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Importance of International Business
Welcome friends, to the session of International Business. So, in the last lecture wediscussed about what international business is; and I gave you a task. I hope you musthave done your task; you must have identified the logos which I had given you. So let uscontinue with the same right!! So, in the 2nd lecture today I will be continuing with theintroduction right!!So, we said what is international business? and why international business has you knowstarted growing right!! Today we will be discussing some of the importance ofinternational business.(Refer Slide Time: 00:57)So, the first importance that we have mentioned here is earn foreign exchange. So,through the exports of goods and services all over the world it helps to earn you knowvaluable foreign exchange. Today if you do not have enough foreign exchange; theneven importing or exporting you know doing any business becomes a very challengingtask; you cannot do it. So, the major role of international business is to earn foreignexchange right!! So, that the countries today hold foreign exchange and they can use itfor some other benefit right!!Second is international business the importance is that it helps to get governmentalsupport and benefits. For example, I have taken if you can see the Hyundai unit atSriperumbudur which was done in Tamil Nadu, it help the company to get several taxrelaxations tax brackets you know tax benefits; so, that they would set up the plant.So, the government in wanted to attract them and start their Hyundai plant and theyoffered them special you know benefits. So, this is some of the benefits that companiesget when they come into a new country through such kind of for example, provision ofeasy land, rebates, right! etc.The third importance is the optimum utilisation of resources. Now for example, whenyou are producing when a company is producing in a domestic market for example, letus take the very popular case of Reliance. So, when Vimal started and Reliance youknow started it is business in textiles. The domestic market was already in a coming to asaturation. But the new plant which Reliance set up it was good enough to produce a in alarge capacity. So, this large capacity helped to reduce the cost of production. But sincethe market was already becoming more or less saturated. So, they looked you knowoption to go international.And this rather helped the company to not only utilise it’s resources proper, but becauseof this they could achieve scales of economy and get into new markets and do betterright!! So, they started earning better for in foreign exchange right!! Another examplewhy it is so important international business is so important. Is the case of I have givento increase market share.So, I have given the example of Kellogg’s in India. When Kellogg’s came to Indiaalready it was a known brand, but then they were getting you know not getting enoughsales in the other markets. So, to realise after realising this; they thought India would beone of the potential markets because the population size of India is extremely hugeright!!So, if this market can be tapped and because and one more thing is the product thatKellogg’s makes right! corn flakes. It is largely unavailable in India right! at that timewhen Kellogg’s came. So, Kellogg’s was the first to enter into the market and thoughtthey could increase that foothold in India and thus increase their market share right!!(Refer Slide Time: 04:01)Increase the competitive capacity; now what does it mean? International businessproduces high quality goods at low cost by using superior technology, new managementtechniques, marketing techniques and spends a lot of money on advertising all over theworld. So, it can fight competition from foreign companies ok.So, international business is not only spreading your products to other parts, but alsospreading high quality producing high quality goods because of your efficienttechniques, efficient mechanisms and providing it to the consumers across the worldright!!Similarly IBM took a long time to penetrate into the Indian market, Coca Cola took along time to penetrate into the Indian market. Coca Cola was plenty you know heavilysuccessful in other countries, but when it came to India it was comparatively lesssuccessful as compared to the other countries right!!You see for example, this is a case which I have given. Nestle suffered through aproblem. Nestle was boycotted in many countries because they promoted their, youknow milk powder against the mother’s milk. So, this case was in relation to that whennestle once had promoted. And said that Nestle milk or the product is better than evenmother’s milk; it was heavily criticised and this criticism led to a dump in the sales.Then international business differs largely from domestic business right!! Since it isengaged in economic transaction with several countries for example, for that there arefree trade agreements for example, like NAFTA, SAARC and ASEAN you must haveheard about this. So, international business has to be more dynamic, has to handlecomplexity in a larger way. So, that because it is an integral part of it right!!Large scale operations as I said the cost per unit of output decreases with large scale ofproduction. In the last session also we have discussed about it right!! Then the sensitivenature