International Business

Management Theory
and Practice

International Business
 International Business

S
IM
M
N
 COURSE DESIGN COMMITTEE

TOC Reviewer Content Reviewer

Mr. Sreedhar Kadambi Mr. Sreedhar Kadambi
Visiting Faculty, NMIMS Global Visiting Faculty, NMIMS Global
Access - School for Continuing Education Access - School for Continuing Education
Specialization: Marketing Specialization: Marketing

S
IM
M

Author : Dr. Ajay Kumar

N

Reviewed By: Mr. Sreedhar Kadambi

Copyright:
2015 Publisher
ISBN:
978-93-5119-488-0
Address:
4435/7, Ansari Road, Daryaganj, New Delhi–110002
Only for
NMIMS Global Access - School for Continuing Education School Address
V. L. Mehta Road, Vile Parle (W), Mumbai – 400 056, India.

NMIMS Global Access - School for Continuing Education

 C ONTENTS

CHAPTER NO. CHAPTER NAME PAGE NO.

1 Introduction to International Business and Globalisation 01

2 International Trade Theories and Policies 25

International Monetary System and Export

3 59
Documentation

S
4 International Business Environment 101

5 Cultural Environment Facing International Business 131

IM
6 Entering International Markets 155

7 International Marketing 173

M

8 Marketing Mix in International Business 195

N

9 Issues in International Trade 223

10 Ethics in International Business 239

11 Case Studies 255

NMIMS Global Access - School for Continuing Education

 International Business

c u r r ic u l u m

Introduction to International Business and Globalisation: Concept of International Business,

Concept of Globalisation, Reforms to Reap Benefits of Globalisation, Free Trade Vs Protectionism

International Trade Theories and Policies: Classical Trade Theories, Heckscher and Ohlin
Theory—Modern Theory of International Trade, Porter’s Diamond Theory of National Advantage,
Evaluation of International Trade Theories, India’s International Trade policy—EXIM policy,
International Economic Institutions, Regional Economic Integration

S
International Monetary System and Export Documentation: International Monetary System,
Concept of Foreign Exchange Market, Balance of Payment, Foreign Direct Investment, Instruments
of Payment, Export Import Documentation, Export Import Procedures, Direction and Quantum of
IM
India’s Exports, Institutional Setup for Export Promotion

International Business Environment: Concept of International Business Environment, Forces

of International Micro Environment, Forces of International Macro Environment, Risks in
International Business Environment, Role of Intellectual Property Law in International Business
M

Cultural Environment Facing International Business: Concept of Culture, Culture and Interna-
tional Business
N

Entering International Markets: Concept of International Market, Ways to Enter International

Market, Reasons for Entering International Markets, Timing of Entering International Markets,
Benefits of Global Involvement for Associates and Managers

International Marketing: Concept of International Marketing, Multinational Corporation and

Transnational Corporations, Problems in Managing International Marketing Channels, Types of
Exporters, Export Houses and Marketing Organisations, International Market Research

Marketing Mix in International Business: Concept of Global Product, International Product

Management, International Product Strategies, Product Standardisation and Product Adaptation,
International Product Life Cycle, New Product Development in International Market, Concept of
International Pricing, International Pricing Strategies

NMIMS Global Access - School for Continuing Education

 v

Issues in International Trade: Export Restrictions, Determining Export Requirements, Ways to Obtain
export licence, Import Restrictions, International Logistics

Ethics in International Business: International Business Ethics, Corporate Guidelines & Policies for
Global Business, Global Bribery and Corruption, Corporate Social Responsibility, CSR in Multinational
Companies

S
IM
M
N

NMIMS Global Access - School for Continuing Education

N
M
IM
S
 C h a
1 p t e r

INTRODUCTION TO INTERNATIONAL BUSINESS

AND GLOBALISATION

CONTENTS

S
1.1 Introduction
1.2 Concept of International Business
IM
1.2.1 History of International Business
1.2.2 Difference between International Business and Domestic Business
1.2.3 International Business and Economic Growth
1.2.4 Advantages and Disadvantages of International Business
Self Assessment Questions
Activity
M

1.3 Concept of Globalisation

1.3.1 Forces of Globalisation
1.3.2 Advantages of Globalisation
1.3.3 Disadvantages of Globalisation
N

Self Assessment Questions

Activity
1.4 Reforms to Reap the Benefits of Globalisation
Self Assessment Questions
Activity
1.5 Free Trade Vs Protectionism
Self Assessment Questions
Activity
1.6 Summary
1.7 Descriptive Questions
1.8 Answers and Hints
1.9 Suggested Reading for Reference

NMIMS Global Access - School for Continuing Education

2  International Business

Introductory Caselet
n o t e s

INTERNATIONAL BUSINESS BY MCDONALD’S

According to William Gould (1996), before the introduction of Mc-

Donald’s overseas “fast food was almost unknown. McDonald’s
been the first company to try to export America’s love of fast food
and changes in eating habits of other nations.”

McDonald’s being one of the world’s largest fast-food organisa-

tions has dominated the global fast food market. Its burgers have
become a symbol of a global product. It has used effective man-
agement and global expansion strategies to enter countries and
gained a secured share of the foreign fast food market.

Started by brothers, Richard and Maurice McDonald in 1936 in

California, McDonald’s was expanded by their business partner,

S
Ray Kroc who later bought the company from the brothers for
$2.7 million. Ray was convinced that McDonald’s had the poten-
tial to explode across nations. Ray’s enormous efforts paid off and
today, McDonald’s is the world’s leading food service retailer with
IM
more than 33,000 restaurants in 118 countries serving more than
67 million customers each day.

McDonald’s used various modes to enter international trade, such

as joint ventures, franchising, and sole ventures. It has also re-
ceived an award for being the best global brands in 2011. McDon-
ald’s has changed its strategy and adopted flexibility and custo-
M

misation as per the culture, taste and food preferences in each

and every country it entered. Nowadays, McDonald’s outlets can
be seen in malls, shopping centres, university campuses, schools,
and office buildings and the appearance and décor of stores varies
in different outlets worldwide.
N

With its expansion into the international market, McDonald’s has

become a symbol of globalisation. In each country, the company
faced a new challenge for maintaining its position. The challenges
were demographic, political, competitive and cultural. For instance,
in India, initially, the growth of the company was restricted as it of-
fered only non-vegetarian items. It needed to adapt to local prefer-
ences to expand and attract more customers in India. It launched
vegetarian burgers and branded them as McAloo Tikki, McVeggie,
Maharaja Burger, as per the Indian food taste; also it started using
mutton instead of beef in burgers. The cooking area for vegetarian
products was segregated from the place where meat was handled.
Its employees were also segmented accordingly.

A thorough research was performed before the company opened

its restaurants in China. In fact, globalisation helped McDonald’s
to develop specific and unique strategies for different regions in
accordance to cultural and national variations.

