International Business Environment Study Notes

Chapter 1: Introduction to International Business

Importance, nature and scope of International business:

Importance: International business is crucial for companies to grow and expand their market beyond domestic borders. It enables companies to reach a larger customer base, diversify their operations, and increase their revenue. International business also helps companies reduce their dependence on a single market, which can be a significant risk in uncertain economic conditions.

For example, Tata Group, an Indian multinational conglomerate, has a presence in over 100 countries, including the UK, the US, and China, with diverse businesses ranging from automobiles to hospitality.

Nature and Scope: International business encompasses a wide range of activities that involve cross-border transactions, including trade, investment, and global production. International business requires an understanding of cultural differences, legal and regulatory frameworks, and economic conditions in various countries. The scope of international business includes exports and imports of goods and services, foreign direct investment (FDI), joint ventures, franchising, and licensing.

For example, Indian pharmaceutical company Sun Pharmaceuticals has a global presence with subsidiaries in the US, Europe, and Asia, manufacturing and distributing generic drugs.

Modes of entry into International Business:

Companies can enter foreign markets through various modes. The choice of mode depends on several factors, such as market conditions, the company's objectives, resources, and risks involved. The most common modes of entry into international business are:

Exporting: This involves selling goods or services to foreign customers from the domestic market. It is the least risky and most straightforward mode of entry, but it provides limited control over the marketing and distribution of products. For example, India's tea industry exports to several countries, such as the UK, the US, and Russia.
Licensing and franchising: Licensing and franchising allow companies to use their trademarks, patents, or technology to foreign partners for a fee or royalty. This mode of entry requires less investment, but it provides limited control over the quality and management of products. For instance, Indian restaurant chain, Moti Mahal Delux, has franchised its brand to several countries, including the US and the UK.
Joint ventures: Joint ventures involve collaboration between two or more companies to enter a foreign market. Joint ventures allow companies to share risks and resources, but it requires careful management of the partnership to avoid conflicts. For example, Indian pharmaceutical company Lupin has a joint venture with Toyama Chemical Co Ltd in Japan, developing and marketing drugs.
Wholly-owned subsidiaries: Wholly-owned subsidiaries involve setting up a new company in a foreign market, wholly owned by the parent company. It provides complete control over the business but requires substantial investment and managerial resources. For instance, Indian automobile manufacturer Mahindra & Mahindra has wholly-owned subsidiaries in several countries, including the US and Australia.

Internationalization process refers to the process of a company expanding its operations from its domestic market to international markets. The process typically involves a series of steps or stages, each with its own unique characteristics and challenges.

Domestic company: A domestic company operates solely within the boundaries of its home country. It produces and sells products or services to customers in its domestic market, and its operations are governed by the laws and regulations of that country.
International company: An international company is one that has operations in multiple countries. It typically starts by exporting its products or services to foreign markets, and then gradually expands its operations by establishing subsidiaries or joint ventures in those markets. An international company typically adapts its products, marketing strategies, and business practices to suit the specific needs and preferences of each foreign market.
Multinational company: A multinational company is similar to an international company, but it has a more complex organizational structure and operates in multiple countries with a high degree of autonomy. A multinational company typically has a headquarters in one country and subsidiaries or business units in other countries, each with their own management teams and operations.
Global company: A global company is one that operates in multiple countries with a standardized approach to products, marketing, and operations. A global company typically has a strong brand and a centralized management structure, and it seeks to achieve economies of scale by leveraging its global presence.
Transactional company: A transactional company is a company that engages in international business on a project-by-project basis, rather than having a long-term commitment to foreign markets. A transactional company typically seeks to maximize its profits by taking advantage of short-term opportunities in foreign markets, such as bidding on contracts or selling excess inventory.

For example, a small Indian manufacturer may start as a domestic company, producing and selling its products in the local market. As it grows, it may begin to explore opportunities to export its products to neighboring countries, becoming an international company. If it continues to expand its operations and establish subsidiaries in multiple countries, it may become a multinational company. If it adopts a standardized approach to products and operations, it may become a global company. Finally, if it focuses on short-term opportunities in foreign markets rather than long-term expansion, it may become a transactional company.