of international business any changes in the economic policy the technology thepolitical environment. For example, the PESTEL analysis which we say right! has a hugeimpact.So, the government changes it’s policy, the peoples, you know that there is a change inculture, there is a behavioural change, there is an local culture which is affecting so allthese things makes it very sensitive. For example, when MacD (macdonald) came toIndia and they provided initially beef cow is like treated like a mother in India we allknow. So, there was a huge uproar right! and MacD had to apologise for that right!!So, there are several things in some countries there are some things some food habitswhich are prohibited, in some other countries they are acceptable. For example, beef isacceptable around the world, but in India it is even in Asian countries, but in India it is ano no right!! So, several things are there right! in terms of our behaviour and traditionright!!(Refer Slide Time: 11:02)From here we move into the scope; scope of international business. So, what doesinternational provide us right!! First international business helps us in internationalmarketing right!! So, it says the international marketing what how is it different also welet us see that. The international marketing is the application of marketing principles tosatisfy the varied needs and wants of different people residing across the nationalborders.You see I have an example of KFC: Kentucky Fried Chicken offers veg and non vegmeals in India, but you hardly hear Kentucky Fried Chicken KFC giving providing nonveg meals. So, in the last example of so, I had said how MacD’s suffered in India. Andone interesting example is I will talk about it is a Kellogg’s case the Kellogg when itcame to India they suffered through a very typical problem.The typical problem was the habit of the people; Kellogg’s when they offered the cornflakes to Indians the Indians had a habit of using the corn flakes in drinking hot milk. Butcorn flakes is advised to be taken in a cold milk.So, this small difference in the habit of people resulted in a fall of you know Kellogg’s inIndia. And Kellogg’s had to take back it’s products and first educate the customers andeducate them and let them and tell them if this product is suitable to be taken it shouldnot be taken in a cold milk, with cold milk.So, international marketing which is one of the scope of international business; it tells usthat it helps to identify these needs and wants of the customer. Siemens similarly whenthey came to India they wanted to expand in India. They found a very typical problemthat the electrical regulations, the guidelines were not matching.These products which they were making their home country, when they directly broughtit to India they found it was not working because the Indian climate was different, Indianelectrical conditions were different. So, they had to redesign that products right!!Second is international finance and investment another scope of international business.So, international finance is a section of financial economics that deals with the monetaryinteractions that occur between two or more countries. So, IMF and IBRD are twoorganisations involved right!!So, it talks about; what monetary interactions happen? How it should happen? And whatare the policies and guidelines to be taken care of; all these things.(Refer Slide Time: 13:32)The third scope is the earning of the foreign exchange. So, foreign exchange as I havealready explained it is the trading of one currency for another right!! So, for example,ones can swap the U.S. dollar for the euro right!! Now business there is the bullionmarket for example, going on there are currency market.So, now there is every time every moment there is a exchange of currency and the buyersand sellers are constantly buying and selling these currencies right!! for their benefitsacross. So, this is one of the scopes of international business.Another important scope is the global HR; human resource. So, it is an umbrella termthat includes all aspects of an organizations HR payroll and talent management processoperating on a global scale. There have been cases where companies have failed justbecause of a poor HR policy. Or even not a poor HR policy just because they did notunderstand the human resource requirements right!!So, this case I am talking about is a case of Daimler and Chrysler right!; Daimler beingthe German counterpart and Chrysler being the U.S. counterpart. So these two companiesmerged to form a large entity. But in some time they failed the major reason for thefailure was not technology was neither you know any other reason finance or anything.But, it was only because the cultural differences of these two countries the people ofthese two countries persisted and it became so high that the Germans were not able towork with the Americans and the Americans were not able to work with Germanemployees right!!So, this case shows us that during international business it is very very important to dealwith the global HR conditions and the policies right!! For example, I have said salariesand compensation packages, training and development, employee and labour relations allthese are so sensitive because it is connected with the human.It is so sensitive and what you might think is you might you may take it casually in onecountry may become a serious factor for another country. And, that impact largely thecompany’s success right! ok.