NMIMS Global Access - School for Continuing Education

 INTRODUCTION TO INTERNATIONAL BUSINESS AND GLOBALISATION  3

n o t e s

learning objectives

After completing this chapter, you will be able to:

>> Explain the concept of international business
>> Identify differences between international business and do-
mestic business
>> Discuss the concept of globalisation
>> List the reforms to reap the benefits of globalisation
>> Distinguish between free trade and protectionism

1.1 Introduction
International business has become an emerging and distinct area of

S
study in today’s era as it crosses national boundaries and gives us
knowledge and idea about international ways of conducting business-
es. It encompasses the exchange of goods or services and other factors
IM
of production, such as labour, capital, technology and other natural
resources, across international borders. With the advent of globalisa-
tion, businesses have begun expanding globally. International busi-
ness caters to the global needs of organisations operating at multiple
countries in terms of policies, strategies, technologies and ways of do-
ing businesses.
M

Due to the emergence of globalisation, international trade and finance

have become possible that help in understanding the flow of finan-
cial assets or investment across nations. Globalisation includes the
exchange of technological, economic, and political factors across na-
tions due to advancement in communication, transportation and in-
N

frastructure systems that integrate economies all over the world.

Due to globalisation, rapid growth in the free flow of goods and ser-
vices, finance, labour and capital and improved relations among na-
tions have been observed. There can be negative and positive con-
sequences of globalisation. However, globalisation has led to an
increased competition internationally that has led to a decrease in the
market share of organisations to some extent. Therefore, organisa-
tions should not disregard the repercussions associated with globali-
sation, irrespective of what kind of businesses they are into or wheth-
er they are indulged in international trade or not.

In this chapter, you will be learning about concept of international

business and globalisation.

1.2 CONCEPT OF INTERNATIONAL BUSINESS

International business attributes to selling and purchasing of goods
and services by organisations across national borders. It helps coun-
tries to find profitable markets for their goods and services. Interna-

NMIMS Global Access - School for Continuing Education

4  International Business

n o t e s

tional trade has spurred economic growth and contributed largely to-
wards the development of nations by raising income, increasing the
local worker’s earnings. This ultimately leads to an increase in Gross
Domestic Product (GDP). The political, economic, and social advance-
ment of various countries can be attributed mainly to international
trade. The countries entertain international trade as they require a
market for their goods, reduction in the cost of production, and an
advantage of abundant natural resources available in other countries.
The availability of advanced and competent modes of transportation
and rise in industrialisation have made international trade cost effec-
tive and efficient.

The main aim of international trade is that better quality and a spe-
cific variety of goods and services can be imported by a country at
a comparatively lower cost from other countries than to produce it

S
domestically. In other words, the underlying principle in international
trade is to procure goods and services from another nation at a low-
er cost. International trade allows less developed countries to import
technical know-how from developed nations to keep pace with eco-
IM
nomic development. International trade facilitates the economic prog-
ress of a nation, reduces inequalities, and eliminates tax and tariffs
through mutual agreement between countries. The positive effects of
international trade are as follows:
‰‰ Global competitiveness increases when an organisation enters the
foreign market.
M

‰‰ Easy access to technological innovation and knowledge helps in

increasing productivity.
‰‰ Trade barriers are eliminated leading to decline in growth.
N

International business or the exchange of goods and services between

countries get affected by global events. The impact of such events can
be seen in the cost, price, supply, and demand of a product. Inter-
national business gives consumers and countries an opportunity to
select from a variety of goods and services not available in their own
countries. Almost every kind of product can be found on the inter-
national market be it food, clothes, spare parts, oil, jewellery, wine,
stocks, currencies, or water.

International trade can be broadly defined as export and import of

products where export means selling products/commodities any
where in the global market and import implies that a product is pur-
chased anywhere from the global market. Nowadays, international
trade involves various other business activities like tourism, banking,
insurance, consulting and transportation.

Fast paced globalisation is happening and growth in international

trade is crucial for the development and continuance of globalisa-
tion. Goods and services from each and every part of the world are

NMIMS Global Access - School for Continuing Education

 INTRODUCTION TO INTERNATIONAL BUSINESS AND GLOBALISATION  5

n o t e s

available. Without it, people would be restricted to similar kinds of

products and services which are produced within their own national
boundaries. Cross border trade is considered to be a major source of
revenue for any nation.

1.2.1  HISTORY OF INTERNATIONAL BUSINESS

International trade has been in existence since past centuries. This

is evident through anecdotes from the world history. The term ‘inter-
national trade’ has a wider meaning and varied connotations across
history. In times when nations or states were not clearly demarcated,
the term international trade simply meant trade over long distanc-
es; between far off lands. One such example is the silk route, which
extended from China to Rome, through Central Asia to trade espe-
cially in Chinese silk during the 14th and 15th century. Later, during

S
the 18th century, international trade gave rise to industrialisation and
colonisation – which were new concepts in the world economy. Indus-
trialisation brought in changes in the entire processes of producing
goods from traditional methods to scientific methods.
IM
Industrialisation compelled European nations to discover new places
to acquire raw materials and new markets to sell quickly produced
products; to look for places to increase the sales of their goods. This led
to the colonisation of countries of African and Asian continents. The
colonisation of countries refers to the forceful acquisition of another
M

nation’s political and economic setup to take hold of natural resources

of the country and build new marketplaces for finished products.

The international trade of historical times was intended more towards

the movement of goods as compared to the modern day international
N

trade. Today, international trade involves various activities apart from

the export and import of goods. These activities are trading in stocks
and shares, services, marketing and so on.

1.2.2 DIFFERENCE BETWEEN INTERNATIONAL BUSINESS

AND DOMESTIC BUSINESS

International trade and domestic trade are different in more aspects

than one. Doing business internationally is different from doing busi-
ness within one’s domestic country. As the term clearly states, domes-
tic trade is restricted within the limited political boundary of a coun-
try, while international trade involves cross border (from one country
to another) movement of goods and services. International business
operations are more complex than undertaking and conducting do-
mestic business. The major differences between domestic and inter-
national trade can be listed on the basis of the following features of
trade:

NMIMS Global Access - School for Continuing Education

6  International Business

n o t e s

‰‰ Factor of production: Domestic trade pertains to a limited territo-

ry and thus the capital, land and labour used for the production of
goods is easier to acquire and can be moved and shifted from one
town to another conveniently. However, in international trade, the
mobility of resources, such as currency and manpower across the
international boundary of a country are quite restricted.
‰‰ Goods and services: These are the tangible and intangible assets
of an organisation. In the domestic trade, the movement of these
goods and services within the country is comparatively easier. Or-
ganisations are required to pay taxes, such as sales tax, value add-
ed tax, and so on, to sell their goods in different parts of a country.
However, the movement of goods across nations is quite compli-
cated and involves stringent custom clearance, licensing, franchis-
ing, payment of quotas and tariff, security checks, etc.

S
‰‰ Currency: It denotes the medium of exchange in terms of finances;
paper money, coins, or banknote of a particular country. In the do-
mestic trade, transactions are done using the same type of curren-
cy. However, organisations operating in different countries have to
IM
rely on foreign investment, conversion, and use of heterogeneous
currencies to pay off their international transactions.
‰‰ Marketplace: It is a place from where goods and services are to
be sold and consumed. Domestic trade caters to a limited market-
place within the demographic and geographic extent of a coun-
try. However, international trade operates across the whole world,
M

thus it caters to a broader marketplace and diverse customers.

Long distances mean more transaction time and increased costs.
‰‰ Cultural and language barriers: Understanding both social and
business culture in another country is a key to success in inter-
N

national trade. Culture represents spoken languages, values, and

beliefs, of people in a particular region, area, or country. These
factors affect the communication or flow of information among
people. In case of domestic trade, people within the same national
boundary share similar cultural beliefs and practices. Moreover,
language is not a major issue in the domestic country. Thus, it be-
comes easier to communicate and present goods. However, it is not
so for organisations that operates internationally to relate to the
local community.

