International Business Strategy Material as per Bharathiar University Syllabus base

INTERNATIONAL BUSINESS STRATEGY
SREE NARAYANA GURU COLLEGE K.G CHAVADI
Ms.JISSY.C, Assistant professor Dept Of Commerce (IB) Page 1
UNIT I-
STRATEGY
In order to understand business functions, it is important to understand the term
strategy. After all, every business needs a strategy to be successful. The word
‘strategy’ comes from the ancient Greek word ‘Strategos’, meaning ‘the art of the
General’. However, in business, it is more about the managerial response to changes
in the business environment than the art of war. In this article, we will take a quick
look at the meaning and types of strategies in business.
Meaning of Strategy
In ancient Greece, the term Strategos was used in military science and implied the
plan to win a battle. However, in business, strategies are more about understanding
the competitionand preparing a plan to match/surpass the potential of the rivals. It is
defined as:
“Strategy is the direction and scope of an organization over the long-term. It helps
achieve an advantage for the organization through its configuration of resources
within a challenging environment, to meet the needs of markets and
fulfill stakeholder expectations.”
Features of Strategy
 Specialized plan to outperform the competitors.
 Details about how managers must respond to any change in the business
environment.
 Redefines direction towards common goals.
 Reflects the concern to effectively mobilize resources.
 Maximizes the organization’s chances to achieve the set objectives.
Strategies at Different Levels of Business
In an organization, strategies can exist at all levels – right from the overall business to
the individuals working in it. Here are some common types of strategies:
 Corporate Strategies – These are also explicitly mentioned in the
organization’s Mission Statement. They involve the overall purpose and scope

of the business to help it meet the expectations of stakeholders. These are
important strategies due to the heavy influence of investors. Further, corporate
strategies act as a guide for strategic decision-making throughout the business.
 Business Unit Strategies – These are more about how a business competes
successfully in a particular market. They involve strategic decisions about:
o Choosing products
o Meeting the needs of the consumers
o Gaining an advantage over the competitors
o Creating new opportunities, etc.
 Operational Strategies – These are about how each part of the business is
organized to deliver the corporate and business unit level strategic direction.
Therefore, these strategies focus on the issues of resources, people, processes,
etc.
Meaning
International business strategy refers to plans that guide commercial
transactions taking place between entities in different countries. Typically,
international business strategy refers to the plans and actions of private
companies rather than governments; as such, the goal is increased profit.
 Most companies of any appreciable size deal with at least one international
partner at some point in their supply chain, and in most well-established
fields competition is international. Because methods of doing business vary
appreciably in different countries,an understanding of cultural and linguistic
barriers, political and legal systems, and the many complexities
of international trade is essential to commercial success.
 As historically developing countries become increasingly prominent, new
markets open up and new sources of goods become available,[1] making it
increasingly important even for long-established firms to have a viable
international business strategy. This is often facilitated with the use of

international management consulting firms such as Oliver Wyman, Roland
Berger, Amritt, or the Everest Group.
 Due to increasing globalisation the past decades, even smaller companies
have been able to cross national borders and do business abroad.
Consequently, many terms have been given to companies operating in
multiple countries: multinationals, global businesses, transnational
companies, international firms et cetera. The aim of this article is to clearly
define these different terms and see how they differ from each other, because
they do differ! An often used framework to distinguish multiple forms of
internationally operating businesses is the Bartlett & Ghoshal Matrix (1989).
Bartlett and Ghoshal clustered these businesses based on two criteria: global
integration and local responsiveness. Businesses that are highly globally
integrated have the objective to reduce costs as much as possible by
creating economies of scale through a more standarized product offering
worldwide. Business that are highly locally responsive have as extra
objective to adapt products and services to specific local needs. It seems that
these strategic options are mutually exclusive, but there are companies trying
to be both globally integrated and locally responsive as can be seen in some
examples below. Together these two factors generate four types of strategies
that internationally operating businesses can
pursue: Multidomestic, Global, Transnational and International strategie
s.


 Figure 1: Bartlett and Ghoshal’s Typology of Multinational Companies:
Global, Transnational, International and Multidomestic Strategy
 Multidomestic: Low Integration and High Responsiveness
 Companies with a multidomestic strategy have as aim to
meet the needs and requirements of the local markets worldwide by
customizing and tailoring their products and services extensively. In
addition, they have little pressure for global integration. Consequently,
multidomestic firms often have a very decentralized and loosely coupled
structure where subsidiaries worldwide are operating relatively
autonomously and independent from the headquarter. A great example of a
multidomestic company is Nestlé. Nestlé uses a unique marketing and sales
approach for each of the markets in which it operates. Furthermore, it adapts
its products to local tastes by offering different products in different markets.

 Global: High Integration and Low Responsiveness
 Global companies are the opposite of multidomestic
companies. They offer a standarized product worldwide and have the goal to
maximize efficiencies in order to recude costs as much as possible. Global
companies are highly centralized and subsidiaries are often very dependent
on the HQ. Their main role is to implement the parent company’s
decisions and to act as pipelines of products and strategies. This model is
also known as the hub-and-spoke model. Pharmaceutical companies such as
Pfizer can be considered global companies.
 Transnational: High Integration and High Responsiveness
 The transnational company has characteristics of both the
global and multidomestic firm. Its aim is to maximize local responsiveness
but also to gain benefits from global integration. Even though this seems
impossible, it is actually perfectly doable when taking the whole value chain
into considerations. Transnational companies often try to create economies
of scale more upstream in the value chain and be more flexible and locally
adaptive in downstream activities such as marketing and sales. In terms of
organizational design, a transnational company is characterised by an
integrated and interdependent network of subsidiaries all over the world.
These subsidiaries have strategic roles and act as centres of excellence. Due
to efficient knowledge and expertise exchange between subsidiaries, the
company in general is able to meet both strategic objectives. A great
example of a transnational company is Unilever.
 International: Low Integration and Low Responsiveness
 Bartlett and Ghoshal originally didn’t include this type in their typologies.
Other authors on the other hand have attributed the name to the lower left
corner of the matrix. An international company therefore has little need for

local adaption and global integration. The majority of the value chain
activities will be maintained at the headquarter. This strategy is also often
referred to as an exporting strategy. Products are produced in the company’s
home country and send to customers all over the world. Subsidiaries, if any,
are functioning in this case more like local channels through which the
products are being sold to the end-consumer. Large wine producers from
countries such as France and Italy are great examples of international
companies.

BIGGEST CHALLENGES OF INTERNATIONAL BUSINESS
From the U.K.’s unprecedented decision to leave the European Union to the
historic and divisive U.S. presidential election, 2016 was a year of large-scale
change and uncertainty. Nowhere, perhaps, was it felt more keenly than in the
world of international business. Political, economic, and environmental
issues are increasingly becoming the remit of international business leaders as
much as governments.
At Hult, our aim is to prepare our students to become the next generation of
global business leaders, embracing the opportunities and challenges of
international business. While the global marketplace becomes more

interconnected and accessible, the risks involved in doing business abroad are not
to be taken lightly.
Expanding business overseas means reaching new clients or customers and
potentially boosting profits. Despite all the uncertainty of 2017 and the
challenges that have yet to reveal themselves, there are some guidelines for
conducting business on a global scale that you should always consider before
leaping into new international operations. Here is our advice on how to tackle
the 11 biggest challenges for international business:
1. International company structure
2. Foreign laws and regulations
3. International accounting
4. Cost calculation and global pricing strategy
5. Universal payment methods
6. Currency rates
7. Choosing the right global shipment methods
8. Communication difficulties and cultural differences
9. Political risks
10.Supply chain complexity and risks of labor exploitation
11.Worldwide environmental issues
 International company structure
If your aim is to be competitive globally, you must have a team in place that’s up
for the challenge. One fundamental consideration is the structure of your
organization and the location of your teams.
For instance, will your company be run from one central headquarters? Or will
you have offices and representatives “on the ground” in key markets abroad? If
so, how will these teams be organized, what autonomy will they have, and how
will they coordinate working across time zones? If not, will you consider hiring
local market experts who understand the culture of your target markets, but will
work centrally?
Coca-Cola offers one example of effective multinational business structure. The
company is organized into continental groups, each overseen by a President. The
central Presidents manage Presidents of smaller, country-based or regional