(Refer Slide Time: 15:45)So, after the scope now we move into the modes of entry, when you are doinginternational business how do you enter into different countries right!! So, for example, Iam an Indian company for example, Tata and now Tata wants to get into Britain or Tatahas gone into Germany right!!So, how do Tata’s get into? Is it so is it very simple that you just go into another countryand you set up your business? Obviously not, we all know. As a student you also knowand as a faculty I also know it is not that simple right!!So, how do you what are the modes of entry into international business we need tounderstand that. This is a brief diagram which talks about there are three ways majorlytrade related. So, we divided into trade related, contractual and investment entry right!!So, we will see all of these, but let us take one by one right!!(Refer Slide Time: 16:34)So, the modes of entry is through this is a simple diagram. So, what it says? Extent ofinvestment and risk in the ‘y’ axis and the degree of ownership and control in the ‘x’axis. So, when it is low and high this is low and high. So, what are the different measuresof modes of entry? For example; exporting, licensing, franchising, strategic alliance,joint venture and a wholly owned subsidiary.What you can do is I will request you to take a break and look at this diagram closely.And try to understand why am I saying that the degree of ownership is low in one caseand the extent of investment and risk is also low right! in for example, exporting. Why itis very high why the degree of ownership is very high in the wholly owned subsidiaryand why the extent of investment risk is also very high. Kindly, look into it and try tounderstand how they are different right!!So, let us start with the first part the export right!! So, from here if you can look at thisthe trade related we are talking about so exporting.(Refer Slide Time: 17:39)So, what is direct export? Direct export means the organisation produces that product intheir home market and sells them to customer’s overseas right!! So, this is simply I amproducing in my home market in India maybe and selling it to in Bangladesh, selling it toPhilippines, Mexico anywhere right!!So, example I have given is Tata Steel exports a large number of steel products to thecountries like USA, European Union, Jordan, Qatar, Vietnam, Iraq, Afghanistan, andKorea so producers selling directly to the importer right!!(Refer Slide Time: 18:15)Direct export has several advantages; what are the advantages? First a good control overthe foreign markets. It gives you straight information from the target market. So, becauseyou are directly doing it so you get a ground you know information from the groundlevel about what the people are thinking, what they want, what they do not want,everything right!! Better protection of trademarks, patents, goodwill and other intangibleproperty right!! So, these are some of the advantages of when you are directly exporting.Potentially greater sales you can sell more if you would have done it indirectly right!, butevery time it does not only have advantages it has some disadvantages also. So, what arethe disadvantages? The start up cost is the initial setup and the start up cost is very highright!!Because you want to directly export you have to set up the entire channel right! maybe.Greater information requirements; you cannot just barge into any country any nationright!! So, you need to understand the complete the PESTEL analysis you have to do thePESTEL analysis.You have to do the SWOT analysis, you have to understand what is the political climate?What is the economic climate? What is the technological climate social climate?Everything right!! And then only you have to you can get into and these things demand alot of investment a lot of you know you have to be very accurate.If you are not accurate then it is again trouble. So, you spend a lot of money and thenmaybe if you are not accurate then it is dangerous right!! It is highly time consumingright!! So, these are some of the direct export advantages and disadvantages.(Refer Slide Time: 19:52)What is indirect export? Now I am not doing it directly right!! So, the organisations selltheir products to a third party who then sells it on their behalf right!! So that means, I sellit to ‘A’ and ‘A’ sells it to some other country for me right!!Example: an EMC is a private company that serves as the export department for severalmanufacturers. So, there is an EMC which is a private company that serves as the exportdepartment for several manufacturers; may be of the same product right! similar product.Soliciting and transacting export business on behalf of it’s clients.So, you see there is a producer who direct is selling you know given to the exporter orsubsidiary of the importer right!! So, there is an importer, there are two importers here.So, one I am giving to the exporter and this exporter is given to the important right!! Orthere is a subsidiary of the importer in my country maybe right!! And this importerpurchase it from me and sells it to it is parent company right! in the parent/home thecountry right!!