ASSIGNMENT

SUBJECT CODE & NAME

MB0053 –International Business Management

Q1 In international business, scanning of demographic environment plays an important

role as it helps firm understand the various demographic factors. One has to
understand both sides of the demographic environment while planning strategy for
international markets. Explain this concept.
ANS International business can be defined as any business that crosses the national
borders of a country. It includes importing and exporting; international movement of
goods, services, employees, technology, licensing, and franchising of intellectual property
(trademarks, patents, copyright and so on). International business includes investment in
financial and immovable assets in foreign countries. Contract manufacturing or assembly of
products for local sale or for export to other countries, establishment of foreign
warehousing and distribution systems, and import of goods from one foreign country to a
second foreign country for subsequent local sale is part of international business.
Evolution
Origins of international trade can be traced thousands of years back to the Babylonians,
who used to ply their wares to distant lands. Records of organised international trade have
been traced to the ancient Roman Empire, when a common coinage was introduced to
encourage trade across the vast empire. The proof of ancient trade routes is found in the
regions of Egypt, Arabia, Greece, Asia, and Mesopotamia.
The well-known Silk Road and Spice Routes were the epitome of international business.
The Silk Road was an overland trade route from the Mediterranean Sea to China,
developed during the Han Dynasty between 200 BC and 8 AD. This 6,000 km-long route ran
from Mediterranean Sea to the early Chinese capital of Hangman (refer figure 1.3). Goods
like perfumes, fine fabrics, silk, and spices were traded from various European ports to
China and other places in between.
Industrial revolution in the eighteenth century gave way to innovation and technology,
which led to mass production facilities, and took the British Empire to global markets. With
almost unlimited supply of raw materials, minerals, precious metals, low cost labour, and
manpower supply from their colonies, the British Empire became a world power in terms of
international trade.
Creation of the WTO on 1 January, 1995, marked the biggest reform of international
trade since World War II. Under the Marrakech agreement, WTO was formed to replace
GATT. The WTO is the only international body that deals with the rules of trade between
nations. Its main objective is to facilitate smooth international trade.
Q2 Explain foreign direct investment and its advantages.
ANS Foreign direct investment is when an individual or business owns 10 percent or
more of a foreign company. If an investor owns less than 10 percent, the International
Monetary Fund defines it as part of his or her stock portfolio.
A 10 percent ownership doesn't give the investor a controlling interest. It does allow
influence over the company's management, operations, and policies. For this reason,
governments track who invests in their country's businesses.
Advantages
Foreign direct investment benefits the global economy, as well as investors and
recipients.
Capital goes to the businesses with the best growth prospects, anywhere in the world.
That's because investors seek the best return with the least risk. This profit motive is
color-blind and doesn't care about religion or politics.
That gives well-run businesses, regardless of race, color or creed, a competitive
advantage. It reduces the effects of politics, cronyism, and bribery. As a result, the
smartest money rewards the best businesses all over the world. Their goods and services
go to market faster than without unrestricted FDI.
Individual investors receive the extra benefits of lowered risk. FDI diversifies their
holdings outside of a specific country, industry or political system. Diversification
always increases return without increasing risk.
Recipient businesses receive "best practices" management, accounting or legal guidance
from their investors. They can incorporate the latest technology, operational practices,
and financing tools. By adopting these practices, they enhance their employees' lifestyles.
That raises the standard of living for more people in the recipient country. FDI rewards
the best companies in any country. It reduces the influence of local governments over
them.
Recipient countries see their standard of living rise. As the recipient company benefits
from the investment, it can pay higher taxes. Unfortunately, some nations offset this
benefit by offering tax incentives to attract FDI.
Another advantage of FDI is that it offsets the volatility created by "hot money." That's
when short-term lenders and currency traders create an asset bubble. They invest lots of
money all at once, then sell their investments just as fast.
That can create a boom-bust cycle that ruins economies and ends political regimes.
Foreign direct investment takes longer to set up and has a more permanent footprint in a
country.

Q3 Regional integration can be defined as the unification of countries into a larger

whole.
It also reflects a country’s willingness to share or unify into a larger whole. Explain
its types.
ANS Types of Integration
 Preferential trading agreement
Preferential trading agreement is a trade pact between countries. It is the weakest type of
economic integration and aims to reduce taxes on few products to the countries who
sign the pact. The tariffs are not abolished completely but are lower than the tariffs
charged to countries not party to the agreement. India is in PTA with countries like
Afghanistan, Chile and South Common Market (MERCOSUR). The introduction of
PTA has generated an increase in the market size and resulted in the availability and
variety of new products.
 Free trade area
Free Trade Area (FTA) is a type of trade bloc and can be considered as the second stage
of economic integration. It comprises of all countries that are willing to or agree to
reduce preferences, tariffs and quotas on services and goods traded between them. The
importers product is qualified individually by the FTA. The product should have a
minimum percentage of local content for it to be qualified.
 Custom union Custom
Union is an agreement among two or more countries having already entered into a free
trade agreement to further align their external tariff to help remove trade barriers.
Custom union agreement among negotiating countries may encompass to reduce or
eliminate customs duty on mutual trade. Under customs union agreement, countries
generally impose a common external -tariff (CTF) on imports from non-member
countries.
 Common market
Common market is a group formed by countries within a geographical area to promote
duty free trade and free movement of labour and capital among its members. European
community is an example of common market. Common markets levy common external
tariff on imports from non-member countries. A single market is a type of trade bloc,
comprising a free trade area with common policies on product regulation, and freedom
of movement of goods, capital, labour and services, which are known as the four factors
of production. This agreement aims at making the movement of four factors of
production between the member countries easier. The technical, fiscal and physical
barriers among the member countries are eliminated considerably as these barriers
hinder the freedom of movement of the four factors of production. The member
countries must come forward to eliminate these barriers, have a political will and
formulate common economic policies.