Globalization is a multifaceted process that involves the increasing interconnectedness and integration of economies, societies, and cultures worldwide. It is driven by advancements in technology, transportation, communication, and trade liberalization policies. Globalization has facilitated the flow of goods, services, capital, and information across borders, creating a more interconnected and interdependent world.

Implications: Globalization has both positive and negative implications for countries, businesses, and individuals. Some of the positive implications of globalization include increased economic growth, job creation, and access to a wider range of goods and services. Globalization has also facilitated the spread of ideas, knowledge, and culture, leading to greater cross-cultural understanding and cooperation.

Globalization as a driver of International Business: Globalization has been a significant driver of international business, creating new opportunities for companies to expand their operations beyond domestic borders. Globalization has enabled companies to access new markets, diversify their operations, and reduce costs by accessing cheaper inputs and labor. It has also facilitated the growth of global value chains, where companies source inputs, produce, and distribute products across multiple countries.

However, globalization has also created new challenges for companies, such as managing global supply chains, navigating cultural differences, and complying with complex legal and regulatory frameworks in different countries. To succeed in the global marketplace, companies must develop strategies that account for these challenges and take advantage of the opportunities presented by globalization.

For example, Indian IT companies like Tata Consultancy Services and Infosys have leveraged globalization to expand their operations globally, establishing subsidiaries and joint ventures in countries across the world to provide IT services to clients. Similarly, Indian automobile manufacturers like Tata Motors and Mahindra & Mahindra have expanded their operations globally by acquiring foreign companies and establishing production facilities in different countries.

Multinational Corporations (MNCs) are companies that operate in multiple countries with a significant level of autonomy in each country. They typically have a strong brand, advanced technology, and significant financial resources, which enable them to compete effectively in the global market.

Evolution of MNCs: The evolution of MNCs can be traced back to the colonial era, when European countries established trading companies to exploit resources and markets in their colonies. In the post-World War II era, MNCs emerged as a dominant force in the global economy, as technological advancements and trade liberalization policies facilitated the growth of global value chains and international business. Today, MNCs operate in a wide range of industries, from manufacturing and services to finance and technology.

Features of MNCs: MNCs have several distinct features that set them apart from domestic companies. They typically have a global reach, with operations in multiple countries and regions. They have a strong brand and reputation, which enables them to establish a presence in new markets and attract customers. They also have significant financial resources, which enable them to invest in research and development, expand their operations, and acquire other companies. Finally, MNCs have a highly diverse workforce, with employees from different cultures and nationalities.

Dynamics of Global Enterprises: The dynamics of global enterprises are constantly evolving, as MNCs adapt to changes in the global market and emerging trends. Some of the key dynamics of global enterprises include the use of technology to drive innovation and productivity, the development of global value chains to maximize efficiency, and the pursuit of sustainable business practices to address environmental and social challenges.

Economic globalization has had both positive and negative consequences for countries, businesses, and individuals. Some of the positive consequences of economic globalization include increased economic growth, job creation, and access to a wider range of goods and services. Globalization has also facilitated the spread of ideas, knowledge, and culture, leading to greater cross-cultural understanding and cooperation.

However, economic globalization has also created several challenges, such as increased economic inequality, environmental degradation, and cultural homogenization. Globalization has also led to increased competition and volatility in the global market, creating risks and uncertainties for businesses and countries.

Brexit is the withdrawal of the United Kingdom from the European Union, following a referendum held in June 2016. Brexit has significant consequences for both the UK and the EU, as it affects trade, investment, and political relations between the two regions. Brexit has also created uncertainty for businesses operating in the UK and the EU, as they face new regulatory and trade barriers.