(Refer Slide Time: 20:55)So, again this also has it is advantages and disadvantages now let us look at theadvantages and disadvantages. The first advantage is that fast market access because I donot need to consume time I do not need to waste time in learning the habits andeverything. So, this exporter or the you know subsidiary of the importer is an expert inthat so he knows everything. So, there is a fast market access. So, you are very flexibleand you take less time ok.Second point is the concentration of resources for production. So, because I am not doinganything I am just giving it to somebody and he is you know doing it for me. So, theresources for production I can concentrate on that and use it wisely.Very little financial commitment right!! And, I do not need to handle the processes. Seethere are two types of major barriers in trade tariffs and non tariff barriers. So, when wetalk about tariffs and non-tariff barriers. So, one of the non tariff barriers sometimes aremore difficult because they include some of the things like the you know documentationand policies and all. So, since and they are very cumbersome, very critical, very difficultthe policies for one country is very different for the policies another country.So, since I do not need to handle this and somebody is doing it and he is taking of youknow some kind of a fee or remuneration from me. So, this is an advantage on my partthat; I do not have to put my head, into invest my time and energy into it.But, the disadvantages are it has higher risk sometimes, in the risk sometimes becausewhy I am saying it is there are agency who is taking your product, if he is not seriously isnot committed to your product then you do not know what is happening in behind right!!So, that is the risk you hold right!!Little or no control you do not have any control of the distribution. So, when you do nothave the control of the distribution sales and marketing; how would you get the rawinformation from the ground, the ground level information. And, if you do not knowunderstand the information how would you make a change in your product design ifsuppose you want to/ you have to make it.So, all these things are very important and you sometimes you miss out on them. Andinability to operate overseas you are not able to do it overseas directly. So, as I saidearlier you might not get some of the benefits that earlier you could have got had youdone it direct export right!! So, these are some of the advantages and disadvantages.(Refer Slide Time: 23:17)Another feature that comes into play when I am talking about trade is the countertrade.Now what is counter trade? Exchanging goods or services right! which are paid for inwhole or part with other goods or services. Sometimes, in fact, it happened with Russiain shortage of money what happened was they wanted to exchange goods like a barterright!; so barter is one way of it.So, exchanging goods which are paid with other goods or services right!! So, some of thecounter trade mechanisms are ways are which I will be explaining in my next to nextclass just understand. So, barter, switch trading, counter purchase, buyback, offset andcompensation trade.So, there are six different types of countertrade. And what they are I will explain one byone. So, but just understand today that countertrade means where you are exchangingagainst goods and services right! ok.(Refer Slide Time: 24:10)Piggybacking; now what is piggybacking? It is an old and early form of strategicpartnering; two different firms tie up or have a strategic partnership because to getadvantage. Now what it says, it is discussed as a strategy to serve foreign marketsespecially where the market has high entry barriers.So, I cannot do everything so what I am doing is the main requirements for piggybackingare producing quality goods, and finding firms to carry them for you. So, I am producinga good and somebody is I am not depending on some exporter, but some other companyhe has some know how. So, I am depending on him to carry my products. So, it is aviable alternative for firms with limited exporting activities right! and limited resourcesand lack of foreign market knowledge.A car company tying up with a tire company or a car company tying up with some otheryou know producer who is in a similar field right!! So, and it helps you to take yourproduct and sell it in some other overseas market. So, this is called piggyback; piggybackmeans to jump over somebody’s back and ride through some way right!!(Refer Slide Time: 25:18)Now, another mode is licensing. Now what is licensing it is an agreement between thelicenser and the licensee over a period of time for the use of; brand name, marketing,know how, copyright, work method, and trademark by paying a license fee.So, you can enter into this so it is a very important mode of entry. So, you are enteringinto another nation or another country. So, this international business organisers ororganisations they do it largely; that they take a license and they produce a productright!!For example BAT has given licenses in many countries including India where ITC is thelicensed producer of the cigarettes right! for particular brand I am saying is 555 right!!So, license means you give me a license and once I get the license I can produce it foryou right!! So, this licensing is also a very important way which companies have adoptedto enter into the new markets ok!.