subdivisions. Despite its diverse global presence, the Coca-Cola brand and product
is controlled centrally and consistent around the world.
While Coca-Cola is a vast international brand, the structure of your business and
the number, nationality, and level of expertise of your team will vary depending on
your industry, product, and the size of your business.
 Foreign laws and regulations
Along with getting your company structure in place, gaining a comprehensive
understanding of the local laws and regulations governing your target markets is
key. From tax implications through to trading laws, navigating legal
requirements is a central function for any successful international business.
Eligibility to trade is a significant consideration, as are potential tariffs and the
legal costs associated with entering new markets.
Airbnb ran into trouble in 2014, with a crackdown on advertised rental properties
falling outside local housing and tourism regulations. The company was forced to
pay a €30,000 fine for a breach of local tourism laws in Barcelona.
It’s important to note that employment and labor requirements also differ by
country. For instance, European countries stipulate that a minimum of 14-weeks
maternity leave be offered to employees, while on the other hand, there is no such
requirement for U.S. employers. With the complexity involved in foreign trade and
employment laws, investing in knowledgeable and experienced corporate
counsel can prove invaluable.
Beyond abiding by official laws, engaging in international business often requires
following other unwritten cultural guidelines. This can prove especially
challenging in emerging markets with ill-defined regulations or potential
corruption. In response, companies doing business in the United States must abide
by the Foreign Corrupt Practices Act, which aims at eliminating bribery and
unethical practices in international business. A good rule of thumb is to beware
of engaging in any questionable activities, which might be legal but could have
future reputational repercussions.
 International accounting
Of the main legal areas to consider when it comes to doing international
business, tax compliance is perhaps the most crucial. Accounting can present a
challenge to multinational businesses who may be liable for corporation tax

abroad. Different tax systems, rates, and compliance requirements can make the
accounting function of a multinational organization significantly challenging.
Accounting strategy is key to maximizing revenue, and the location where your
business is registered can impact your tax liability. Mitigating the risk of multiple
layers of taxation makes good business sense for any organization trading abroad.
Being aware of tax treaties between countries where your business is trading will
help to ensure you’re not paying double taxes unnecessarily.
A focus on tax efficiency is often the aim of international accounting efforts. In
the European Union, companies may benefit from the Common Consolidated
Corporate Tax Base proposal, whereby companies with operations around the EU
can limit tax liability to one corporate center. Tax consolidation is a feature of
several multinationals’ decision to be headquartered in Dublin, as Ireland is known
for its “business-friendly” corporate tax policy. Well-known companies with
operational headquarters in the Republic of Ireland include Google, Facebook, and
Intel.
 Cost calculation and global pricing strategy
Setting the price for your products and services can present challenges when doing
business overseas and should be another major consideration of your strategy. You
must consider costs to remain competitive, while still ensuring profit. Researching
the prices of direct, local-market competitors can give you a benchmark, however,
it remains essential to ensure the math still works in your favor. For instance, the
cost of production and shipping, labor, marketing, and distribution, as well as your
margin, must be a taken into account for your business to be viable.
Pricing can also come down to how you choose to position your brand —
should the cost of your product reflect luxury status? Or will low prices help you to
penetrate a new market? Swedish furniture giant Ikea, known in Europe for its
low-cost value, struggled initially in China due to local competitor costs of labor
and production being much cheaper. By relocating production for the Chinese
market and using more locally sourced materials, the company was able to
successfully cut prices to better reflect its brand and boost sales among target
consumers.
Wherever you’re looking to launch your product or service, here are four useful
strategies to help you find the right price:

Source: AmericanExpress
 Universal payment methods
The proliferation of international e-commerce websites has made selling goods
overseas easier and more affordable for businesses and consumers. However,
payment methods that are commonly accepted in your home market might be
unavailable abroad. Determining acceptable payment methods and ensuring
secure processing mustbe a centralconsiderationfor businesses who seeks to
trade internationally.
Accepting well-known global payment methods through companies like Worldpay,
as well as accepting local payment methods, such as JCB in Asia or Yandex
Money in Russia, can be a good option for large international businesses.
Accepting wire transfers, PayPal payments, and Bitcoin, are other possibilities,
with Bitcoin users benefiting from no bank or credit card transaction fees. Despite
the risk of fluctuating value, the lack of fees is one of the reasons a number of
online companies, including WordPress, the Apple App Store, Expedia, and a
number of Etsy sellers accept Bitcoin.
 Currency rates
While price setting and payment methods are major considerations, currency rate
fluctuation is one of the most challenging international business problems to
navigate. Monitoring exchange rates must therefore be a central part of the strategy
for all international businesses. However, global economic volatility can make
forecasting profit especially difficult, particularly when rates fluctuate at
unpredictable levels.
Major fluctuations can seriously impact the balance of business expenses and
profit. For instance, if your company is paying suppliers and production costs in
U.S. dollars, but selling in markets with a weaker or more unpredictable currency,
your company could end up with a much smaller margin — or even a loss. One
way to protect yourself against large fluctuations in currency is to pay suppliers
and production costs in the same currency as the one you’re selling in. This
may mean switching to more local production where possible in order to better
balance your outgoings and sales revenue.
Another option for mitigating the risk of unpredictable currency rates can be
setting up a forward contract and agreeing a price in advance for future sales. Of

course, this potentially means missing out on greater profit should rates shift in
your favor. However, it can protect your sales from the risk presented by unstable
currency.
Learn more about six key factors that can influence currency exchange rates:
 Choosing the right global shipment methods
The potential of online sales presents a huge international business opportunity
for retailers in the 21st century, but finding reliable, fast, and cost-
effective shipment and distribution methods can be a difficult balance in some
markets. Depending on the volume and destination of your shipments, will you
send by land, sea, air, or a combination? Your choice of shipping method can be
a major influence on your revenue and may be a limiting factor to the
products you can viably sell overseas.
Other considerations to address according to your company’s products and your
target markets include customs fees, the need and cost of storage, and local
methods of distribution. There are also country-specific regulations and shipping
requirements to take into account. For a quick check of costs and compliance, UPS
International has created an online tool called TradeAbility to help businesses and
individuals manage the movement of good overseas.
 Communication difficulties and cultural differences
Good communication is at the heart of effective international business
strategy. However, communicating across cultures can be a very real challenge. At
Hult, developing cross-cultural competency and communication skills are a core
focus inside and outside of the classroom.
Effective communication with colleagues, clients, and customers abroad is
essential for success in international business. And it’s often more than just a
language barrier you need to think about — nonverbal communication can make
or break business deals too. Do your research and know how different cultural
values and norms — such as shaking hands — can and should influence the way
you communicate in a professional context. Being aware of acceptable business
etiquette abroad, and how things like religious and cultural traditions can influence
this, will help you to better navigate potential communication problems in
international business.
Discover the subtle nuances of body language for different countries and
nationalities you may be doing business with:

Source: BusinessInsider
Cultural differences can also influence market demand for your product or
service. The need your business may address at home may already be met or not
exist at all overseas. Local market insight is key, and there are a number of
successful brands whose business models simply weren’t viable in overseas
markets. For instance, American coffee company Starbucks seriously struggled in
Australia, where the demand for local, independent cafes and coffee shops vastly
outweighed the appeal of the corporate giant.
Small practical considerations can also be easily overlooked, such as
creating quality translations of product and marketing materials, and even ensuring
your brand name works well abroad. A number of well-known companies have had
to consider adapting the names of their brand or product when launching in a
foreign market. The Chevrolet Nova is perhaps the most commonly cited example,
where “no va” literally translates to “no go” in Spanish—not the best product name
for a car. Although slumping sales figures in Latin America have proven to be
an urban legend, the story of the “no go” car serves as a useful reminder of the
importance of preparing well before launching your business in a new market.
 Political risks
An obvious risk for international business is political uncertainty and
instability. Countries and emerging markets that may offer considerable
opportunities for expanding global businesses may also pose challenges, which
more established markets do not. Before considering expansion into a new or
unknown market, a risk assessment of the economic and political landscape is
critical.
Issues such as ill-defined or unstable policies and corrupt practices can be hugely
problematic in emerging markets. Changes in governments can bring changes in
policy, regulations, and interest rates that can prove damaging to foreign business
and investment.
A growing trend towards economic nationalism also makes the current global
political landscape potentially hostile towards international businesses. For
instance, companies like Facebook are banned in China, partially in preference for
national social networks and also due to government regulation over internet