Key Events in Brexit:

Referendum: In June 2016, a referendum was held in the UK to determine whether the country should leave the EU. The "Leave" campaign won by a margin of 52% to 48%.
Article 50: In March 2017, the UK triggered Article 50 of the Lisbon Treaty, which set out the process for a member state to leave the EU. This started a two-year countdown clock for negotiations.
Negotiations: Negotiations between the UK and the EU began in June 2017, with the aim of reaching a withdrawal agreement that would set out the terms of the UK's departure from the EU.
Withdrawal Agreement: In November 2018, the UK and EU reached a draft Withdrawal Agreement that addressed issues such as citizens' rights, the financial settlement, and the Irish border. The agreement was approved by the EU but faced several rejections in the UK Parliament.
Extension: In March and October 2019, the UK requested and received extensions to the Article 50 process, as negotiations continued.
General Election: In December 2019, a general election was held in the UK, which resulted in a decisive victory for the Conservative Party and their leader Boris Johnson, who campaigned on a platform of delivering Brexit.
Withdrawal: On January 31, 2020, the UK officially left the EU, entering into a transition period until December 31, 2020, during which negotiations continued on the future relationship between the UK and EU.
Trade deal: On December 24, 2020, the UK and EU reached a post-Brexit trade agreement, which set out the terms of their future trade relationship. The deal came into effect on January 1, 2021.

Reverse globalization refers to the trend of companies re-shoring or bringing their production and operations back to their home country, after years of offshoring to low-cost countries. This trend is driven by several factors, including rising labor costs in emerging markets, the need to reduce supply chain risks, and the growing importance of domestic markets. Reverse globalization has significant implications for global trade and investment patterns, as companies shift their focus from global to local markets.

An example of reverse globalization is the Indian company Mahindra & Mahindra, which has recently announced plans to set up a new manufacturing plant in the United States, after years of offshoring production to India and other low-cost countries. This move is driven by the need to reduce supply chain risks and access the growing US market for its products.

Chapter 2: International Business Environment

The political economy of international business refers to the interplay between politics and economics in shaping the conduct of international business. It involves understanding the role of government policies, institutions, and regulations in influencing international trade, investment, and business operations.

Political factors can significantly impact international business operations, including tariffs, trade barriers, and regulations. Governments can create policies that promote or restrict foreign investment, impose tariffs and trade barriers, and set standards and regulations that affect the operation of foreign businesses.
The political economy of international business also involves understanding the role of international organizations such as the World Trade Organization (WTO), International Monetary Fund (IMF), and World Bank in shaping global trade and investment. These organizations work to promote free trade, encourage investment, and provide financial assistance to developing countries.
An example of economic nationalism is the trade policy of the United States under the Trump administration, which focused on protecting American jobs and industries by imposing tariffs on imports and renegotiating trade agreements.

The economic and political systems of a country play a crucial role in shaping its business environment. The economic system refers to the structure and organization of a country's economy, while the political system includes the government and its policies. The interaction between these two systems affects international business operations. For example, in a country with a socialist economic system, the government may have more control over businesses and may impose regulations and taxes on foreign companies. In contrast, a country with a capitalist economic system may have more free-market policies and fewer restrictions on foreign businesses.

The legal environment refers to the laws and regulations that govern business operations in a country. Laws related to intellectual property, labor, contracts, and taxes are examples of legal factors that impact international business. Understanding the legal environment of a country is essential for businesses to comply with local regulations and avoid legal problems.

The cultural environment refers to the values, beliefs, and norms of a society. It includes factors such as language, religion, social customs, and attitudes towards work and business. Understanding the cultural environment is important for businesses to develop effective communication strategies, adapt products and services to local tastes, and respect cultural differences.

Ethics and corporate social responsibility (CSR) are becoming increasingly important for international businesses. Companies are expected to operate in a socially responsible manner and to address environmental and social issues. CSR initiatives can include philanthropy, sustainability, and ethical business practices. In some cases, companies may face negative consequences if they are perceived to be operating unethically or irresponsibly.

An example of a company that emphasizes CSR is Tata Group, a multinational conglomerate based in India. Tata Group has initiatives focused on sustainability, education, and community development. The company has also been recognized for its ethical business practices, including its commitment to transparency and accountability.

