company finds it less burdensome financially to expand internationally as the local partner also contributes to the equity capital of such a venture.
  Large projects requiring huge capital outlays and manpower are executable as a result of joint ventures.
  The overseas business company benefits from a local partner’s knowledge of the host countries regarding the competitive conditions, language, culture, business systems and political systems.
  In many instances entering into a foreign market is very expensive and involves risk. To prevent this, sharing the expenses and/or risks with a local partner under joint venture agreements would be beneficial.

 

Limitations

Major restrictions of a joint venture are outlined as follows:

Overseas companies entering into joint Ventures run the risks of technology and secrets being disclosed to others by sharing the technology and trade secrets with local companies in foreign countries.
  The dual ownership agreement could thus result in conflicts, leading to battle for control between the investing companies.

 

Question-7

What is India's involvement in World business?

Solution:
India’s Involvement in World Business

As a known fact, India is now the 10th largest economy in the world and the fastest growing economy, next only to China. As per the Goldman Sach Report 2004, India is poised to be the second largest economy by 2050. In spite of these features, involvement of India with international business is not very striking. India’s share in world trade in 2003 was dreadfully low i.e., just 0.8 per cent as compared to other developing countries such as China (5.9 per cent), Hong Kong (3.0 per cent), South Korea (2.6 per cent), Malaysia (1.3 per cent), Singapore (1.9 per cent), and Thailand (1.1 per cent). Even with regards to foreign investments, India has been significantly lagging behind other countries.

Question-8

What are the differences between international business and domestic business?

Solution:

S. No

Basis

Domestic Business

International Business

1.

Nationality of buyers and sellers

People who take part are from the same country.

The transaction takes place in an International range with both people and organizations from outside the parent country.

2.

Nationality of shareholders

Participants in the form of shareholders, suppliers, partners are from the same country.

All these people are from different countries.

3.

Mobility of factors of production

The degree of mobility of both labour and capital is more.

The degree of mobility of labour and capital is comparitively less.

4.

Customer heterogeneity across the market

These markets are homogenous in nature.

Due to the difference in people, culture and languages spoken, the market lacks homogeneity.

5.

Difference in business system and practices

Mostly within the country.

Business is mainly across countries.

6.

Political system and risks

Political system and risk pertains to one country alone.

The degree of risks and policies changes from one country to another.

7.

Policies and regulations of business

Rules, laws, regulations, tax of one single country is taken into account.

Rules, laws, regulations, tax of across countries is taken into account.

8.

Currency used for business transactions

The domestic currency is only used.

This involves more than on currency.

 

Question-9

What do you mean by Licensing and Franchising? What are their merits and demerits?

Solution:
Licensing and Franchising

Licensing is a contractual agreement whereby one company grants access to its patents, trade secrets or technology to another company abroad for a fee known as royalty. The company that gives this access to the other company is called licensor and the other company abroad that acquires these rights is called the licensee which uses technology or patents. It is worth noting that it is not only technology that is licensed. In the fashion industry, a number of designers license the use of their names. In certain instances, there is swap of technology between the two companies. Occasionally, there is mutual exchange of technology, knowledge, and/or patents between the companies which is called cross-licensing. Franchising is a very similar term to licensing. One chief difference between the two is that while licensing is used in connection with manufacture and marketing of goods, the term franchising refers to service business. The other point of distinction between the two is that franchising is comparatively more stricter than licensing. Franchisers generally set stringent rules and regulations on how the franchisees should run while running their business. Apart from these two differences, franchising is almost the same as licensing. As in the case of licensing, a franchising agreement too includes grant of rights by one party to another party for use of trademark, technology, and patents in return for the accepted sum for some time period. The parent firm is called the franchiser and the other party to the "Franchising is generally a specialised form of licensing where the franchisor sells both intangible property (normally a trademark) to the franchisee, and also insists that the franchisee accepts to abide by stringent rules on how it does business." Franchising is a "form of licensing in which a parent company (the franchisor) grants another independent entity (the franchisee) the right to do business in a prescribed manner. This right can take the form of selling the franchisers products, ‘using its name, production and marketing technique, or general business approach agreement is known as franchisee. The franchiser could be any service provider who has developed a unique technique for creating and marketing of services under its own name and trade mark such as a hotel, restaurant, travel agency, bank wholesaler or even a retailer. It is the uniqueness of the technique which gives the franchiser an edge over its opponents in the field, and makes the would-be-service providers fascinated in joining the franchising system. Some of the examples of leading franchisers operating worldwide are McDonald, Pizza Hut and Wal-Mart.