content. Monitoring political developments and planning accordingly can
mitigate political risks of doing business abroad.
 Supply chain complexity and risks of labor exploitation
When it comes to sourcing products and services from overseas, managing
suppliers and supply chains can also be a tricky process. Unfortunately, the
length and complexity of supply chains increases the chance of working with
suppliers who have unethical — and even illegal — business practices. Of growing
concern is the risk in international business of forced labor and worker
exploitation.
In October 2015, the UK passed the Modern Slavery Act in response to this often-
hidden human rights violation. Recent research led by a partnership between Hult
International Business School and the Ethical Trading Initiative revealed that an
astonishing 77% of businesses believe that modern slavery exists at some point
in their supply chains.
To raise awareness and help local and international businesses respond more
effectively to this issue, their published research report presents case studies of
businesses who have implemented practices at the leading edge of the fight against
modern slavery. As the research team continues to bring their findings to light,
developing and supporting ethical and sustainable business practices remains a
focus in the Hult classroom.
 Worldwide environmental issues
As the environmental risks and effects of climate change are becoming better
understood, sustainability is high on the agenda of many major global
corporations. Recent international legislations and proposals, such as the UN’s
Sustainable Development Goals, have put environmental issues at the forefront of
international business development. The Ashridge Centre for Business and
Sustainability at Hult researches innovative ways that organizations can develop
and implement more environmentally sustainable business models.
On a practical level, if you’re considering expanding your business overseas, it’s
important to be aware of the country-specific environmental regulations and issues
associated with your industry. Some key considerations include how your
production methods might impact the local environment through waste and
pollution.
Beyond a legal or ethical incentive to be more eco-friendly, establishing
environmentally conscious business practices can attract new, forward-thinking

consumers to your company. With a number of brands such as Dell, Renault,
and MUD Jeans leading a shift towards the circular economy, there is an
opportunity and demand for changing production methods and consumer behavior
to establish a more sustainable future for the environment and society as a
whole.
What is a Multinational Corporation?
A multinational corporation is a company that operates in its home country, as well
as in other countries around the world. It maintains a central office located in one
country, which coordinates the management of all other offices such as
administrative branches or factories.
Characteristics of a Multinational Corporation
1. Very high assets and turnover
To become a multinational corporation, the business must be large and must own a
huge amount of assets, both physical and financial. The company’s targets are so
high that they are also able to make substantial profits.
2. Network of branches
Multinational companies keep production and marketing operations in different
countries. In each country, the business oversees more than one office that
functions through several branches and subsidiaries.
3. Control
In relation to the previous point, the management of the offices in other countries is
controlled by one head office located in the home country. Therefore, the source of
command is found in the home country.
4. Continued growth
Multinational corporations keep growing. Even as they operate in other countries,
they strive to grow their economic size by constantly upgrading and even
doing mergers and acquisitions.
5. Sophisticated technology
When a company goes global, they need to make sure that their investment will
grow substantially. In order to achieve substantial growth, they need to make use
of capital-intensive technology, especially in their production and marketing.

6. Right skills
Multinational companies employ only the best managers who are capable of
handling huge funds, using advanced technology, managing workers, and running
a huge business entity.
7. Forceful marketing and advertising
One of the most effective survival strategies of multinational corporations is
spending a huge amount of money on marketing and advertising. It is how they are
able to sell every product or brand they make.
8. Good quality products
Because they use capital-intensive technology, they are able to produce top-of-the-
line products
Reasons for Being a Multinational Corporation:
1. Access to lower production costs
It is a very common reason for companies to go global because if they set up
production in other countries, especially in developing economies, they spend less
on production costs. Though outsourcing is a way of doing this, setting up
manufacturing plants in other countries may be even cheaper.
2. Proximity to target international markets
It is beneficial to set up business in countries where the target market of a company
is. It helps reduce transport costs, and it gives multinational corporations easier
access to consumer feedback and information, as well as to consumer intelligence.
3. Avoidance of tariffs
When a company produces or manufactures its products in another country where
they sell them, they are exempt from import quotas and tariffs.
Meaning of Multinational Companies (MNCs):
A multinational company is one which is incorporated in one country (called the
home country); but whose operations extend beyond the home country and which
carries on business in other countries (called the host countries) in addition to the
home country.
It must be emphasized that the headquarters of a multinational company are
located in the home country.
Features of Multinational Corporations (MNCs):
Features of Multinational Corporations (MNCs):

(i) Huge Assets and Turnover:
Because of operations on a global basis, MNCs have huge physical and financial
assets. This also results in huge turnover (sales) of MNCs. In fact, in terms of
assets and turnover, many MNCs are bigger than national economies of several
countries.
(ii) International Operations Through a Network of Branches:
MNCs have production and marketing operations in several countries; operating
through a network of branches, subsidiaries and affiliates in host countries.
(iii) Unity of Control:
MNCs are characterized by unity of control. MNCs control business activities of
their branches in foreign countries through head office located in the home
country. Managements of branches operate within the policy framework of the
parent corporation.
(iv) Mighty Economic Power:
MNCs are powerful economic entities. They keep on adding to their economic
power through constant mergers and acquisitions of companies, in host countries.
(v) Advanced and Sophisticated Technology:
Generally, a MNC has at its command advanced and sophisticated technology. It
employs capital intensive technology in manufacturing and marketing.
(vi) Professional Management:
A MNC employs professionally trained managers to handle huge funds, advanced
technology and international business operations.
(vii)Aggressive Advertising and Marketing:
MNCs spend huge sums of money on advertising and marketing to secure
international business. This is, perhaps, the biggest strategy of success of MNCs.
Because of this strategy, they are able to sell whatever products/services, they
produce/generate.
(viii) Better Quality of Products:
A MNC has to compete on the world level. It, therefore, has to pay special
attention to the quality of its products.
Advantages and Limitations of MNCs:
Advantages of MNCs from the Viewpoint of Host Country.
(i) Employment Generation:
MNCs create large scale employment opportunities in host countries. This is a big
advantage of MNCs for countries; where there is a lot of unemployment.

(ii) Automatic Inflow of Foreign Capital:
MNCs bring in much needed capital for the rapid development of developing
countries. In fact, with the entry of MNCs, inflow of foreign capital is automatic.
As a result of the entry of MNCs, India e.g. has attracted foreign investment with
several million dollars.
(iii) Proper Use of Idle Resources:
Because of their advanced technical knowledge, MNCs are in a position to
properly utilise idle physical and human resources of the host country. This results
in an increase in the National Income of the host country.
(iv) Improvement in Balance of Payment Position:
MNCs help the host countries to increase their exports. As such, they help the host
country to improve upon its Balance of Payment position.
(vi) Technical Development:
MNCs carry the advantages of technical development 10 host countries. In fact,
MNCs are a vehicle for transference of technical development from one country to
another. Because of MNCs poor host countries also begin to develop technically.
(vii) Managerial Development:
MNCs employ latest management techniques. People employed by MNCs do a lot
of research in management. In a way, they help to professionalize management
along latest lines of management theory and practice. This leads to managerial
development in host countries.
(viii) End of Local Monopolies:
The entry of MNCs leads to competition in the host countries. Local monopolies of
host countries either start improving their products or reduce their prices. Thus
MNCs put an end to exploitative practices of local monopolists. As a matter of
fact, MNCs compel domestic companies to improve their efficiency and quality.
(ix) Improvement in Standard of Living:
By providing super quality products and services, MNCs help to improve the
standard of living of people of host countries.
(x) Promotion of international brotherhood and culture:
MNCs integrate economies of various nations with the world economy. Through
their international dealings, MNCs promote international brotherhood and culture;
and pave way for world peace and prosperity.
Limitations of MNCs from the Viewpoint of Host Country:
(i) Danger for Domestic Industries:

MNCs, because of their vast economic power, pose a danger to domestic
industries; which are still in the process of development. Domestic industries
cannot face challenges posed by MNCs. Many domestic industries have to wind
up, as a result of threat from MNCs. Thus MNCs give a setback to the economic
growth of host countries.
(ii) Repatriation of Profits:
(Repatriation of profits means sending profits to their country).
MNCs earn huge profits. Repatriation of profits by MNCs adversely affects the
foreign exchange reserves of the host country; which means that a large amount of
foreign exchange goes out of the host country.
(iii) No Benefit to Poor People:
MNCs produce only those things, which are used by the rich. Therefore, poor
people of host countries do not get, generally, any benefit, out of MNCs.
(iv) Danger to Independence:
Initially MNCs help the Government of the host country, in a number of ways; and
then gradually start interfering in the political affairs of the host country. There is,
then, an implicit danger to the independence of the host country, in the long-run.
(v) Disregard of the National Interests of the Host Country:
MNCs invest in most profitable sectors; and disregard the national goals and
priorities of the host country. They do not care for the development of backward
regions; and never care to solve chronic problems of the host country like
unemployment and poverty.
(vi) Misuse of Mighty Status:
MNCs are powerful economic entities. They can afford to bear losses for a long
while, in the hope of earning huge profits-once they have ended local competition
and achieved monopoly. This may be the dirties strategy of MNCs to wipe off
local competitors from the host country.
(vii) Careless Exploitation of Natural Resources:
MNCs tend to use the natural resources of the host country carelessly. They cause
rapid depletion of some of the non-renewable natural resources of the host country.
In this way, MNCs cause a permanent damage to the economic development of the
host country.
(viii) Selfish Promotion of Alien Culture:
MNCs tend to promote alien culture in host country to sell their products. They
make people forget about their own cultural heritage. In India, e.g. MNCs have

created a taste for synthetic food, soft drinks etc. This promotion of foreign culture
by MNCs is injurious to the health of people also.
(ix) Exploitation of People, in a Systematic Manner:
MNCs join hands with big business houses of host country and emerge as powerful
monopolies. This leads to concentration of economic power only in a few hands.
Gradually these monopolies make it their birth right to exploit poor people and
enrich themselves at the cost of the poor working class.
Advantages from the Viewpoint of the Home Country:
Some of the advantages of the MNCs from the viewpoint of the home country
are:
(i) MNCs usually get raw-materials and labour supplies from host countries at
lower prices; specially when host countries are backward or developing economies.
(ii) MNCs can widen their market for goods by selling in host countries; and
increase their profits. They usually have good earnings by way of dividends earned
from operations in host countries.
(iii) Through operating in many countries and providing quality services, MNCs
add to their international goodwill on which they can capitalize, in the long-run.
Limitations from the Viewpoint of the Home Country:
Some of the limitations of MNCs from the viewpoint of home country may be:
(i) There may be loss of employment in the home country, due to spreading
manufacturing and marketing operations in other countries.
(ii) MNCs face severe problems of managing cultural diversity. This might distract
managements’ attention from main business issues, causing loss to the home
country.
(iii) MNCs may face severe competition from bigger MNCs in international
markets. Their attention and finances might be more devoted to wasteful counter
and competitive advertising; resulting in higher marketing costs and lesser profits
for the home country.

UNIT II
International Business Environment is multidimensional including the political
risks, cultural differences, exchange risks, legal & taxation issues. Therefore
(IBE) International Business Environment comprises the political, economic,
regulatory, tax, social & cultural, legal, & technological environments.
The main cultural and social factors that affect international business are language,
education, religion, values, customs, and social relationships. These relationships
include interactions among families, labor unions, and other organizations.
COMPONENTS OF INTERNATIONAL BUSINESS ENVIRONMENT
 POLITICAL ENVIRONMENT.
 LEGAL ENVIRONMENT.
 ECONOMIC ENVIRONMENT.
 SOCIO-CULTURAL ENVIRONMENT.
 TECHNOLOGICAL ENVIRONMENT.
 NATURAL ENVIRONMENT.
 DEMOGRAPHIC ENVIRONMENT.
(IBE) International Business Environment is multidimensional including the
political risks, cultural differences, exchange risks, legal & taxation issues.
Therefore (IBE) International Business Environment comprises the political,
economic, regulatory, tax, social & cultural, legal, & technological environments.
Political Environment
The political environment refers to the type of the government, the government
relationship with a business, & the political risk in the country. Doing business
internationally, therefore, implies dealing with a different type of governments,
relationships, & levels of risk.
There are many different types of political systems, for example, multi-party
democracies, one-party states, constitutional monarchies, dictatorships (military &
non-military). Therefore, in analyzing the political-legal environment, an
organization may broadly consider the following aspects:
 The Political system of the business;
 Approaches to the Government towards business i.e. Restrictive or
facilitating;
 Facilities & incentives offered by the Government;

 Legal restrictions for instance licensing requirement, reservation to a
specific sector like the public sector, private or small-scale sector;
 The Restrictions on importing technical know-how, capital goods & raw
materials;
 The Restrictions on exporting products & services;
 Restrictions on pricing & distribution of goods;
 Procedural formalities required in setting the business
Economic Environment
The economic environment relates to all the factors that contribute to a country’s
attractiveness for foreign businesses. The economic environment can be very
different from one nation to another. Countries are often divided into three main
categories: the more developed or industrialized, the less developed or third world,
& the newly industrializing or emerging economies.
Within each category, there are major variations, but overall the more developed
countries are the rich countries, the less developed the poor ones, & the newly
industrializing (those moving from poorer to richer). These distinctions are
generally made on the basis of the gross domestic product per capita (GDP/capita).
Better education, infrastructure, & technology, healthcare, & so on are also often
associated with higher levels of economic development.
Clearly, the level of economic activity combined with education, infrastructure, &
so on, as well as the degree of government control of the economy, affect virtually
all facets of doing business, & a firm needs to recognize this environment if it is to
operate successfully internationally. While analyzing the economic environment,
the organization intending to enter a particular business sector may consider the
following aspects:
 An Economic system to enter the business sector.
 Stage of economic growth & the pace of growth.
 Level of national & per capita income.
 Incidents of taxes, both direct & indirect tax.
 Infrastructure facilities available & the difficulties thereof.
 Availability of raw materials & components & the cost thereof.

 Sources of financial resources & their costs.
 Availability of manpower-managerial, technical & workers available & their
salary & wage structures.
Technological Environment
The technological environment comprises factors related to the materials &
machines used in manufacturing goods & services. Receptivity of organizations to
new technology & adoption of new technology by consumers influence decisions
made in an organization.
As firms do not have any control over the external environment, their success
depends on how well they adapt to the external environment. An important aspect
of the international business environment is the level, & acceptance, of
technological innovation in different countries.
The last decades of the twentieth century saw major advances in technology, & this
is continuing in the twenty-first century. Technology often is seen as giving firms a
competitive advantage; hence, firms compete for access to the newest in
technology, & international firms transfer technology to be globally competitive.
It is easier than ever for even small business plan to have a global presence thanks
to the internet, which greatly grows their exposure, their market, & their potential
customer base. For the economic, political, & cultural reasons, some countries are
more accepting of technological innovations, others less accepting. In analyzing
the technological environment, the organization may consider the following
aspects:
 Level of technological development in the country as a whole & specific
business sector.
 The pace of technological changes & technological obsolescence.
 Sources of technology.
 Restrictions & facilities for technology transfer & time taken for the
absorption of technology.
Cultural Environment
The cultural environment is one of the critical components of the international
business environment & one of the most difficult to understand. This is because the

cultural environment is essentially unseen; it has been described as a shared,
commonly held body of general beliefs & values that determine what is right for
one group, according to Kluckhohn & Strodtbeck.
National culture is described as the body of general beliefs & the values that are
shared by the nation. Beliefs & the values are generally seen as formed by the
factors such as the history, language, religion, geographic location, government, &
the education; thus firms begin a cultural analysis by seeking to understand these
factors. The most well-known is that developed by Hofstede in1980.
His model proposes four dimensions of cultural values
including individualism, uncertainty avoidance, power distance & masculinity.
Individualism is the degree to which a nation values & encourages individual
action & decision making.
Uncertainty avoidance is the degree to which a nation is willing to accept & deal
with uncertainty.
Power distance is the degree to which a national accepts & sanctions differences in
power.
This model of cultural values has been used extensively because it provides data
for a wide array of countries. Many academics & the managers found that this
model helpful in exploring management approaches that would be appropriate in
different cultures.
For example, in a nation that is high on individualism one expects individual
goals, individual tasks, & individual reward systems to be effective, whereas the
reverse would be the case in a nation that is low on individualism.
 While analyzing social & cultural factors, the organization may consider the
following aspects:
 Approaches to society towards business in general & in specific areas;
 Influence of social, cultural & religious factors on the acceptability of the
product;
 The lifestyle of people & the products used for them;
 Level of acceptance of, or resistance to change;
 Values attached to a particular product i.e. the possessive value or the
functional value of the product;
 Demand for the specific products for specific occasions;
 The propensity to consume & to save.
Competitive Environment