Chapter 3: International Financial Environment

Foreign investments refer to the investment made by foreign individuals, companies, or governments in a country's economy. This can be in the form of direct investments, such as setting up a business or acquiring a local company, or portfolio investments, such as buying stocks and bonds in a foreign country.

The pattern of foreign investments varies based on factors such as the country's economic development, political stability, and market size. Developed countries tend to attract more foreign investments than developing countries due to their established infrastructure and stable business environment. However, developing countries with large markets and growth potential can also attract significant foreign investments.
The structure of foreign investments can vary based on the level of control and ownership. Foreign investments can be in the form of joint ventures, where the foreign investor partners with a local company, or wholly-owned subsidiaries, where the foreign investor has complete control over the business.
Foreign investments can have both positive and negative effects on a country's economy. On the positive side, foreign investments can bring in capital, technology, and expertise, creating jobs and driving economic growth. Foreign investments can also lead to increased competition, which can improve productivity and efficiency in local industries.

Foreign Direct Investment (FDI) refers to the investment made by a foreign entity in a country's economy. There are various theories that explain the motivations and implications of FDI.

The traditional theories of FDI, such as market imperfection theory and internalization theory, suggest that FDI is driven by market imperfections, such as differences in labor costs, technology, and resource endowments. According to the market imperfection theory, FDI takes place when a company is unable to exploit the advantages of the domestic market due to some market imperfections. The internalization theory, on the other hand, suggests that FDI takes place when a company internalizes its transactions within a multinational corporation rather than relying on external markets.

Modern theories of FDI, such as the eclectic paradigm, suggest that FDI is driven by a combination of factors, including ownership advantages, location advantages, and internalization advantages. The ownership advantage refers to the company's unique assets and resources that can be leveraged in foreign markets. The location advantage refers to the advantages offered by the host country, such as low labor costs, infrastructure, and natural resources. The internalization advantage refers to the company's ability to internalize transactions within the multinational corporation.

Modes of FDI:

Greenfield investments refer to the establishment of a new business in the host country. For example, in India, IKEA set up a greenfield investment by establishing a new retail store in Hyderabad.
Mergers and acquisitions (M&A) refer to the acquisition of an existing business in the host country. For example, in India, Walmart acquired a majority stake in Flipkart, an e-commerce company.
Brownfield investments refer to the acquisition of existing assets or facilities that are then redeveloped or repositioned. For example, in India, a Japanese company, SoftBank, acquired a 20% stake in One97 Communications, the parent company of Paytm, and later invested in the company's expansion into various sectors, such as e-commerce and financial services.

The motives for FDI can vary, including the desire to access new markets, resources, and technology, and to gain cost advantages. For example, several foreign companies have invested in India to tap into its large consumer market, such as Amazon and Walmart's acquisition of e-commerce companies. Additionally, companies such as Tesla and Apple have invested in India to tap into its skilled workforce and gain access to resources such as lithium.

Foreign Portfolio Investment (FPI) refers to the investment made by foreign entities in the financial assets of a country, such as stocks, bonds, and other securities. FPI differs from FDI in that it does not involve the acquisition of ownership or control over a business. FPI is generally considered more volatile than FDI and can have a greater impact on a country's financial markets.

The Forex Market is a global decentralized market for the trading of currencies. The exchange rate between two currencies is determined by supply and demand, based on factors such as interest rates, inflation, and political stability. In India, the Forex Market is regulated by the Reserve Bank of India and operates through authorized dealers, such as banks and currency exchange companies. Forex trading can provide opportunities for investors to profit from changes in exchange rates but also carries a significant level of risk.

Chapter 4: International Economic Institutions and Agreements

The World Trade Organization (WTO) is an international organization that deals with the rules and regulations of trade between nations. It was established in 1995 and has 164 member countries. The WTO aims to promote free trade and reduce trade barriers among member countries. It also provides a platform for negotiating and resolving trade disputes.