1.2.3 INTERNATIONAL BUSINESS AND

ECONOMIC GROWTH

Some economists and policy makers (especially those of developed

and developing nations) are divided in opinions as far as the impact
of international trade on economic growth is concerned. According
to them, international trade has brought unfavourable changes in the
economic and financial scenarios of developing countries as gains
from trade have gone mostly to the developed nations of the world.

NMIMS Global Access - School for Continuing Education

 INTRODUCTION TO INTERNATIONAL BUSINESS AND GLOBALISATION  7

n o t e s

With the introduction of liberalised trade policies, tariff reductions,

and globalisation, the domestic market of developing countries has
been adversely affected. Many small-scale production houses have
shut down their operations, because they were unable to live up to
the pressure of competition from international companies. Many in-
dustries operating under government protection could not bear high
competition from their global counterparts.

The other group of economists is in favour of globalisation and interna-

tional trade. They see it as an opportunity for growth and prosperity of
the nation. They feel that developing countries with liberalised trade
policies can gain from globalisation and international trade provid-
ed that these policies are properly implemented. The entrepreneurs
of developing nations can find new places to market their products.
These nations can adopt and use advanced and latest technologies to

S
compete with their global counterparts. This will increase efficiency
and in turn ensure optimum utilisation of available resources. Thus, it
can be concluded that international trade provides a host of opportu-
nities for countries to progress and prosper economically. China and
IM
India are regarded as the trendsetters in this case.

However, it is important to remember that international trade alone

cannot result in economic growth and prosperity. Several other fac-
tors, apart from liberalised trade policies are important as well. These
include political stability, administration of policy programmes, infra-
structure, and workforce development.
M

Several examples show that often countries have failed to seek the
benefits of international trade because of the absence of appropriate
policy measures. The economic growth was hindered because of po-
N

litical crisis and lack of sound policies for international trade in the
Ivory Coast in the 1980s and 1990s. Likewise, Kenya and Zimbabwe
have been facing hyperinflation and have not gained much from inter-
national trade due to bad political and economic conditions. However,
these are rare instances. These alone cannot hinder the international
trade activities that are practiced across the world.

To conclude, it can be said that international trade leads to economic

growth provided that a country’s economic infrastructure and policy
measures are designed to meet resultant changes in social and finan-
cial scenario.

1.2.4 ADVANTAGES AND DISADVANTAGES OF

INTERNATIONAL BUSINESS

The main reason for carrying out and expanding business is to in-
crease sales and profits. When a company goes global and indulges
in international trade, the likelihood of increasing sales goes up as it
then opens up a market for consumers all over the world. This reduc-
es dependence and reliability on local and national economies. With

NMIMS Global Access - School for Continuing Education

8  International Business

n o t e s

technological advancement and the use of the Internet on the rise,

global players are able to do business at all hours of the day with con-
sumers from every point on the globe. The potential for expansion for
businesses has thus increased manifold as manufacturers can access
many more markets.

In the past few years, flourishing international trade has greatly con-
tributed to the GDP of any country and has acted as a significant and
major source for real foreign exchange earnings by any developing
economy. The growth of international trade can be attributed to rapid
industrialisation; due to modern production techniques, flourishing
multinationals, better transportation, advanced technology and out-
sourcing of services.

Classical and neoclassical economists advocated many theories stat-

ing the importance of international trade in social, political, and

S
economic context. To achieve complete benefits of globalisation, the
growth of international trade is essential. Hindrances or limitations
in cross-border trade, restricts the consumers of these economies to
IM
select goods and services produced within its own territories. This fur-
ther leads to losing out on valuable foreign exchange revenue by that
economy, which it can earn through global trade.

During the late 20th century, international trade has acted as a ma-
jor factor in the growth of national and world economy. Nations with
strong international trade have witnessed prosperity and econom-
M

ic growth along with a strong control on the economic affairs of the

world as a whole. Poverty can be alleviated in a significant manner
through cross-border trade.
N

Advantages of International Trade

The main advantages of international trade are as follows:

‰‰ Increased competitiveness: Competition increases among do-
mestic and international organisations; thereby improving on
the quality of products. The products are available at competitive
rates. Emerging economies like China, India and other developing
countries move up the global value chain by increasing value ad-
dition to their products.
‰‰ Technology transfer: It connotes the sharing of knowledge, skills,
and technologies by organisations to cater to customers’ needs.
New and innovative products thus reach customers. International
trade facilitates the flow of technology from one country to anoth-
er. Manufacturers and producers invest in machinery and latest
software and technology from other countries to meet competition.
‰‰ Opportunity for expansion: Through international trade, busi-
ness organisations get an entry into new markets; there by prepar-
ing and securing a platform to expand business activities.

NMIMS Global Access - School for Continuing Education

 INTRODUCTION TO INTERNATIONAL BUSINESS AND GLOBALISATION  9

n o t e s

‰‰ Rise in sales and profits: International trade provides business

organisations extended potential to sell the existing products. The
access to new markets is thus a platform for increase in profits.
‰‰ Extended sales potential of existing products: International trade
provides an opportunity to extend the sales potential of existing
products. In case a product is not used in a country, an organisa-
tion can generate demand by promoting and selling products in
another country.
‰‰ Opportunity to market share at the international level: Business
organisations can capture a share in the global market through
international trade. Organisations can make their presence felt
globally with the help of international trade.
‰‰ Reduce dependence on the existing market: In cases of saturation
in the domestic market, international trade allows organisations to

S
enter into new markets. Thus, organisations can diversify and re-
duce the risk factor in terms of markets available to do business.
‰‰ Resistance to market fluctuations: International trade facilitates
IM
organisations to carry out business activities in other markets
when one market fluctuates. For example, during fluctuation, an
organisation can buy a commodity at a low price from one market
and can sell it in the other.

Disadvantages of International Trade

M

Some disadvantages of international trade can be listed as follows:

‰‰ Domestic production may hamper: International trade allows or-
ganisations from different countries to enter into a country’s do-
N

mestic market thus, making it difficult for local/domestic organi-

sations to meet competition in rates and quality. The competitive
business environment poses challenges and problems for techno-
logically less efficient domestic industries. The less priced foreign
goods may decrease the demand of high priced domestic products
and make it difficult for domestic organisations to survive. A de-
crease in demand of locally produced goods may lead to the clo-
sure of units thus causing loss of employment.
‰‰ Rise in unemployment: International trade may sometimes cre-
ate unemployment in a country. Most multinationals use capi-
tal-intensive methods and advanced machinery to produce goods.
These technology-produced goods are most often better than man-
made goods. When domestic organisations try to adopt the latest
technology to survive in the market, they usually cut down on jobs
and reduce human resources, which leads to domestic job losses.
‰‰ Rise in the influence of rich and developed countries: Developed
nations generally dominate and govern trade policies and proce-
dures. Thus, there are the chances of developed economies to gain
control over weaker nations and economies. These countries grad-

NMIMS Global Access - School for Continuing Education

10  International Business

n o t e s

ually develop a more say in political and economic affairs of devel-

oping countries and manipulate the local policy making bodies to
their advantage.
‰‰ Differences in ideology: Ideological differences may arise among
countries on matters related to procedures and practices of inter-
national trade. Sometimes the welfare of locals is ignored for the
sake of profit. International trade can also destroy and exhaust the
natural resources of a country due to over exploitation. These dif-
ferences may sometimes sour political relationships between na-
tions.
‰‰ Special licenses and regulations: Licenses refer to the set rules
and regulations of countries to allow trade in their region. Every
country has its own set of procedures to conduct business and at
times this becomes a cause of problem for the countries that in-

S
tend to trade with another country.