The competitive environment also changes from country to country. This is partly
because of the economic, political, & cultural environments; these environmental
factors help determine the type & degree of competition that exists in a given
country. Competition can come from a variety of sources. It can be a public or a
private sector, come from the large or the small organizations, be domestic or
global, & stem from traditional or new competitors, GST registration. For a
domestic firm, the most likely sources of competition might be well understood.
The same isn’t the case when a person moves to compete in the new environment.
INTERNATIONAL POLITICS
A. Definition, Nature and Scope of International Politics
International Relations is an important branch of Social Science. The Scope of
International relations is the complex relations existing among the soverign states
of the world. It is mainly concerned, among other things, with the study in depth of
all events and situations affecting more than one state. The great Greek
Philosopher Aristotle, said that man by nature is a social animal. Being a social
animal, man can’t live in isolation. His basic nature and his basic needs make him
to satisfy his numerous needs in association with others. Moreover no man is self
sufficient even in his daily needs and therefore, he has to depend upon his fellow
man for existences. Just as no individual can live in isolation, no state can afford to
live in isolation. Like the individual no state is self sufficient. Naturally, it has to
cultivate relations between states. These relations are the subject matter of
International Politics.
DEFINITION
According to Hartman “International Relations as a field of study is focused upon
the process by which states adjust their national interest to those of other states”.
Padelford and Lincoln define it as the “Interactions of state policies within the
changing patterns of power relationships”.
According to Quincy Wright “International Relations is the relations between
groups of major importance in the life of the world at any period of history and
particularly relations among territorially organized nation states which today are of
such importance. We will also use the term to designate the studies of discipline,
describing, explaining or assisting in the context of these relations. With the

assistance of these definitions it can be understood that nations try to protect their
incompatiable interest by means of power.
Padelford and Lincoin define it as the “Interactions of state policies within the
changing patterns of power relationships”.
According to Morgenthau. “It is the struggle for and use of power among nations.”
Palmer and Perkins opine that International politics is essentially concerned with
state system. Sprout and Sprout also defined international politics as those aspects
of the interactions and relations of independent political communities in which
some element of opposition, resistance and conflict
NATURE OF INP
International Politics constitute relations and interactions among nations. As in
politics, so in international politics, there are sovereign states whose interests are
not identical. Those interests of the sovereign states are called national interest.
The sovereign School of Distance Education International Politics Page 6 states in
order to achieve their interest come into conflict with one another and as a means
to achieve the ends, power is generally used. Thus INP is that aspect of interactions
and relations of sovereign states in which the element of conflict or interest is
present. It is a process in which nations try to protect their incompatible interest by
means of power.
But international relations are not merely state to state political relations but it is
something more than this. As Hartmann says “INRS include all intercourse among
states and all movements of peoples, goods and ideas across national frontiers.
Thus it is clear that international Relations covers a wider meaning than mere
political relations. No doubt political factors dominate over other factors in
international Relations namely economic, cultural and religious factors. Therefore
it studies it studies the totality of all relations of all those factors between, and
among the states of the world.
SCOPE OF INTERNTIONAL POLITICS
International Politics is an important branch, of social science and it is inter
disciplinary in nature. Scope means areas of study. The scope of International
Relations is not yet well settled. In 1954 the UNESCO published a booklet edited

by C.A W Manning. In this book IR has been recognised as an independent
discipline. During the last 40 years this discipline has evolved all the traits of an
independent study and it can be understood from its progress that it is well on its
way to becoming and Independent academic discipline. Most of the scholars of
international Relations describe the following aspects in the study of this
discipline.
1. State system
2. National Interest
3. National Power
4. Foreign Policy
5. Instruments of international politics – Diplomacy. Foreign policy, international
trade, Economic and Military assistance etc.
6. Nationalism, Colonialism and imperialism.
7. Control of interstate Relations – Balance of power-International law and
international organizations. 8. Dynamic elements and new Dimensions-Rivalry
between super powers and different blocs of nations. 9. World government.
10. War and peace ideologies.
11. Ethnic groups – Races of mankind and Terrorist groups.
12. International Regionalism.
13. Nuclear weapons and its use.
14. International organization and its role in maintaining world order.
International Relations is a developing subject it has to keep pace with the highly
dynamic, and developing nature of relations among nations. Hence its scope is
bound to be ever expanding in content.
International Relations and International Politics
Many writers have shown their inability in drawing a line of demarcation between
international Relations and international Politics. Kenneth Thompson and
Morgenthau consider IP as an inalienable part of IR. This super flauos resemblance
does not make IP the core of IR/-Both are different from each other as shown
below:
1. International Relations includes all sorts of relations ie. political, economic,
cultural, geographical, legal and non official. So it embraces the totality of

relations among people. But International Politics includes only the political
aspects of the overall relations. In other words only those relations which arouse
actions and reactions are the subjects of IP. Thus it can be said that international
politics is the political aspects of international Relations.
2. International Relations is a wider concept whereas international politics is a
narrower concept.
3. The methodology of the study of international relations is descriptive while that
of international politics is purely analaytical. In international relations the factors
are studied chronologically while in international politics the basis of study is
what, when and how of the present with a relationship between the past and future.
It is established beyond doubt that international politics derives its strength from
international relations. The former uses the latter as the basis and subject matter of
study and hence both are one and the same thing. Modern international politics
aims at the establishment of peace through the international organization and
international relations too are based on this very principle. Thus, concern for peace
is the common denominator between international politics and international
relations.
International Politics and National Politics
In international politics, there are sovereign states whose interest are not identical.
These interests of the sovereign states are called the national interest. The
sovereign states in order to achieve their interests come into conflict with one
another and as a means to achieve the ends power is generally used. Thus,
international politics is that aspect of interactions and relations of sovereign states
in which the element of conflict or interest is present. National Politics, like
international politics, like international politics also involves a sort of adjustment
of relationship within and among individuals or groups.
Politics denotes the struggle for power. Whether it is national politics or
International politics, politics is a common word. According to Morgenthau
“Power man’s control over the minds and actions of other men and political power
means the mutual relations of control among the holders of public authority and
between the latter and people at large”.

There are groups of divergent interest in national politics too and each aims to
further its own interest. This incompatibility of interests generates a conflict.
Keeping in mind their own interests the groups tend to strengthen their position by
making temporary alliances. However, the conflict always remains restricted to a
certain level as the government checks the struggle with the help of laws. The
governmental intervention may frustrate a group or a section of people from taking
the process of politics beyond limits. In national politics the individual is the actor.
The individual is generally under the impact of a particular culture, ideology and
ethical values. This analysis states that there is an area in which the national and
international politics are similar and in some respects they are different from one
another.
SIMILARITIES BETWEEN NATIONAL POLITICSAND
INTERNATIONALPOLITICS
1. International politics as well as national politics cluster around the interests.
Conflict is the result of incompatible interests. 2. In both seeking of power is
important as it is the means through which the desires and wants can be fulfilled. 3.
Both adopt psychological methods to seek power. 4. In both alliances generally
appear from the desire of men states to strengthen themselves against the
adversary.
DISSIMILARITIES
1. In international politics only interests are permanent and so the states may use
direct means to achieve their goals. The use of cunningness, treachery, and
sabotage is the part and parcel of international politics. In national politics some
ethical norms have to be observed. The state regulates the conduct of it citizens and
punishes them if they jump over the limits.
2. In national politics the individuals are under the coercive authority of the state.
The laws are universally binding upon them and the municipal courts have a
complete jurisdiction over them. On the other hand, the sovereign states are
governed by a weak law called international law and the International Court of
Justice too cannot exercise its jurisdiction as freely as the municipal courts do in
regard to individuals

3. In international politics the sovereign states generally resort to wars if their
interests are jeopardized and there is apparently no other alternative. National
politics is a field which does not interest the ordinary man. The issues involved in
international politics to an ordinary man are in comprehensible
INTERNATIONAL FINANCE
The economic and monetary system that transcends national borders. The field of
international finance concerns itself with studying global capital markets and
might involve monitoring movements in foreign exchange rates, global
investment flows and cross border trade practices.
International Finance is an important part of financial economics. It mainly
discusses the issues related with monetary interactions of at least two or more
countries. International finance is concerned with subjects such as exchange rates
of currencies, monetary systems of the world, foreign direct investment (FDI), and
other important issues associated with international financial management.
Like international trade and business, international finance exists due to the fact
that economic activities of businesses, governments, and organizations get
affected by the existence of nations. It is a known fact that countries often borrow
and lend from each other. In such trades, many countries use their own currencies.
Therefore, we must understand how the currencies compare with each other.
Moreover, we should also have a good understanding of how these goods are paid
for and what is the determining factor of the prices that the currencies trade at.
Note − The World Bank, the International Finance Corporation (IFC), the
International Monetary Fund (IMF), and the National Bureau of Economic
Research (NBER) are some of the notable international finance organizations.
International trade is one of the most important factors of growth and prosperity of
participating economies. Its importance has got magnified many times due to
globalization. Moreover, the resurgence of the US from being the biggest
international creditor to become the largest international debtor is an important
issue. These issues are a part of international macroeconomics, which is popularly
known as international finance.
Importance ofInternationalFinance