Latest Indian example: India is a member of the WTO and has been involved in several disputes with other member countries. In 2020, India requested consultations with the United States regarding the increase in H-1B and L-1 visa fees. India argued that the increase was discriminatory and violated the General Agreement on Trade in Services (GATS).

The International Monetary Fund (IMF) is an international organization that promotes international monetary cooperation, facilitates international trade, and provides financial assistance to member countries in need. It was established in 1944 and has 190 member countries. The IMF provides financial assistance to countries experiencing balance of payment difficulties and also provides policy advice to member countries.

Latest Indian example: India received a $1.4 billion emergency loan from the IMF in 2020 to support its efforts to mitigate the economic impact of the COVID-19 pandemic.

The World Bank is an international financial institution that provides loans and grants to developing countries for various projects such as infrastructure development, poverty reduction, and education. It was established in 1944 and has 189 member countries. The World Bank provides financial assistance to countries based on their development needs and performance.

Latest Indian example: The World Bank approved a $500 million loan to India in 2021 to improve the quality and governance of its secondary education system.

The United Nations Conference on Trade and Development (UNCTAD) is a UN body that deals with trade, investment, and development issues. It was established in 1964 and has 195 member countries. UNCTAD provides policy recommendations, technical assistance, and research on trade and development issues.

Latest Indian example: UNCTAD ranked India as the ninth-largest recipient of foreign direct investment (FDI) in the world in 2020, with FDI inflows of $57 billion.

Tariff and Non-tariff Barriers:

1. Tariff Barriers: Tariffs are taxes that governments impose on imported goods. The purpose of a tariff is to make the imported goods more expensive than the domestic goods, thereby encouraging consumers to buy domestic products. Tariffs can be ad valorem (a percentage of the value of the goods) or specific (a fixed amount per unit of the goods).

India, for instance, has imposed a number of tariffs on various imported goods, such as electronics, textiles, and automobiles. For example, the Indian government has imposed a 20% tariff on imported mobile phones and accessories to protect the domestic mobile manufacturing industry.

Non-tariff Barriers: Non-tariff barriers (NTBs) are regulations or policies that make it difficult or expensive for foreign firms to compete in a domestic market. These can take many forms, including quotas, import licenses, subsidies, technical standards, and health and safety regulations.

India has also used non-tariff barriers in the past to protect domestic industries. For example, India used to require import licenses for certain goods, which made it more difficult for foreign firms to import those goods into the country. India has also imposed technical regulations on imported goods, such as labeling requirements, which can make it more expensive for foreign firms to comply with those regulations.

The balance of payments (BOP) account is a record of all international transactions between a country and the rest of the world over a given period. The BOP account has two main components: the current account and the capital account. The current account records the trade in goods and services, while the capital account records the flow of capital between countries.

1. The current account records transactions involving the export and import of goods and services, as well as income earned from foreign investments and unilateral transfers, such as remittances. The current account is further subdivided into four categories: merchandise trade, services, income, and current transfers.

India's current account deficit (CAD) widened to 1.7% of GDP in the fiscal year 2020-21 from 0.9% in the previous fiscal year. This increase was mainly due to a higher trade deficit, which widened to $98.6 billion from $79.4 billion in the previous fiscal year.

2. The capital account records transactions involving the purchase and sale of assets between a country and the rest of the world. This includes foreign direct investment (FDI), portfolio investment, and other investments, such as loans and currency swaps.

India's capital account recorded a surplus of $72.3 billion in the fiscal year 2020-21, compared to a surplus of $54.4 billion in the previous fiscal year. This was mainly due to higher FDI inflows, which increased to $81.7 billion from $49.9 billion in the previous fiscal year.

International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB). IFRS are used by companies around the world to ensure consistency and comparability in financial reporting.

Latest Indian example: The Securities and Exchange Board of India (SEBI) mandated the use of Ind AS (Indian Accounting Standards) for listed companies in India from 2016, which are converged with IFRS.