Economists consider global trade beneficial for the world economy

as its benefits outnumber its disadvantages. There is improvement in
IM
the overall economy of all countries of the world. A country benefits in
monetary terms from international trade as it sells its surplus goods in
the international market after fulfilling the needs of domestic consum-
ers. These trade activities provide countries more capital and hence
boost their economy.

In terms of global trade, a rise in exports is considered good and ben-

M

eficial whereas an increase in imports is not considered good as it re-

duces foreign exchange. It is a challenging task for the policymakers
to maintain a balance between restrictions and free trade.
N

self assessment Questions

1. International business attributes to selling and purchasing of

__________by organisations across national borders.
2. Which one of the following is not an advantage of international
trade?
a. Increased competitiveness
b. Technology transfer
c. Better political environment
d. Opportunity for expansion

Activity

How international business contributes to the economic growth of

a country? Give your opinion.

NMIMS Global Access - School for Continuing Education

 INTRODUCTION TO INTERNATIONAL BUSINESS AND GLOBALISATION  11

n o t e s

1.3 CONCEPT OF GLOBALISATION

There has been a frequent shift in national cultures, organisational
structure, and trade patterns with the changing world economy. Ear-
lier, countries were confined to their national boundaries only and
restricted trade to cross-border territories. Now, the scenario has
changed as an open economy and relaxation in trade barriers has led
to free flow of capital, goods, services, human resources and technolo-
gies across nations. Different economics have integrated into an inter-
national economy through the exchange of trade and foreign direct in-
vestments(which are investments made to acquire long-term interest
in an organisation at a global level). This cross-border integration and
interconnection can be social, economic, cultural or political. This in-
tegration is attributed to the emergence of the concept globalisation.

S
Globalisation can be defined as an assimilation of different countries
through the exchange of ideas, financial resources, information, goods,
and resources. It has made a significant contribution in the Indian
economy by generating abundant employment opportunities with the
IM
expansion of markets. Globalisation has both positive and negative
impact on the economy of a country. The following are some popular
definitions of globalisation:

The United Nations ESCWA defines globalisation as, “In an economic

context, it refers to the reduction and removal of barriers between na-
M

tional borders in order to facilitate the flow of goods, capital, services

and labour, although, considerable barriers remain to the flow of labour.
Globalization is not a new phenomenon. It began in the late nineteenth
century, but its spread slowed during the period from the start of the
First World War until the third quarter of the twentieth century. This
N

slowdown can be attributed to the inward-looking policies pursued by a

number of countries in order to protect their respective industries, how-
ever, the pace of globalization picked up rapidly during the fourth quar-
ter of the twentieth century.”

Tom G. Palmer of the Cato Institute states, “Globalization is the dimi-

nution or elimination of state-enforced restrictions on exchanges across
borders and the increasingly integrated and complex global system of
production and exchange that has emerged as a result.”

Herman E. Daly argues that most often the terms internationalisation

and globalisation are used interchangeably but there is a significant
formal difference between the two. The term internationalisation re-
fers to the importance of international trade, relations and treaties
owing to the (hypothetical) immobility of labour and capital between
or among nations.
Thomas L. Friedman has analysed the impact of the flattening of the
world, and argues that globalised trade, outsourcing, supply chain, and
political forces have changed the world permanently, both for better

NMIMS Global Access - School for Continuing Education

12  International Business

n o t e s

and for worse. He also argues that the pace of globalisation is rapid and
will continue to make an impact on business organisations and practice.
Noam Chomsky argues that the word globalisation is also used, in a doc-
trinal sense, to describe the neoliberal form of economic globalisation.
Therefore, on the basis of the aforementioned definitions, globalisa-
tion is the interdependence and integration of the global economy
to enhance the worldwide exchange of capital, goods and services. A
particular product may not necessarily be designed, manufactured,
and sold in one country alone. For example, Daimler Chrysler car
is designed in Germany, assembled in Mexico from the components
made in the United States and Japan. The interiors of carsare made
from Malaysian rubber and Korean steel.
Another example can be Nokia cell phone, which is designed in Fin-

S
land and made in China or Korea using chip sets produced in Taiwan
and designed by an Indian software engineer working there. All this
integration is possible due to globalisation.
IM
Globalisation, when seen through the perspectives of market, means
the merging of separate, distinct and isolated national markets into a
large global marketplace. Relaxation in trade barriers and adaptation
to cultures across nations has made it possible for organisations to
maintain a standard quality and sell their products in other countries.
For example, consumer products like Citibank credit cards, soft drinks
by Pepsi Co., Play Station and video games by Sony, Apple iPod, and
M

McDonald’s burgers have maintained the same quality and standards

throughout the world.
However, the production perspective of globalisation refers to the
sourcing of raw materials, parts and components, and services from
N

different countries. This is advantageous to the organisations in terms

of national differences in costs of labour, energy, land and capital. For
example, IBM ThinkPad X31 Laptop is designed by efficient IBM
engineers in the United States. Computer case, keyboard and hard
driveare manufactured in Thailand; the display screen and memory
were contributed by South Korea; Malaysia provides the built-in wire-
less card; whereas the United States manufactures the microproces-
sor. Finally, the laptop is assembled in Mexico and shipped for fur-
ther sale. This whole process segregates the manufacturing process
of countries where specific jobs can be done in the most cost effective
manner (with cheap labour and raw materials) and ultimately uses
expertise of the best nations to assemble final products. Another very
common example of globalisation can be seen in Business Process
Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) that
have been used to advantage national differences in production costs.

1.3.1 FORCES OF GLOBALISATION

Globalisation is driven by advancement and changes in the world

economy. Generally, organisations go global for a reason of expanding

NMIMS Global Access - School for Continuing Education

 INTRODUCTION TO INTERNATIONAL BUSINESS AND GLOBALISATION  13

n o t e s

their markets and increasing their sales and profits. One of the ma-
jor forces leading to globalisation is the expansion of communication
systems. In the present times, it has become easier and convenient to
distribute information to any part of the world through the Internet.
Some important forces behind globalisation are shown in Figure 1.1:

Forces of
Globalisation

Advancement Reduction in Increase in High

of Technologies Cross-trade Barriers Consumer Demand Competition

S
Figure 1.1: Forces of Globalisation

These forces are explained in detail as follows:

‰‰ Advancement of technologies: It is one of the crucial factors of
IM
globalisation. Enhancement in Information Technology (IT), tele-
communications and an improved communication network has
made are markable improvement since 1990s in the way informa-
tion is accessed. The advancement in technology has led to globali-
sation by facilitating the exchange of goods and services, resources
and ideas, irrespective of geographical location of a place.
M

‰‰ Reduction in cross-trade barriers: It is another critical force of

globalisation. Every country restricts the movement of goods and
services across its border by imposing tariffs and quotas on goods
and services imported. These random restrictions and regulations
N

create a chaos in a global business environment. Such practices

impose limits on international business activities. However, offer-
ing relief in the cross-border trade restrictions by most govern-
ments has induced frequent and free trade, which, in turn, has
increased the growth rate of an economy.
‰‰ Increase in consumer demand: It is a main driver to facilitate
globalisation. With an increase in the average family income and
standard of living, the demand of consumers for a variety of prod-
ucts has also increased. Consumers nowadays are well aware of
products and services available in other countries through the use
of the Internet, phone and television. This fact has impelled many
organisations to work in association with foreign players for cater-
ing to the needs of the local market.
‰‰ High competition: It contributes as an important driver for bring-
ing about globalisation. An organisation generally strives hard
to gain a competitive edge in the market. A frequent increase in
competition in the domestic market compels organisations to go
global. Thus, organisations enter other countries (for selling goods
and services) to expand their market share. They export goods to

NMIMS Global Access - School for Continuing Education

14  International Business

n o t e s

foreign lands where they receive a relatively higher price for their
goods and services. Many organisations strive to achieve even
larger global market shares through mergers and acquisitions,
strategic alliances and joint ventures.