 

Advantages

When compared to joint ventures and wholly owned subsidiaries, licensing/ franchising is comparatively a much easier way of gaining access into overseas markets with proven product/technology without much business risks and investments. Some of the specific benefits of licensing are:

It is the licensor/franchiser who sets up the business unit and invests his/her own money in the business, under the licensing/franchising system. As such, the licensor/franchiser does not have to invest overseas. Therefore Licensing/franchising is considered a cheaper way of entering into overseas business.
  Since meagre amounts of foreign investment is involved, licensor/ franchiser does not bear the losses, if any, that occur to overseas business. The Licensee/franchisee pays fees to the licensor/franchiser a fixed amount in advance as a percentage of manufacture or sales return. This royalty or fee keeps accumulating to the licensor/franchiser until the manufacture and sales gets going in the licensee’s/franchisee’s business unit.
  There are lower risks of business takeovers or government interventions as the business abroad is run by the licensee/franchisee, who is a local person.
  Licensee/franchisee being a local person could prove quite helpful to the licensor/franchiser in conducting its marketing operations successfully as he has a much better market knowledge and contacts.
  As regards the terms of the licensing/ franchising agreement, only the parties to the licensing/franchising agreement are legally allowed to use the licensor’s/franchiser’s copyrights, patents and brand names in foreign countries. Hence, other companies in the overseas market cannot make use of these trademarks and patents.

 

Limitations

Licensing/franchising as a mode of overseas business suffers from the following weaknesses.

There is a danger that the licensee can start marketing an identical product under a slightly different brand name when a licensee/franchisee becomes well versed in the production and marketing of the licensed/franchised products. This can lead to severe competition to the licenser/ franchiser.
  If not maintained properly, trade secrets could get divulged to others in the foreign markets. Such lapses on the part of the licensee/franchisee can cause serious losses to the licensor/franchiser.
  Over time, there could be conflicts between the licensor/franchiser and licensee/franchisee over matters such as maintenance of accounts, payment of royalty and non-adherence to standards relating to the manufacture of quality products. Such variations could often lead to costly litigations, causing harm to both the parties.

 

Question-10

What is joint venture, wholly owned subsidiaries and list their merits and demerits.

Solution:
Joint Ventures

Joint venture is a very common policy for getting into overseas markets. A joint venture means setting up a company that is jointly owned by two or more independent companies. In the other words, it can also be explained as any form of connection which implies teamwork for more than a transitory period. A joint ownership venture may be brought about in three main modes:

(i) Local firm obtaining an interest in an existing foreign company

(ii) Foreign investor buying an interest in a local firm

(iii) Both the foreign and local entrepreneurs together forming a new venture

 

Advantages

Main advantages of joint venture comprise:

The overseas company finds it less burdensome financially to expand internationally as the local partner also contributes to the equity capital of such a venture.
  Large projects requiring huge capital outlays and manpower are executable as a result of joint ventures.
  The overseas business company benefits from a local partner’s knowledge of the host countries regarding the competitive conditions, language, culture, business systems and political systems.
  In many instances entering into a foreign market is very expensive and involves risk. To prevent this, sharing the expenses and/or risks with a local partner under joint venture agreements would be beneficial.

 

Limitations

Major restrictions of a joint venture are outlined as follows:

Overseas companies entering into joint Ventures run the risks of technology and secrets being disclosed to others by sharing the technology and trade secrets with local companies in foreign countries.
  The dual ownership agreement could thus result in conflicts, leading to battle for control between the investing companies.

 

Wholly Owned Subsidiaries

To keep full control over their overseas business, this entry mode of international business is preferred by firms. The parent company makes 100 percent investment in its equity capital and thereby takes full control over the overseas firm.

A wholly owned subsidiary in a foreign market can be established in either of the two ways:

(i) Establishing a new company totally to start operations abroad — also referred to as a green field venture, or

(ii) Obtaining an already set up company in the foreign country and using that company to produce and/or promote its products in the host country.

 

Advantages

Main advantages of a wholly owned subsidiary in a foreign country are outlined below:

The parent company can exercise full control over its operations in foreign countries.
  The parent company is not required to disclose its technology or trade secrets to others as the parent company looks after the entire operations of foreign subsidiary on its own.