International finance plays a critical role in international trade and inter-economy
exchange of goods and services. It is important for a number of reasons, the most
notable ones are listed here
 International finance is an important tool to find the exchange rates,
compare inflation rates, get an idea about investing in international debt
securities, ascertain the economic status of other countries and judge the
foreign markets.
 Exchange rates are very important in international finance, as they let us
determine the relative values of currencies. International finance helps in
calculating these rates.
 Various economic factors help in making international investment
decisions. Economic factors of economies help in determining whether or
not investors’ money is safe with foreign debt securities.
 Utilizing IFRS is an important factor for many stages of international
finance. Financial statements made by the countries that have adopted IFRS
are similar. It helps many countries to follow similar reporting systems.
 IFRS system, which is a part of international finance, also helps in saving
money by following the rules of reporting on a single accounting standard.
 International finance has grown in stature due to globalization. It helps
understand the basics of all international organizations and keeps the
balance intact among them.
 An international finance system maintains peace among the nations.
Without a solid finance measure, all nations would work for their self-
interest. International finance helps in keeping that issue at bay.
 International finance organizations, such as IMF, the World Bank, etc.,
provide a mediators’ role in managing international finance disputes.
The very existence of an international financial system means that there are
possibilities of international financial crises. This is where the study of
international finance becomes very important. To know about the international
financial crises, we have to understand the nature of the international financial
system.
Without international finance, chances of conflicts and thereby, a resultant mess,
is apparent. International finance helps keep international issues in a disciplined
state.

In the last two decades, the financial economies have increasingly got
interconnected around the world. The impact of globalization has been felt in
every aspect of economy. Financial globalization has offered substantial benefits
to the national economies and to both investors and wealth creators. However, it
has a wreaking effect on financial markets as well.
DrivingForcesofFinancialGlobalization
When we talk about financial globalization, there are four major factors to be
considered. They are −
 Advancement in information and communication technologies −
Technological advancements have made market players and governments
far more efficient in collecting the information needed to manage financial
risks.
 Globalization of national economies − Economic globalization has made
production, consumption, and investments dispersed over various
geographic locations. As barriers to international trade have been lowered,
international flows of goods and services have dramatically increased.
 Liberalization of national financial and capital markets − Liberalization
and fast improvements in IT and the globalization of national economies
have resulted in highly spread financial innovations. It has increased the
growth of international capital movements.
 Competition among intermediary services providers − Competition has
increased manifold due to technological advancements and financial
liberalization. A new class of nonbank financial entities, including
institutional investors, have also emerged.
ChangesinCapitalMarkets
The driving forces of financial globalization have led to four dramatic changes in
the structure of national and international capital markets.
 First, banking systems have been under a process ofdisintermediation.
Financial intermediation is happening more through tradable securities and
not through bank loans and deposits.
 Second, cross-border financing has increased. Investors are now trying to
enhance their returns by diversifying their portfolios internationally. They
are now seeking the best investment opportunities from around the world.

 Third, the non-banking financial institutions are competing with banks in
national and international markets, decreasing the prices of financial
instruments. They are taking advantage of economies of scale.
 Fourth, banks have accessed a market beyond their traditional businesses. It
has enabled the banks to diversify their sources of income and the risks.
BenefitsandRisksofFinancialGlobalization
One of the major benefits of Financial Globalization is that the risk of a "credit
crunch" has been reduced to extremely low levels. When banks are under strain,
they can now raise funds from international capital markets.
Another benefit is that, with more choices, borrowers and investors get a better
pricing on their financing. Corporations can finance the investments more
cheaply.
The disadvantage is that the markets are now extremely volatile, and this can be a
threat to financial stability. Financial globalization has altered the balance of risks
in international capital markets.
With financial globalization, creditworthy banks and businesses in emerging
markets can now reduce their borrowing costs. However, emerging markets with
weak or poorly managed banks are at risk.
SafeguardingFinancialStability
The crises of the 1990s have shown the importance for a prudent sovereign debt
management, effective capital account liberalization, and management of
domestic financial systems.
Private financial institutions and market players can now contribute to financial
stability by managing their businesses well and avoiding unnecessary risk-taking.
As financial stability is a global public good, governments and regulators also
play a key role in it. The scope of this role is increasingly getting international.
The IMF is a key role-player as well. Its global surveillance initiatives to enhance
its ability to manage international financial stability must also stay in track
International finance may sound like an extravagant, complicated word to some,
but its basic definition is quite the opposite. International finance simply refers to
any financial transaction that takes place, crossing national borders. If the
transmittal and receipt locations are in two different countries, the transaction falls
into the categorization of international finance.

This concept holds true even if the sender and recipient are the same company or
business entity. An example of this would be “Company X” sending monetary
assets from its U.S.-based central office to its operating branch in Spain. The
money never changed hands in ownership, but it did cross borders. This also is a
form of international finance. For a closer look at some of today’s more common
forms of international finance, we highlight some examples below.
Personal Banking
There are many different ways in which one’s personal banking matters can cross
borders. Students abroad can setup foreign accounts, moving money from the
United States to oversees accounts. A traveler might do much similar transacting.
Perhaps someone has dual citizenship, living in two countries. In this case there
will likely be a wide range of financial transactions going from one country to
another. This is a form of international finance.
Company Asset Shifts
As previously mentioned, “Company X” may need to move some financial assets
from the U.S. to another country. The inverse might also be true and even a
somewhat frequent occurrence. This is international finance in the form of asset re-
allocation.
It is important to note here however, there are many laws governing such
transactions. Government agencies such as the Securities Exchange
Commission and the Internal Revenue Service keep a vigilant eye on these kinds of
border-crossing business transactions. For this reason, companies doing these sorts
of transactions must be well-versed in the international laws pertaining to them.
Sales, Purchases, Trade
The buying, selling, and trading of foreign commodities is a necessity to the
world’s financial systems and populations alike. Foreign cars, clothes, home
goods, and even pet products fill the homes and businesses of the world’s
populations. This requires a lot of international finance transacting, all in the form
of buying, selling, and trading. Again, participants must be familiar with laws on
the matter.

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Foreign Market Investing
One can find a very helpful publication by the Securities and Exchange
Commission entitled “International Investing”. Some of the most common forms
of international finance via foreign investing are listed in the publication. These
include mutual funds, American depository receipts, and exchange-traded funds.
Also listed are the legal reasons why one should be familiar with relevant law, cost
factors, scam information, and more. Foreign market investing is a major arena in
which international finances can be seen in action.
These are just a few examples of international finances in action in the real world.
Again, there are many laws regarding activity in this financial sector. Participants
should be aware of these in all matters of international finance dealings.
ECONOMIC INTEGRATION
Economic integration has been one of the main economic developments affecting
international trade in the last years. Countries have wanted to engage in economic
cooperation to use their respective resources more effectively and to provide large
markets for member-countries of the resulting integrated areas. There are mainly
four levels of economic integration:
 Free trade area: is the least restrictive and loosest form of economic integration
among nations. In a free trade area all barriers to trade among members
countries are removed. Each member country maintains its own trade
barriers vis-à-vis con-member countries.
 Customs union: is one step further in the economic integration process. As in
the free tradearea, goods and services are freely traded among members. In
addition, however, thecustoms union establishes a common trade policy with
respect to non-members. Typically this takes the form of a common external
tariff, whereby imports from non-member are subject to the same tariff when
sold to any member country.
 Common market. The common market has the same features as
a customs union, but, in addition, factors of production (labour, capital and

technology) are mobile among members. Restrictions on immigration and
cross-border investment are abolished.
 Economic union: it is the last step in an economic integration process. In
addition to free movement of goods, services and production factors, it also
requires integration of economic policies, both monetary and fiscal. Under
an economic union members harmonize monetary policies, taxation and
government spending. In addition, a common currency is used by members and
this could involve a system of fixed exchange rates.
Advantages Of Economic Integration
Trade Creation: Member countries have (a) wider selection of goods and
services not previously available; (b) acquire goods and services at a lower
cost after trade barriers due to lowered tariffs or removal of tariffs (c)
encourage more trade between member countries the balance of money
spend from cheaper goods and services, can be used to buy more products
and services
Greater Consensus: Unlike WTO with hugh membership (147 countries),
easier to gain consensus amongst small memberships in regional integration
Political Cooperation: A group of nation can have significantly greater
political influence than each nation would have individually. This
integration is an essential strategy to address the effects of conflicts and
political instability that may affect the region. Useful tool to handle the
social and economic challenges associated with globalization
Employment Opportunities: As economic integration encourage trade
liberation and lead to market expansion, more investment into the country
and greater diffusion of technology, it create more employment
opportunities for people to move from one country to another to find jobs or
to earn higher pay. For example, industries requiring mostly unskilled labor
tends to shift production to low wage countries within a regional
cooperation
Disadvantages Of Economic Integration
Creation Of Trading Blocs: It can also increase trade barriers against non-

member countries.
Trade Diversion: Because of trade barriers, trade is diverted from a non-
member country to a member country despite the inefficiency in cost. For
example, a country has to stop trading with a low cost manufacture in a
non-member country and trade with a manufacturer in a member country
which has a higher cost.
National Sovereignty: Requires member countries to give up some degree of
control over key policies like trade, monetary and fiscal policies. The higher
the level of integration, the greater the degree of controls that needs to be
given up particularly in the case of a political union economic integration
which requires nations to give up a high degree of sovereignty.