1.3.2 ADVANTAGES OF GLOBALISATION

Globalisation has changed the whole world socially, economically and

culturally. This tremendous socio-economic change and internation-
alisation of business would not have been possible without globalisa-
tion. This can be easily understood by considering the five aspects of
globalisation, which are shown in Figure 1.2:

S
International
Trade
IM
Employment Aspects of Financial
Opportunities Globalisation Integration
M

Exchange of
Technologies
N

Figure 1.2: Aspects of Globalisation

Let us now discuss the aspects of globalisation in brief.

‰‰ International trade: It involves business transactions that take
place between countries. Reduction in trade barriers has increased
business transactions among nations. Due to globalisation, trade
restrictions imposed by several countries have been relaxed to a
great extent. In the export-import of goods, the tariff and non-tar-
iff barriers, and subsidies were reduced by different countries to
allow free movement of goods across the borders. It is evident that
the trade share of developing countries in the world trade has in-
creased from 19% in 1971 to 29% in 1999.
‰‰ Financial integration: It one of the most crucial positive impacts
of globalisation. Financial integration is defined as a phenome-
non in which global economies are closely linked. It is a process
of closely assimilating different financial markets and economies
thus leading to a free flow of capital and financial resources within

NMIMS Global Access - School for Continuing Education

 INTRODUCTION TO INTERNATIONAL BUSINESS AND GLOBALISATION  15

n o t e s

nations. Technologies, such as electronic data transfer and elec-

tronic fund transfer, have contributed significantly to the develop-
ment of globalisation. The inflow of FDI, portfolio investment, and
bank credit rose dramatically since the late 1990s.
‰‰ Exchange of technologies: It is another positive effect of globali-
sation, which has facilitated the movement of latest and advanced
technologies from developed nations to developing nations; there-
by making the production methods of developing countries more
effective and efficient. Industrialisation has facilitated the mass
production of goods and increased economies and scaled up the
ability of developing nations to provide goods at a low and compet-
itive price to the world.
‰‰ Employment opportunities: It constitutes the major benefit of glo-
balisation. Due to globalisation, many organisations have shown

S
their interest in investing capital in different countries and have
expanded their reach globally by establishing new branches and
subsidiaries in different countries. Of late, there is a tremendous
growth in segments, such as IT, personal and beauty care etc. This
IM
has led to a remarkable increase in employment opportunities,
especially in developing countries. Due to an increase in better
employment opportunities, individuals move from one country to
another and in return bring back foreign currency, which adds to
the national income of the country they belong.
M

1.3.3  DISADVANTAGES OF GLOBALISATION

Globalisation is seen as a driving force of internationalisation of busi-

ness. In the previous sections, we have learned how globalisation has
contributed to the development of underdeveloped or newly devel-
N

oped economies. However, globalisation also reflects a darker side

where unparalleled growth, increasing inequality and diminishing
sovereignty of countries are the major concerns. These consequences
are shown in Figure 1.3:

Unparalleled Economic Growth

International Inequality

Deteriorating Workers’ Interest in Advanced Nations

Financial Crises

Loss of National Sovereignty

Figure 1.3: Negative Consequences of Globalisation

NMIMS Global Access - School for Continuing Education

16  International Business

n o t e s

Now, let us discuss the negative consequences of globalisation in detail.

‰‰ Unparalleled economic growth: Unparalleled economic growth is
one of the major negative consequences of globalisation witnessed
by the world during the 20th century. During this period, the GDP
of countries increased almost up to five times, but the increase was
not steady. However, the most remarkable stretch appeared in the
latter half of the century, which was due to rapid trade expansion
and financial liberalisation. The analysts have divided the 20th
century into four phases on the basis of the uneven growth trends.
These phases are explained as follows:
 Phase 1 (1900s-1913s): This is the first phase, which is also
known as inter-war era. During this phase, most of the nations
were against internationalism or globalisation. The world econ-
omies advocated and strongly favoured the ideologies of closed

S
economies, protectionism, and pervasive capital control. Most
of the nations imposed restrictions through tariffs and quotas.
 Phase 2 (1913s-1950s): This phase marks an era when the con-
IM sequences of policies adopted during 1900s-1913 swere echoed
in the second phase (i.e. between 1913s-1950s). This era expe-
rienced a devastating slowdown in the global economy and the
per capita income growth steeply dropped below 1%.
 Phase 3 (1950s-1973s): It is a period when nations showed a fre-
quent increase in the global per capita income after World War
M

II. This was due to the establishment of United Nation Organi-

zation (UNO) and World Trade Organization (WTO), and ma-
jor amendments in international trade agreements. The world
economy increased by 2% because of a change in economic pol-
icies and the trade boom in the industrially advanced countries.
N

 Phase 4 (1973s-2000s): It is the fourth phase, which marks a

downturn in the economy, due to global crises in the 1990s.
During these years, the economies of different countries, such
as Russia, Mexico, Brazil, Indonesia and Thailand, were most
affected due to economic recession.
‰‰ International inequality: International inequality has become
a major issue during the 20th century. According to World Bank,
inequality is defined as “the disparity of income and standard of
living among nations and their citizens.” With the initiation of the
process of globalisation, disparity was seen between the rich and
poor nations; richer nations were getting richer, while the poor-
er nations were getting poorer. This gap was becoming relative-
ly wider. The progress was not uniformly dispersed all over the
world. It was found that the richest segments or countries grew
up rapidly, showing an increase in per capita GDP nearly six-fold
during the century.
‰‰ Deteriorating workers’ interest in advanced nations: Analysts are
of the view that due to stiff competition from low-wage economies,

NMIMS Global Access - School for Continuing Education

 INTRODUCTION TO INTERNATIONAL BUSINESS AND GLOBALISATION  17

n o t e s

the workers from high-wage jobs have been displaced. Due to the
free movement of goods and services, workers in the advanced na-
tions have suffered a lot as organisations of advanced nations have
shifted their interest towards low cost and high profit processes.
One of the common examples of such process is outsourcing, which
has seemingly depleted employment opportunities in advanced
countries. Organisations outsource work partially or completely to
developing countries because of the availability of highly skilled la-
bour at a very low wage in developing countries. Thus, outsourcing
results in a loss of job opportunities in the home country.
‰‰ Financial crises: The global crisis of the 1990s affected the econ-
omies of Mexico, Thailand, Indonesia, Korea, Russia, and Brazil.
This became a topic for debate whether it had resulted due to glo-
balisation. Economists have suggested various reasons for the on-
set of economic crises.