 

Limitations

The restrictions of establishing a wholly owned subsidiary in a foreign country comprises:

The parent firm has to make 100 per cent equity investments in the foreign subsidiaries. As a result, this form of international business is, not suitable for small and medium size companies which have insufficient funds with them to invest in foreign countries.
  Also, the parent company has to bear the entire losses resulting from failure of its foreign operations on its own, as it owns 100 per cent equity in the foreign company.
  Some countries are reluctant to establishing 100 per cent wholly owned subsidiaries by foreigners in their countries. Therefore, this form of international business operations, becomes subject to greater political risks.

 

Question-11

Explain what exporting and importing and Contract Manufacturing along with their merits and demerits.

Solution:
Exporting and Importing

Exporting refers to sending of goods and services from the home country to a foreign land. Similarly, importing is procuring foreign goods and bringing them into one’s home country. There are two major ways in which a company can export or import products: direct and indirect exporting/importing. As regards direct exporting/importing, a company itself approaches the foreign customers /suppliers and looks after all the formalities related to exporting/ importing activities including those associated with transportation and financing of goods and services. On the other hand, Indirect exporting/importing, is one where the company’s participation in the export/import operations is minimum, and most of the tasks relating to export/import of the goods are done by some middle men such as buying offices or export houses of customers abroad located in the home country or wholesale importers in the case of import operations. Such companies indirectly deal with foreign customers in the case of exports and suppliers in the case of imports.

 

Advantages

Chief advantages of exporting are:

Exporting/importing is the easiest mode of gaining entry into international markets as compared to other modes of entry. It is a less complicated activity when compared to setting up and running joint-ventures or wholly owned subsidiaries in foreign countries.
  Exporting/importing is less involving in the sense that business firms are not required to invest that much time and money as is needed when they desire to enter into joint deals or set up production plants and facilities in host nations
  Since exporting/importing does not require much of investment abroad, exposure to foreign investment risks is minimal or much lower than that is present when companies opt for other ways of entry into international business.

 

Limitations

Major restrictions of exporting/ importing as an entry mode of international business are as follows:

As the product physically move from one nation to another, exporting/importing comprises of additional transportation, packaging and insurance costs. Transportation costs alone become an inhibiting factor to the exports and imports particularly in the case of heavy items. On landing the shores of foreign countries, these products are subject to custom duty and other different levies and charges. On the whole, all these costs and payments significantly increase product costs and make them less competitive.
  Exporting is not a practical alternative when import limitations exist in a foreign country. In such a circumstances, firms have no option but to opt for other entry ways such as licensing/franchising or joint venture which makes it reasonable to make the product available by way of manufacturing and marketing it locally in foreign countries.
  Export companies mainly function from their home grounds. They manufacture in the home country and then transport goods across to foreign countries. The export companies in general have not much contact with the overseas markets, except for a few visits by the executives of export companies to foreign countries to promote their products. This places the export companies in a detrimental position in comparison with the local companies which have their base near the customers being able to better understand their needs and serve them. On the other hand, apart from these limitations, exporting/importing is the most opted way for business companies when they involve themselves initially with international business. As is customary, companies start their foreign operations with exports and imports, and later having gained awareness with the foreign market operations and switch over to other forms of international business operations.

 

Contract Manufacturing

Contract manufacturing refers to a kind of international business where a company get certain components or goods produced as per its specifications by entering into a contract with one or a few local manufacturers in foreign countries. There are three major forms of Contract manufacturing, also known as outsourcing:

Manufacture of certain components/parts including automobile components or shoe uppers that are used later for producing final products such as cars and shoes;
  Assembly of components into final products such as assembly of hard disk, floppy disk, mother board, drive and modem chip into computers; and
  Complete production of the products such as garments and textiles. These goods are manufactured or assembled as per the technology and management guidance provided to them by the foreign company. The goods thus produced or assembled by the local producers are delivered to the international company for use in its final products or out rightly sold as finished products by the overseas company under its brand names in different countries including the home, host and other countries. Today the developing countries under contract manufacturing manufacture products or components for all the major international companies such as Nike, Reebok, Levis and Wrangler.

Advantages

Contract manufacturing offers a lot of benefits to both the overseas firm and local manufacturers in the foreign countries.