Q4 There are several methods used in globalised era for international market entry, such
as exporting, franchising, licensing, joint venture and wholly owned subsidiary.
Compare any two mode of Foreign market entry.
ANS Comparison of foreign market entry modes
Sl. no Mode Factors favoring Advantages Disadvantages
the entry mode in
target market
1. Exporting 1.Opportunities 1. Minimizes 1. Trade
for limited the potential barriers and
sales in the risk in trade as tariffs and
target country. firms need not other cost
2. Chances for invest in target make products
little product, market. and services
new product 2. Ease in uncompetitive
and adaptation. market entry 2. In case of far
3. Distribution 3. Better away market,
channels are utilization of transport,
usually close to production packaging and
manufacturing facility and logistics costs
sites. resources. put additional
4. Economies burden.
of scale cannot 3. Problems in
be attained in accessing the
production and local market
logistics, hence information.
high
production cost
in domestic
market Liberal
import policies
of target
country.

1. Firms are 1. Licensing 1. In licensing,

facing import minimises risk firm lack the
control and and investment control of
investment of licensor, i.e. market and use
2. Licensing barriers for exporter. of assets in
entry. 2. Ensures target market.
2. Country speed in 2. Sometimes,
provides entering the licensee
protection to target market. becomes
domestic 3. Licensing potential
industry and help in competitor.
allows foreign circumventing 4. Usually, the
firms through the various license period
 licensing or trade barriers. is limited and
franchising offsets firm’s
only. chances for
long term
flows of
profits.

Q5 In today’s trade, the increasing number of strategic alliances stands as one among the
fast growing developments. Explain.
What are the advantages and disadvantages of formulating strategy?
ANS Strategic alliances
In today’s trade, the increasing number of strategic alliances stands as one among the fast
growing developments. According to Booz-Allen and Hamilton,strategic alliances are far-
reaching through nearly every industry and are becoming an important driver of higher
growth. Alliances vary in scope from an informal business association based on a simple
contract to a joint project agreement. To manage the alliance for legal and tax purposes
either a corporation or partnership is set up.
Strategic alliances involve organisations working together towards a common goal
for small businesses, without losing their individuality. Forming strategic alliances helps
one reap considerable profits as well as obtain rewards of team effort. Statistical studies
claim, organisations that take part in alliances account for 18 percent of their profits that
come from their alliances.

Strategic alliances are used in businesses to:

 Attain advantages of scope and speed.
 Boost market access.
 Improve competitiveness in domestic or global markets.
 Improve product development.
 Increase new business opportunities through new products and services
Strategic alliances are becoming a common tool for increasing the reach of the
organisation without exerting organisation to expensive internal expansions beyond the
core business.

Advantages and disadvantages of formulating strategy

The advantages of a well structured strategy in international business are:
 It provides proper guidance in business.
 It alerts the manager aboutnew opportunities and threats.
 It aligns members to work towards common goals that are set.
 It facilitates to make management become more proactive than reactive.
 It helps the decision making course of assigning resources.
Q6 ‘Global sourcing’ is described as ‘the practice of sourcing cost effective and best goods
and services across geopolitical boundaries in order to cater to global markets’.
Explain five reasons for Global Sourcing.
ANS Reasons for Global Sourcing
1. Lower salary and wages The foremost reasons for global sourcing have been
the ‘financial incentive’ of outsourced operations to low cost labour destinations
such as India, Philippines, Poland and Romania. Due to the different stages of
economic development, labour cost of workers in any developed countries is far
higher than their counterparts. The following table illustrate labour cost
differentials among countries
2. Tax breaks and benefits Developing countries like India offer tax breaks for
new entrants thus offering cost savings for these companies. For example,
Hyundai was offered a tax break (VAT) of 5 years by the Tamilnadu government
for setting up a plant. Nokia shifted its plant from Germany to Romania as it had
low labour cost coupled with tax breaks offered by government.
3. Faster turnaround time Companies as well as government are outsourcing their
non core operations to low cost countries as it helps not only to focus on core
activities but to also get the required job done much faster with reduced time and
accuracy. In business, ‘time is money’ as the saying goes, thus, firms outsource
some of their business operations for faster and quicker turnaround time.
4. Proximity to key markets In an era of globalization, firms have outsourced their
business operations close to their key markets. For example, it is cheaper to
manufacture goods in Thailand or China and then ship them to Japan than to ship
them from US or Europe. Multination organisations have resorted to global
sourcing to countries like India to fulfil their markets demand not only for South
Asia but also for East Asia, Middle-East and Eastern Africa.
5. Improved performance Developed countries usually outsource their business
operations to developing countries like India which is at the bottom of their core
operations, monotonous and require huge labor. Such work can be done by
dedicated outsourced labour force in developing country at a fraction of the cost
of developed countries.

THE END