S
At a national level, some countries have maintained an impressive
economic growth but are not fully prepared for sudden downturn
IM
faced by the international market. In addition, some malpractices
and mismanagement at the international level can also attribute to
financial crisis. Inappropriate risk management, inadequate monitor-
ing of economic development, and lack of sufficient information about
international investors and financial institutions can be likely be the
factors leading to crises. This is quite evident from global crises that
reoccurred in 2008 in which liquidation of Lehman Brothers and sale
M

of Bear Sterns and Merill Lynch were some of the major contributors.
‰‰ Loss of national sovereignty: Another major concern of globali-
sation is the loss of national sovereignty. Due to the integration of
world economy, countries are losing their autonomy. In order to
N

provide relaxation and comply with international trade policies,

they compromise with their domestic objectives and follow con-
ventions proposed by international institutions, such as WTO and
International Monetary Fund (IMF). The diminishing tariff and
non-tariff trade barriers to promote uninterrupted flow of goods
and services are the common examples. These barriers were often
imposed by countries to protect their domestic industries. Howev-
er, international conventions such as UNCTAD, Convention on In-
ternational Sale of Goods (CISG), and other obligations to remove
trade barriers affect the autonomy of some nations.

self assessment Questions

3. Which one of the following is not a disadvantage of

globalisation?
a. Unparalleled economic growth
b. International inequality

NMIMS Global Access - School for Continuing Education

18  International Business

n o t e s

c. Financial crisis
d. Technology transfer
4. Due to the integration of the world economy, countries are
losing their ___________.

Activity

Discuss with your friends the forces that drive globalisation.

REFORMS TO REAP THE BENEFITS OF

1.4
GLOBALISATION

S
Globalisation opens the door for developing countries, such as India, to
grow at a faster pace by adopting constructive policies and reforms par-
allel to advanced nations. Not all countries do so and are still lagging
IM
behind. Increase in population is the basic reason for the lacklustre per-
formance of these countries. This further leads to a slowdown in the eco-
nomic development, low per capita income, living standards and GDP.

Studies reveal that approximately 60-70 per cent of per capita growth
in developing countries is an outcome of increase in physical capital;
12-20 per cent is due to increase in efficient and skilled human capital,
M

and the remaining 10-30 percent is attributed to improved productivi-

ty. The policies and reforms adopted by countries to increase the pace
of economic growth and enter in the main frame of global economic
development are shown in Figure 1.4:
N

Macroeconomic Stability

Outward-oriented Policies

Government Institutions

Highly skilled Human Resource

External Debt Management

Trade Promotion

In-flow of Private Capital

Debt Relief

Figure 1.4: Reforms to Reap the Benefits of Globalisation

NMIMS Global Access - School for Continuing Education

 INTRODUCTION TO INTERNATIONAL BUSINESS AND GLOBALISATION  19

n o t e s

Let us discuss these reforms in brief.

‰‰ Macroeconomic stability: The economy of a country must be sta-
ble and act as a buffer against external shocks. It should be able to
control inflation rate, exchange rates, foreign exchange markets,
and balance of payment, trade, and fiscal deficits. Macroeconom-
ic stability in a country attracts foreign investors and traders and
creates a favourable condition for investments and savings.
‰‰ Outward-oriented policies: An outward-oriented policy is a policy
that promotes import and export. It refers to policies supporting
free trade and an open market economy. These policies promote
unhindered inward and outward movement of goods and services
across the border. As a result, industries in the domestic market
get an opportunity to compete with foreign industries, compelling
them to improve productivity and use innovate techniques for pro-

S
duction to reap economic benefits.
‰‰ Government institutions: Strong and effective government in-
stitutions can be incorporated to encourage good governance.
IM
Government policies must be such that they attract more foreign
investors in the country. There should be a decline in trade re-
strictions and physical and monetary support should be fostered
to encourage domestic organisations to go global. This improves
the country’s economic condition.
‰‰ Highly skilled human resource: Nations with large population have
M

a huge pool of human resource, which needs to be converted into

skilled workforce. Therefore, nations lagging behind in global eco-
nomic development must promote education, training and research
and development facilities. This is required to develop the existing
‘unskilled’ human resource to ‘highly skilled and knowledgeable re-
N

source ’and thus enhance productivity and attract employment.

‰‰ External debt management: It emphasises the judicious use of
external funds and aids to poor nations thus leading to the system-
atic growth of poor economies/countries. Allocation of adequate
resources is also necessary for the social, economic and sustain-
able development of a country.

Apart from the aforementioned measures, the developed nations should

also make vital contribution to integrate countries, which are lagging
behind to align them with the growing global economy. Some of the
measures that should be taken by developed countries are as follows:
‰‰ Trade promotion: The developed nations should reduce or com-
pletely remove the quota or other restrictions on the import of
items from nations lagging behind economically. They should en-
courage underdeveloped nations to export processed goods in-
stead of primary commodities. The growing needs for processed
foods, such as canned fruit pulps, vegetables and non-vegetable
items in developed countries can increase the scope of interna-

NMIMS Global Access - School for Continuing Education

20  International Business

n o t e s

tional trade. The gulf nations and western countries are rapidly
becoming a huge market for these items.
‰‰ Inflow of private capital: The developed countries should encour-
age FDI in low-income countries. Technology transfer and steady
financial aid should be provided to help domestic industries of un-
derdeveloped countries to help them progress.
‰‰ Debt relief: Relief on debt (in terms of low interest on loans) and
financial support should be provided to help lower income coun-
tries to improve their economic condition and induce more devel-
opment programs.

To summarise, good government policies and above suggested mea-

sures can assist the poor nations to catch up with the global economy
more rapidly.

S
self assessment Questions

5. _________ in population is the basic reason for the lacklustre

IM
performance of these countries.
6. Which one of the following is not a reform taken to reap the
benefits of globalisation?
a. Macroeconomic stability
b. Outward-oriented policies
M

c Unemployment
d. Debt relief
N

Activity

Using the Internet, list down all major reforms to reap the benefits
of globalisation in India.

1.5 FREE TRADE VS. PROTECTIONISM

Economists differ in their views on international trade with regard to
the level of control placed on trade. These contrasting views are ‘free
trade’ and ‘protectionism’. The Laissez-faire (a French word, which
means allow to do) policy should be encouraged for free trade,which
states that there should not be any restrictions or interference on
trade practices by governments. It believes that market forces en-
sure efficient and sufficient production to maintain a balance in de-
mand and supply on a global scale. Thus, no policy is required to
protect or promote trade and growth as it can be done automatically
by market forces.

NMIMS Global Access - School for Continuing Education

 INTRODUCTION TO INTERNATIONAL BUSINESS AND GLOBALISATION  21

n o t e s

On the other hand, the protectionist theory upholds the view that
international trade should be governed by regulations to function
smoothly and properly. Governmental interference is necessary for
fair competition between domestic and international market. Econo-
mists, who favour this theory, are of the opinion that inefficiencies in
the market adversely affect the benefits of international trade. There-
fore measures, such as tariffs, subsidies and import and export quotas
are required.