Contract manufacturing allows the overseas companies to get the products manufactured on a large scale without needing investment in setting up manufacturing services. Such companies make use of the production facilities already present in the foreign countries.
  There is hardly any investment risk involved in the foreign countries as there is no or little investment in the foreign countries.
  Contract manufacturing also offers an advantage to the overseas firm of buying goods produced or assembled at cheaper costs specifically if the local manufacturers happen to be located in countries which have cheaper material and man power costs.
  Local manufacturers in overseas also benefit from contract manufacturing. Manufacturing jobs obtained on contract basis in a way provide a ready market for their products and ensure greater utilisation of their production capacities if they have any idle production capacities. This is how the Godrej group is gaining from contract manufacturing in India. It is producing soaps under contract for many multinationals including Dettol soap for Reckitt and Colman. This has significantly helped it in making use of its surplus soap producing capacity.
  The local producer also gets the chance to get involved with overseas business and gain incentives, if any, available to the export companies in case the overseas company wishes products so produced be transported to its home country or to some other countries abroad.

Limitations

The prime limitations of contract manufacturing to overseas company and local manufacturer in foreign countries are outlined below:

Local companies may not stick on to manufacture quality and design standards, thereby creating serious product quality issue to the overseas company.
  Local producer in the foreign country does not have control over the production process as products are manufactured exactly as per the terms and specifications of the contract.
  The local company manufacturing under contract manufacturing is not free to sell the contracted output as per its wish. The goods have to be sold to the international company at predetermined prices. This leads to lesser gains for the local company if the open market prices for such goods tend to be greater than the prices agreed upon under the contract.

 

Question-12

Explain in detail about the benefits of International Business.

Solution:
Benefits of International Business

Notwithstanding greater complexities and risks, international business is important to both nations and business firms. It offers them several benefits. Growing realisation of these benefits over time has in fact been a contributory factor to the expansion of trade and investment amongst nations, resulting in the phenomenon of globalisation. Some of the benefits of international business to the nations and business firms are discussed below.

 

Benefits to Nations

(i) Earning of Foreign Exchange: International business helps a country to earn foreign exchange which it can later use for meeting its imports of capital goods, technology, petroleum products and fertilisers, pharmaceutical products and a host of other consumer products which otherwise might not be available domestically.

(ii) More Efficient Use of Resources: As stated earlier, international business operates on a simple principle produce what your country can produce more efficiently, and trade the surplus production so generated with other countries to procure what they can produce more efficiently. When countries trade on this principle, they end up producing much more than what they can when each of them attempts to produce all the goods and services on its own. If such an enhanced pool of goods and services is distributed equitably amongst nations, it benefits all the trading nations.

(iii) Improving Growth Prospects and Employment Potentials: Producing solely for the purposes of domestic consumption severely restricts a country’s prospects for growth and employment. Many countries, especially the developing ones, could not execute their plans to produce on a larger scale, and thus create employment for people because their domestic market was not large enough to absorb all that extra production. Later on a few countries such as Singapore, South Korea and China which saw markets for their products in the foreign countries embarked upon the strategy ‘export and flourish’, and soon became the star performers on the world map. This helped them not only in improving their growth prospects, but also created opportunities for employment of people living in these countries.

(iv) Increased Standard of Living: If it was not for the international trade of goods and services, it would not have been possible for the world community to enjoy the goods and services produced in other nations that the people in these countries are able to consume and enjoy a higher standard of living.

 

Benefits to Firms

(i) Prospects for Higher Profits: International business could be more fruitful than the domestic business. When the domestic prices are cheaper, business establishments can make more profits by selling their products in countries where they get a good price for their products.

(ii) Increased Capacity Utilisation: Many companies set up manufacturing capacities for their products which are in greater demand in the domestic market. By planning foreign expansion and obtaining orders from customers abroad, they can think of making use of their excess production capacities and also improve the profitability of their ventures. Manufacturing on a larger scale often leads to economies of scale, which thereby lowers manufacture cost and enhances per unit profit margin.

(iii) Prospects for Growth: It is quite annoying for the business merchants when demand for their products reaches a plateau in the domestic market. Such firms can significantly enhance prospects of their growth by getting involved with foreign markets. This is exactly what has driven most of the multinationals from the developed nations to enter into markets of developing nations. While demand in their home countries has reached a plateau, they realised their products were in demand in the developing nations and that demand was picking up quite fast.

(iv) Way Out to Intense Competition in Domestic Market: With increasing competition in the domestic market internationalization seems to be the only way to achieve considerable growth. This is the drive for many companies to go global in the search of markets for their products. Thus, international business serves as a medium of growth for companies facing tough market conditions on the domestic grounds.

(v) Improved Business Vision: The advancement of international business of many firms is basically a part of their business policies or strategic management. The vision to go global comes from the need to grow, the urge to become more competitive, the need to diversify and to gain strategic benefits of going global.





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