UNIT III
Human Resource Management
The best way to understand strategic human resources management is by
comparing it to human resource management. Human resource
management (HRM) focuses on recruiting and hiring the best employees and
providing them with the compensation, benefits, training, and development they
need to be successful within an organization. However, strategic human resource
management takes these responsibilities one step further by aligning them with the
goals of other departments and overall organizational goals. HR departments that
practice strategic management also ensure that all of their objectives are aligned
with the mission, vision, values, and goals of the organization of which they are a
part.
Strategic Human Resource Management
Strategic human resource management is the practice of attracting, developing,
rewarding, and retaining employees for the benefit of both the employees as
individuals and the organization as a whole. HR departments that practice strategic
human resource management do not work independently within a silo; they interact
with other departments within an organization in order to understand their goals
and then create strategies that align with those objectives, as well as those of the
organization. As a result, the goals of a human resource department reflect and
support the goals of the rest of the organization. Strategic HRM is seen as a partner
in organizational success, as opposed to a necessity for legal compliance or
compensation. Strategic HRM utilizes the talent and opportunity within the human
resources department to make other departments stronger and more effective.
Definition
Strategic human resource management can be defined as the linking of human
resources with strategic goals and objectives in order to improve business
performance and develop organizational culture that foster innovation, flexibility
and competitive advantage. In an organisation SHRM means accepting and
involving the HR function as a strategic partner in the formulation and

implementation of the company's strategies through HR activities such as
recruiting, selecting, training and rewarding personnel
Key Features of Strategic Human Resource Management
The key features of SHRM are
 There is an explicit linkage between HR policy and practices and overall
organizational strategic aims and the organizational environment
 There is some organizing schema linking individual HR interventions so that
they are mutually supportive
 Much of the responsibility for the management of human resources is
devolved down the line
Approaches of the SHRM,
 attempts to link Human Resource activities with competency based
performance measures
 attempts to link Human Resource activities with business surpluses or profit
These to approaches indicate two factors in an organisational setting. The first one
is the human factor, their performance and competency and the later is the business
surplus. An approachof people concern is based on the belief that human resources
are uniquely important in sustained business success. An organization gains
competitive advantage by using its people effectively, drawing on their expertise
and ingenuity to meet clearly defined objectives. Integration of the business
surplus to the human competency and performance required adequate strategies.
Here the role of strategy comes into picture. The way in which people are
managed, motivated and deployed, and the availability of skills and knowledge
will all shape the business strategy. The strategic orinetation of the business then
requires the effective orinetation of human resource to competency and
performance excellance.
Benefits of SHRM
Identifying and analyzing external opportunities and threats that may be
crucial to the company's success.
Provides a clear business strategy and vision for the future.
To supply competitive intelligence that may be useful in the strategic planning
process.
To recruit, retain and motivate people.

To develop and retain of highly competent people.
To ensure that people development issues are addressed systematically.
To supply information regarding the company's internal strengths and
weaknesses.
To meet the expectations of the customers effectively.
To ensure high productivity.
To ensure business surplus thorough competency
Barriers of SHRM
Barriers to successful SHRM implementation are complex. The main reason is a
lack of growth strategy or failure to implement one. Other major barriers are
summarized as follows:
o Inducing the vision and mission of the change effort.
o High resistance due to lack of cooperation from the bottom line.
o Interdepartmental conflict.
o The commitment of the entire senior management team
o Plans that integrate internal resource with external requirements.
o Limited time, money and the resources.
o The statusquo approach of employees
o Fear of incompetency of senior level managers to take up strategic
steps.
o Diverse work-force with competitive skill sets.
o Fear towards victimisation in the wake of failures
o Resistance that comes through the legitimate labour institutions.
o Presence of an active labour union.
o Rapid structural changes.
o Economic and market pressures influenced the adoption of strategic
HRM.

GLOBAL SOURCING
Global sourcing is a procurement strategy that aims to take advantage of global
efficiencies for the delivery of goods and services. For MNCs, it has become a
strategic sourcing in today’s competitive setting.
Some popular examples of globally sourced goods and services are: labor-intensive
goods produced in China at low production cost, BPOs staffed with low cost
English proficient people in India, and IT (software and hardware) tasks performed
by Indian and Eastern European low cost programmers. These examples
particularly relate to low cost country specific sourcing but the scope and
definition of global sourcing is not limited to low cost nations.
In reality, global sourcing is a centralized procurement strategy of a multinational
company, wherein a central procurement department seeks the economies of scale
through corporate wide standardization and benchmarking. In short, global
sourcing is a ‘strategic business philosophy’ that coordinates the world’s most cost
effective production and operation inputs such as men, materials, machines,
technology, suppliers, engineering and other required facilities.
Advantages of Global Sourcing:
(i) Low cost manufacturing
(ii) Tapping skills and resources that are not available in the home nation
(iii) Seeking the benefit of alternate suppliers
(iv) Utilizing an efficient supply chain management systems
(v) Learning global business skills
(vi) Meeting competition prudently and efficiently
Disadvantages of Global Sourcing:
Disadvantages of global sourcing philosophy are as follows:
i) No exposure of international culture, traditions and beliefs
(ii) Hidden costs related to different time zones and languages
(iii) Financial and political risks associated with emerging economies
(iv) Risk of losing intellectual properties, patents and copyrights
(v) Long lead times
(vi) Labor problems and labor related issues
(vii) Unnecessary shutdowns and supply interruptions
(viii) Difficulty in supervision
(ix) Difficulty of monitoring goods and services quality
.

Costs Associated with Global Sourcing:
It is said that East or West, home is the best. No one is ready to leave his own
country but if somebody does, the reason is domestic compulsion. There are some
factors that force a retailer to buy merchandise from abroad. Buying merchandise
from abroad is full of complexities. Retailers take sourcing decisions due to cost
saving and improved quality, but this exercise is not at all simple. A retailer while
taking global sourcing decision must consider following costs that have impact on
firm’s overall profitability.
These are:
1. Country’s Origin:
The country’s origin has a lot of impact on the sourcing decisions. Buying a
handicam from Japan (a developed nation) and from China, India, Korea
(developing nations) makes a difference in cost. Japan, USA are famous for
producing latest and high quality goods resulting in high cost, while developing
nations due to cheap manpower and other benefits of economies of scale produce
the same thing relatively in cost effective manner. Further, some countries are
technologically advance and therefore, may provide high quality goods in
relatively less cost.
Therefore, a retailer must consider following issues:
(i) Technological advancement
(ii) R&D difficulties
(iii) Distribution and logistics network
(iv) Country’s specific richness
(v) Saving associated with buying from a particular country.
2. Import Duty:
Import duty (commonly known as tariff) is a tax imposed by a government on
imported goods. Tariff raises the cost of imported goods. Government imposes
such taxes to protect the interest of domestic manufacturers and traders. In absence
of import duty, India will be dumped with cheap goods (low cost goods)
demolishing the Indian business. Therefore, a retailer before entering into
international sourcing agreements must check the rate of import duty on particular
merchandise in question.
3. Foreign Currency Risk:
In recent days, currency fluctuations have become significant consideration while
making global sourcing decisions. Currency risk arises due to change in price of