International trade allows allocating tasks to individuals or organisa-

tions based on their specialised skills. This specialisation thus helps in
an efficient use of available resources and enables a country to accel-
erate economic growth by tapping its potential to produce and acquire
goods. On the other hand, the opponents of international trade ar-
gue that due to inequalities existing in international trade, developing

S
economies hardly gain financially.

Various malpractices noticed in international trade have hampered its

benefits in spite of the liberalisation of trade policies. Thus, there is a
IM
need for further liberalisation of trade policies.

self assessment Questions

7. The Laissez-faire (a French word, which means allow to do)

policy should be encouraged for free trade, which states that
M

there should not be any restrictions or interference on trade

practices by governments. (True/False)

Activity
N

How the free trade policy does help businesses to expand interna-
tionally. Discuss with your friends.

1.6 SUMMARY
‰‰ International business involves the exchange of goods or services
and other factors of production, such as labour, capital, technology,
and other natural resources, across international borders.
‰‰ The main aim of international trade is that better quality and spe-
cific variety of goods and services can be imported by a country at
a comparatively lower cost from other countries than to produce
it domestically.
‰‰ International business or the exchange of goods and services
between countries gets affected by global events. The impact of
such events can be seen in the cost, price, supply and demand for
a product.

NMIMS Global Access - School for Continuing Education

22  International Business

n o t e s

‰‰ International trade involves various activities apart from export

and import of goods it involves trading in stocks and shares, ser-
vices, marketing, and so on.
‰‰ Classical and neoclassical economists theorised and developed the
importance of international trade in social, political and economic
context. To achieve complete benefits of globalisation the growth
of international trade is essential.
‰‰ Globalisation has not only brought people closer but also it has led
to the integration of ideas, cultures and values. It has also facilitat-
ed a free flow of new inventions and innovations across nations.
‰‰ International inequality has become a major issue during the 20th
century. According to World Bank, inequality is defined as “the
disparity of income and standard of living among nations and their
citizens.”

S
‰‰ Economists differ in their views on international trade with regard
to the level of control placed on trade. These contrasting views are
free trade and protectionism.
IM
key words

‰‰ Debt relief: It refers to the relief on debts like low interest rates
and financial grants to support and improve the economic con-
dition of low-income countries.
M

‰‰ Globalisation: In an economic context, it can be defined as the re-

duction and removal of barriers between national borders in order
to facilitate the free flow of goods, capital, services and labour.
‰‰ International trade: It refers to business transactions between
N

counties.
‰‰ International inequality: It can be defined as the disparity of
income and standard of living among nations and their citizens.
‰‰ Macroeconomic stability: It refers to the state of economic sta-
bility of a country, which helps in attracting foreign investors
and traders for investments.

1.7 DESCRIPTIVE QUESTIONS

1. Explain the concept of international business. Also, list its
advantages and disadvantages.
2. What is globalisation? Explain the forces, advantages and
disadvantages of globalisation.
3. What are reforms to reap the benefits of globalisation?

NMIMS Global Access - School for Continuing Education

 INTRODUCTION TO INTERNATIONAL BUSINESS AND GLOBALISATION  23

n o t e s

1.8 ANSWERS AND HINTS

answers for Self Assessment Questions

Topic Q. No. Answers

Concept of International 1. Goods and services
Business
2. c. Better political environ-
ment
Concept of Globalisation 3. d.  Technology transfer
4. Autonomy
Reforms to Reap the 5. Increase

S
Benefits of Globalisation
6. c. Unemployment
Free Trade 7. True
Vs Protectionism
IM
hints for Descriptive Questions
1. International business attributes to selling and purchasing of
goods and services by organisations across national borders. It
helps countries to find profitable markets for their goods and
M

services. Refer to Section 1.2 Concept of International Business.

2. There has been a frequent shift in national cultures, organisational
structure and trade patterns with the changing world economy.
Earlier, countries were confined to their national boundaries
N

only and restricted trade to cross-border territories. Refer to

Section 1.3 Concept of Globalisation.
3. Globalisation opens doors for developing countries, such as
India, to grow at a faster pace by adopting constructive policies
and reforms parallel to advanced nations. Refer to Section
1.4 Reforms to the Reap Benefits of Globalisation.

1.9 SUGGESTED READING FOR REFERENCE

Suggested Readings

‰‰ Aswathappa,A. (2006). International business (1st ed.). New Delhi:

Tata McGraw-Hill.
‰‰ Paul,J. (2011). International business (1st ed.). New Delhi: PHI
Learning.
‰‰ Sharan, V. (2011). International business (1st ed.). Delhi: Dorling
Kindersley (India)/Pearson.

NMIMS Global Access - School for Continuing Education

24  International Business

n o t e s

E-references

‰‰ Cindyking.biz,. (2014). Define International Business - Cindy King’s

International Business Blog. Retrieved 14 October 2014, from http://
cindyking.biz/define-international-business/
‰‰ Martin, I. (2013). Globalisation has a darker side - and it’s a challenge
to us all - Telegraph.Telegraph.co.uk. Retrieved 14 October 2014,
from http://www.telegraph.co.uk/technology/internet/10214068/
Globalisation-has-a-darker-side-and-its-a-challenge-to-us-all.
html
‰‰ Referenceforbusiness.com,. (2014). International Business - strat-
egy, organization, levels, examples, advantages, definition, model,
type, company. Retrieved 14 October 2014, from http://www.refer-
enceforbusiness.com/management/Gr-Int/International-Business.

S
html
IM
M
N

NMIMS Global Access - School for Continuing Education

 C h a
2 p t e r

INTERNATIONAL TRADE THEORIES AND POLICIES

CONTENTS

S
2.1 Introduction
2.2 Classical Trade Theories
IM
2.2.1 Theory of mercantilism
2.2.2 Theory of absolute advantage
2.2.3 Theory of comparative advantage
Self Assessment Questions
Activity
2.3 Heckscher and Ohlin Theory—Modern Theory of International Trade
M

Self Assessment Questions

Activity
2.4 Porter’s Diamond Theory of National Advantage
Self Assessment Questions
N

Activity
2.5 Evaluation of International Trade Theories
Self Assessment Questions
Activity
2.6 India’s International Trade Policy—EXIM Policy
Self Assessment Questions
Activity
2.7 International Economic Institutions
2.7.1 World Trade Organisation
2.7.2 International Monetary Fund
2.7.3 United Nations Conference on Trade and Development
Self Assessment Questions
Activity
2.8 Regional Economic Integration
Self Assessment Questions
Activity

NMIMS Global Access - School for Continuing Education

26  International Business

CONTENTS

2.9 Summary
2.10 Descriptive Questions
2.11 Answers and Hints
2.12 Suggested Reading for Reference

S
IM
M
N

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  27

Introductory Caselet
n o t e s

INDIA AND CHINA’S INTERNATIONAL TRADE

China and India have emerged as the new giants in the world econ-
omy since 2000.Both nations, as we know, have common features
such as the largest population in the world; gained independence
in mid-20th century; have embraced heavy industry oriented de-
velopment strategy and are moving towards trade liberalisation
at the same time. However, China is a larger exporter with 10% of
the global exports to its credit,whereas India stands at 17th rank
with 2.6% of the global exports. This case study will look at the
differences in the trade performances of both the countries and
also study the comparative advantages.