(Refer Slide Time: 26:23)So, what is the advantage of licensing? It helps you obtain extra income for technicalknowhow. Suppose you provide license so you obtain extra income right!! So, you havegiven the license to somebody and on basis of that you earn some income which themarkets were earlier you were not able to access right!!Quickly expand without much risk and large capital investment. So, if bat would havedirectly wanted to enter India it would have been may be tough. But now through ITCthey are into India right! pave the way for future investments in the market.So, it helps to understand the you know which sectors would be more attractive and youknow maybe related areas. So, the company can understand through these partners right!licensing partners and maybe in the future they can enter into these new areas, but thereare also disadvantages.First it increases opportunities for intellectual properties and products theft. So, there is afear that you give a license to somebody and tomorrow that company may take yourentire you know technology, it may steal your technology your know how and may do iton it is own right!! So, this is a fear of intellectual property mishandling of theintellectual property right!!And inconsistent product quality may affect the brand image, product image negatively.So, I have given a license to somebody to produce, but the company which is producingfor me maybe they do not maintain the right! quality you know levels. So, it is my job tocheck obviously, but then every time I cannot check I have to have some trust on mybusiness partners also.So, in such a condition if they do not produce and some of the products are bad orinferior and they have reached the market then it has a huge negative impact on myimage right!! And firms can lose control of the competitive advantage which isconnected with the first point itself right! in disadvantages.(Refer Slide Time: 28:22)Now, another mode of entry is franchising you must have you know when I deliberatelyhave given this McDonalds because this word franchising is connected severalcompanies adopt franchising techniques, but McDonalds is very popular in India and weknow about it.So, arrangement where one party what it says it is an arrangement where one party thefranchiser grants another party the franchisee the right to use it’s trademark or tradename as well as certain business systems and processes to produce and market a good orservice according to certain specifications.So, the specifications are decided by the franchiser right! McDonalds is a popularexample of a franchising option for expanding in international markets.(Refer Slide Time: 29:11)So, what is the advantage again? So, there is a low political risk, well selected partnersbring financial investment. They also do bring financial investment as well as newmanagerial capabilities to the operation. But again the similar disadvantage is likelicensing it because it is also a type of licensing. Franchises may turn into futurecompetitors and wrong franchisee may ruin the company’s name and reputation in themarket right!!(Refer Slide Time: 29:40)So, these are some of the problems which we are facing. So, the one more is anothermode of entry is contract manufacturing. So, nowadays many large companies for Nike,Adidas, Puma Reebok they all are getting into especially the shoes companies I amsaying they get into contract manufacturing.So, they are finding offshore markets where production you know manufacturing is verycheap right! cheap and inexpensive for example. It is the strategy for identifying amanufacturing unit to produce items at a competitive price in any part of the world. Nikeyou would not believe Nike procures 100 percent of it’s you know products fromdifferent nations.For example, they are made in India they are made up Nike shoes are made in thePhilippines and other places right!! So, Nike is procuring it’s athletic footwear in anumber of factories in Southeast Asia India being one of them. Mega Toys is sourcingfrom China right! So, this is a contract manufacturing.(Refer Slide Time: 30:34)So, contract manufacturing with the dimension in the service sector offer ampleopportunities for Indian companies in the form of BPO (business process outsouring) andKPO (knowledge process outsourcing). All the developed nations are becoming end userof outsource products and services of the developing nations.So, what a contract manufacturing helps or what it does basically? It helps to identify theinexpensive places with good talent. And then it helps them to procure the material fromthose places. So, this is what international business is all about.So, today we discussed about international business scope right! We have discussed it isimportance its challenges, why international business is slowly becoming is growing upright! every time. And it is, but it is very complex as I said it is not that easy because ofreasons like cultural dimensions, political dimensions and all.But and then we discussed about the modes of entry; how do you enter into a new nationa new country. It is not that simple; so you may enter directly you may enter it indirectly.But then what precautions you have to take. So, there are certain, so many things wehave discussed.And in the future classes maybe we will take it one by one a little more deeply. And wewill study what parameters do impact international business, and what factors do youshould you keep in mind when you talk about international business right!So, I wish you luck. Thank you so much, we will meet in the next session.Thank you so much.