one country with respect to another. For example, you are an Indian retailer and
you buy merchandise from USA, as usual there exist time gap between placing the
order and paying for the supplies, and now while making the payment in dollars,
you have to pay more (because dollar is stronger than rupee in international
market) and also there is a possibility that you would realize that no gain from
merchandise buying.
4. Trade Blocks:
Trade blocks like FTZs (Free Trade Zones), SEZs (Special Economic Zones),
EOUs (Export Oriented Units) are some designated areas in a country that don’t
come under country’s applicable tariffs. Like Free Trade Zone is an area within a
country where no taxes are applicable with regard to storage, inspection,
packaging, assembly, fabrication or exhibition.
Therefore, a retailer while searching for foreign vendors should consider these
trade blocks. Also Indian retailers should develop relations with global vendors
belonging to these designated areas.
5. Merchandise Carrying Cost:
The cost of maintaining inventory in a retailer’s warehouse like rent, electricity
expense, insurance and employees’ expenses is known as merchandise carrying
cost. In another words, this is basically the cost of holding merchandise in stock.
Carrying Cost = Average Inventory at Cost X Opportunity Cost of Capital
6. Opportunity Cost of Capital:
It is the rate of return that could be earned by investing in the next best possible
option. It is the expected return foregone by using capital for other purpose.
7. Logistics Expense:
It basically includes transportation cost occurred on merchandise travelling. Higher
the distance from vendor, higher will be the transportation expense. For example,
buying merchandise from China is significantly lower than the cost from New
York to India
Managerial Issues Associated With Global Sourcing:
Buying merchandise from overseas may be cheaper than from vendors located
locally. Vendors that are in foreign country is where majority of the retailers get
their merchandise and make a huge profit globally.
Following are the managerial issues associated with global sourcing:
1. Quality Control:

It will take long time for merchandise from outside the country to reach to your
store, keep in mind that shipping/air time while sourcing globally. These problems
are more common in countries that are under developed or have no bilateral trade
with your nation. Therefore, limited/no trade details regarding a country’s vendors
are available.
2. Building relationships with vendors:
Building relationships with suppliers overseas is difficult but if made correctly, can
do wonder for both sides. Domestic retailers look global sourcing not only for
lower costs, but also to improve quality, prompt deliveries and develop innovations
to keep them a step ahead of their competitors.
Problems Related to Global Sourcing:
(i) Language barrier
(ii) Cultural difference
(iii) Climate/time difference
(iv) Distance issue
INTERNATIONAL FINANCIAL MANAGEMENT
International financial management, also known as international finance, is the
management of finance in an international business environment; that is, trading
and making money through the exchange of foreign currency. The international
financial activities help the organizations to connect with international dealings
with overseas business partners- customers, suppliers, lenders etc. It is also used
by government organization and non-profit institutions.
NATURE OF INTERNATIONAL FINANCIAL MANAGEMENT International
financial management is a distinct field of study and certain features set it apart
from other fields. The important distinguishing features of international finance are
explained below.
1. FOREIGN EXCHANGE RISK: an understanding of foreign exchange risk is
essential for managers and investors in the modern day environment of unforeseen
changes in foreign exchange rates. In a domestic economy this risk is generally
ignored because a single national currency serves as the main medium of exchange
within a country. When different national currencies are exchanged for each other
there is a definite risk of volatility in foreign exchange rates. In fact this variability
of exchange rates is widely regarded as the most serious international financial

problem facing corporate managers and policy makers. Features of international
financial management Foreign exchange risk political risk Expanded opportunity
sets market imperfections
2. POLITICAL RISK: another risk that firms may encounter in international
finance is political risk. Political risk ranges from the risk of loss from unforeseen
government actions or other events of a political character such as acts of terrorism
to outright expropriation of assets held by foreigners. MNC must assess the
political risk not only in countries where it is currently doing business but also
where it expects to establish subsidiaries.
3. EXPANDED OPPORTUNITY SETS: when firms go global they also tend to
benefit from expanded opportunities which are available now. They can raise funds
in capital markets where cost of capital is the lowest. In addition firms can also
gain from greater economies of scale when they operate on a global basis.
4. MARKET IMPERFECTIONS: The final feature of international finance that
distinguishes it from domestic finance is that world markets today are highly
imperfect. There are profound differences among nation’s laws tax systems
business practices and general cultural environments. Imperfections in the world
financial markets tend to restrict the extent to which investors can diversify their
portfolio. Though there are risks and costs in coping with this market imperfection
they also offer managers of international firm abundant opportunities. SCOPE OF
INTERNATIONAL FINANCIAL MANAGEMENT International finance is
subject to several external forces. The more important of them namely foreign
exchange markets currency convertibility international monetary system balance of
payments and international financial system. Scope of IFM Foreign exchange
market currency convertibility International monetary system balance of payments
International financial system
1. FOREIGN EXCHANGE MARKET: the foreign exchange market is the place
where money denominated in one currency is bought and sold with money
denominated in another currency.
2. CURRENCY CONVERTIBILITY: the discussion of the foreign exchange
market was based on the assumption that the currencies. This assumption is not
valid. Many 5 countries result the ability of residents and non residents to convert
the local currency into foreign currency making international business more
difficult. A countries currency is said to be freely convertible when the country’s
government allows north residents and non residents to purchase unlimited

amounts of foreign currencies with the local currency. A currency is non
convertible when neither residents nor non residents are allowed to convert local
into a foreign currency.
3. INTERNATIONAL MONETARY SYSTEM: every country needs to have its
own monetary system and an authority to maintain order in the system. Monetary
system facilitates trade and investment. India has its own monetary policy that is
administered by the reserve bank of India. Primarily RBI aims at controlling
inflation and money supply and maintaining an interest rate regime that is helpful
to economic growth.
4. BALANCE OF PAYMENTS: balance of payments is a statistics statement that
systematically summarizes for a specified period time the monetary transactions of
an economy with the rest of the world. BOP data help measure financial transitions
between residents of the country and residents of all other countries. Transactions
include exports and imports of goods and services income flows capital and gifts
and similar one sided transfer payments.
5. INTERNATIONAL FINANCIAL SYSTEM: the international financial system
consists of the numerous rules customs instruments facilities markets and
organization that enable international payments to be made and funds to flow
across borders. In recent years the international financial system has experienced
tremendous growth. New financial instruments have been created and the volume
of transactions has exploded. The dramatic metamorphosis of international
financial markets is driven by technological changes the growth in world trade and
the breakdown of barriers to financial flows.
6. INTERNATIONAL ACCOUNTING AND TAXATION DECISIONS:
international accounting forms an integral part of IFM. It analyses the techniques
for consolidation of financial statements of the various affiliates international audit
international financial reporting and international taxation. Transfer pricing is an
important area of international accounting as it is used lowering the overall burden
of taxes and tariff as well as for working capital management. Similarly
international tax system should be so designed that it fosters economic efficiency
and does not come in the way of the cross border movement of goods and factors
of production
ADVANTAGES OF INTERNATIONAL FINANCIAL MANAGEMENT
 Access to capital markets across the world enables a country to borrow
during tough times and lend during good times

 It promotes domestic investment and growth through capital import
 Worldwide cash flows can exert a corrective force against bad government
policies
 It prevents excessive domestic regulation through global financial
institutions
 International Finance leads to healthy competition and hence a more
effective banking system
 It provides information on the vital areas of investment and leads to effective
capital allocation
RISKS OF INTERNATIONAL FINANCIAL MANAGEMENT
CURRENCY RISKS: currency risk arises from a mismatch between the value of
assets and that of capital and liabilities denominated in foreign currency or because
of mismatch between foreign receivables and foreign payable that are expressed in
domestic currency. Such mismatches may exist between both principal and interest
due. The currency risks can be divided into three different categories transaction
risk transaction risk and economic risk.
2. POLITICAL/COUNTRY RISKS: the political risk or in other sources called
country risk is explained ad risks related to either the country of a foreign buyer or
borrower or to a third country which can cause the exporter financial or investor
credit loss. Political risks also include restrictions on transfer of the credit currency
rescheduling of debts expropriation and war or insurrection. The term political risk
refers to all factors which influence the country’s economy international relations
and internal stability.
3. FINANCIAL RISKS: financial risk in accompany is associated with the method
through which it plans its financial structure. If the capital structure of a company
tends to make earnings unstable the company may fail financially. How a company
raises funds to finance its needs and growth will have an impact on its future
earnings and consequently on the stability of earnings. Debt financing provides a
low cost source of funds to a company at the same time providing financial
leverage for the common stock holders. It is found that variation in returns for
shareholders in levered firms is higher than in unlevered firms. The variance in
return is the financial risk.
4. INTEREST RATE RISK: interest rate risk refers to possible changes in cash
flow or into eh value of assets and liabilities resulting from changes in interest rate.

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