Chapter 5: Emerging Issues in International Business Environment

Growing concern for ecology: There is a growing concern among businesses, governments and individuals about the impact of economic activities on the environment. With increasing awareness about climate change, pollution, deforestation and other environmental issues, many stakeholders are calling for sustainable practices in business operations. This has led to the development of new technologies, green products and services, and regulations to reduce the environmental impact of economic activities.

Indian Example: The Indian government has launched several initiatives to promote sustainable practices in business operations. For example, the government has launched the National Action Plan on Climate Change, which aims to reduce the country's carbon footprint and promote sustainable development. The government has also launched the National Clean Energy Fund, which provides financial support for clean energy projects.

Digitalisation refers to the use of digital technologies to transform business processes, products and services. With the increasing availability and affordability of digital technologies, businesses are adopting digitalisation strategies to increase efficiency, reduce costs and improve customer experience. This has led to the emergence of new business models, such as e-commerce, online marketplaces and digital platforms.

Indian Example: Digitalisation is a major trend in India, with the government promoting the Digital India campaign to transform the country into a digitally empowered society and economy. The campaign aims to provide digital infrastructure, digital literacy and digital services to all citizens. India has also become a hub for digital services outsourcing, with many global companies outsourcing their digital operations to Indian firms.

Outsourcing and Global Value chains: Outsourcing refers to the practice of hiring another company or individual to perform a business function that could be done in-house. This has become a common practice in many industries, with companies outsourcing functions such as manufacturing, customer service, and software development to lower-cost countries. This has led to the emergence of global value chains, where different stages of the production process are located in different countries.

Indian Example: India has emerged as a major destination for outsourcing services, with many global companies outsourcing their operations to Indian firms. India is known for its skilled workforce in areas such as software development, customer service, and business process outsourcing. Indian firms have also established global value chains, with companies such as Tata Motors and Mahindra & Mahindra having operations in multiple countries for different stages of their production process.

Labor and environmental issues have become increasingly important in the context of international trade. There is a growing recognition of the need to protect workers' rights and the environment in global supply chains. This has led to the development of international agreements, standards and certifications to ensure that businesses operate in a responsible and sustainable manner.

Indian Example: India has been working towards improving labor standards and environmental regulations in recent years. The country has ratified several international conventions on labor and environmental standards and has also implemented national legislation to protect workers and the environment. The Indian government has also launched initiatives to promote sustainable practices in businesses, such as the Swachh Bharat Mission and the National Action Plan on Climate Change.

Impact of Pandemic COVID-19 on International Trade : The COVID-19 pandemic has had a significant impact on international trade, with disruptions to global supply chains and a decline in demand for goods and services. The Indian economy has also been affected by the pandemic, with lockdowns and restrictions leading to a decline in economic activity.

Supply chain disruptions: The pandemic has led to disruptions in global supply chains, particularly in industries such as automotive, electronics, and pharmaceuticals, due to factory shutdowns, transportation restrictions, and labor shortages.
Reduced demand: As countries implemented lockdowns and social distancing measures, consumer demand for non-essential goods and services declined, resulting in reduced trade volumes.
Border closures: Many countries closed their borders to prevent the spread of the virus, leading to a reduction in the flow of goods and people across borders.
Shift towards e-commerce: With physical retail outlets closed, many consumers shifted towards online shopping, leading to a surge in e-commerce activity.
Changes in trade patterns: The pandemic has led to changes in trade patterns, with countries looking to diversify their supply chains and reduce reliance on a single country or region.
Government interventions: Many governments have implemented measures to support their domestic industries, such as subsidies, import tariffs, and export restrictions, which have disrupted international trade.
Logistics costs: The pandemic has led to an increase in logistics costs, particularly for air and sea freight, due to reduced capacity and increased demand for shipping of medical equipment and supplies.

The Indian government has taken several measures to mitigate the impact of the pandemic on the economy, such as providing fiscal stimulus and implementing reforms to improve the business environment. The government has also launched initiatives such as the Atmanirbhar Bharat Abhiyan to promote self-reliance and domestic manufacturing. However, the pandemic has also highlighted the need for greater investment in healthcare and social protection measures in India.