While China holds a large trade surplus, India has a large trade

S
deficit. Adoption of different development strategies by the two
nations, India and China, is the main reason for this difference in
trade. China’s development strategy is based on ‘export’ and its
advantage lies in the labour intensive manufacturing goods and
IM
world-wide export of products involving high technology. These
products have high value and market share, where as India deals
in ordinary trade. It adopted the export led development strategy,
almost a decade later than China. It has an advantageous edge
over Chinese industries, such as metal, tobacco, food stuff and
beverages. Though, India also holds a large share of technology
M

products, this is less in proportion when compared to China. Chi-

na had developed and set up Special Economic Zones (SEZ) and
Export Processing Zones (EPZs), and adopted trade liberalisation
much earlier than India.
N

Both China and India have experienced fast labour productivi-

ty growth in the new century. To understand their export perfor-
mance better, we need to study the differences in comparative ad-
vantages of each country.

NMIMS Global Access - School for Continuing Education

28  International Business

n o t e s

learning objectives

After studying this chapter, you will be able to:

>> Explain various classical trade theories of international trade
>> Discuss the modern theory of international trade
>> Describe the Porter’s diamond theory of national advantage
>> Discuss the evaluation of international trade theories
>> Describe India’s international trade policy—Exim policy
>> Explain the functions, contributions and benefits of interna-
tional economic institutions
>> Explain regional economic integration

S
2.1 Introduction
There is no single country in the world, which can claim itself self-suf-
IM
ficient and produce all the goods and services required by its resi-
dents. This is because each country is unique in terms of natural re-
sources, technology and the level of development. For example, India
has natural resources as well as abundant and economical pool of la-
bour; therefore, it focuses on producing labour-intensive goods, such
as agricultural products. However, the production of sophisticated
machinery, such as parts of Metro rail and equipment for building fly-
M

overs, would require huge investment, which may prove quite expen-
sive for a capital scarce country like India. Therefore, the US,which is
a technologically sound country, focuses on producing goods, such as
heavy machinery by using more advanced technology and less labour.
N

The non-abundance and high cost of labour make the production of

labour-intensive goods expensive for the US. In such a situation, it
would be mutually beneficial if India exports the agricultural products
and imports the advanced technology, whereas the US exports the so-
phisticated technology and imports the agricultural products.  

Theories of international trade explain the reasons due to which in-

ternational trade takes place between two countries. In every country,
the international trade is governed by a set of rules and regulations,
which are known as foreign trade policies. These foreign trade poli-
cies laid down the guidelines for the export and import of goods and
services.

2.2 CLASSICAL TRADE THEORIES

The classical theories of international trade were formulated by Adam
Smith and David Ricardo. According to them, when a country enters
into foreign trade, it benefits from two factors - specialisation and ef-
ficient resource allocation. Foreign trade also brings in new technol-

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  29

n o t e s

ogies and skills that lead to higher productivity. These theories work
on the following assumptions:
‰‰ Two goods-producing countries are considered.
‰‰ Theireconomies are of the same size. The mobility of factors of
production within countries is perfect.
‰‰ Transportation cost is not considered.
‰‰ The resources of the countries are equally divided, before special-
isation.

The classical theories are further sub-divided into three theories, as

given in Figure 2.1:

S
Theory of
Absolute Advantage
IM Theory of
Theory of Comparative
Mercantilism Advantage

Classical
Theories
M

Figure 2.1: Classical Trade Theories

N

These theories are discussed in detail in the following sub-sections:

2.2.1 THEORY OF MERCANTILISM

The term ‘Mercantilism’ was popularised by the Father of Economics,

Adam Smith, in his book, The Wealth of Nations. The economic policies
of Western Europe were greatly dominated by this theory. The theory
of mercantilism maintains that countries should encourage exports
and discourage imports. According to this theory, a country’s wealth
can be maximised by limiting imports and maximising exports. The
government plays an important role in increasing a nation’s wealth
by discouraging import by means of subsidies and taxes. It also main-
tains that a nation’s wealth depends on the balance of trade. In earlier
times, gold was used as a medium for trading goods between coun-
tries. Therefore, export was considered good, as it helped in earning
gold, whereas import was considered as bad, as it led to the outflow
of gold. A nation is considered to be wealthy if it has an abundance
of gold. However, this policy has a major disadvantage, i.e., if all the
countries follow this policy, then no one would promote import.

NMIMS Global Access - School for Continuing Education

30  International Business

n o t e s

The theory of mercantilism fosters “selfish trade”, i.e., it believes in

‘one-way transaction’ and ignores enhancing world trade. Since it
benefits only one country, mercantilism is called a ‘zero-sum game’.

2.2.2 THEORY OF ABSOLUTE ADVANTAGE

This theory was coined by Adam Smith in 1776, and it stated that a
country should specialise in those products, which it can produce effi-
ciently. This theory is based on the assumption of a single factor of in-
put, that is, ‘labour’. Mercantilism, as per Adam Smith made it impos-
sible for the nations to become rich simultaneously. He also stated that
gold reserves do not determine the wealth of a nation; instead,wealth
of the countries depends on the goods and services available to the
citizens. He mentioned that it was not the gold reserves of a nation
that made it rich, but the ability of the country to produce ‘goods and

S
services’ at a lower cost as compared to the competitors.

Adam Smith wrote in The Wealth of Nations, “If a foreign country can
supply us with a commodity cheaper than we ourselves can make it,
IM
better buy it of them with some part of the produce of our own indus-
try, employed in a way in which we have some advantage”. He stated
that trade would be mutually beneficial for the countries ‘A’ and ‘B’
if country A exports the goods, which it can produce at a lower cost
than country B and imports the goods, which country B can produce
at a lower cost than it.
M

This theory can be proved with the help of the following example:
Suppose countries, A and B produce tea and coffee with 200 labour-
ers i.e., equal amount of resources. Country A uses 10 labourers to
produce 1 ton of tea and 20 labourers to produce 1 ton of coffee. Coun-
N

try B uses 25 labourers to produce tea and 5 labourers to produce 1

ton of coffee, as shown in Table 2.1:

Table 2.1: Resources Used to Produce a Ton of

Tea and Coffee without Trading
Country A Country B
Tea (in tons) 10 25
Coffee (in tons) 20 5

Table 2.1shows that country A has absolute advantage in producing

tea, as it can produce 1 ton of tea by using less labourers as compared
to country B. On the other hand, country B has absolute advantage in
coffee production, as it can produce 1 ton of coffee by employing less
labourersas compared to country A.

In case, there is no trade between these countries and assuming that

equal resources (that is total 200 labourers) are being used to produce
tea and coffee, 10 tons of tea and 5 tons of coffee would be produced
by country A,while country B would produce 4 tons of tea and 20 tons
of coffee. Thus, total production when no trade is done is 39 tons (14

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  31

n o t e s

tons of tea and 25 tons of coffee).The production without any trade

between country A and country B is shown in Table 2.2:

Table 2.2: Production without Trade

Country A Country B
Tea (in tons) 10 4
Coffee (in tons) 5 20

The total production would be higher if both the countries engage in

trade with each other and also specialise in goods in which they have
an absolute advantage. Country A would produce 20 tons of tea with
200 labourers,whereas country B would produce 40 tons of coffee with
200 labourers generating a total production of 60 units (20 tons of tea
and 40 tons of coffee). Table 2.3 depicts the production of tea and cof-

S
fee after trade:

Table 2.3: Production with Trade

IM
Country A (in tons) Country B (in tons)
Tea 20 0
Coffee 0 40

The total or collective production by both the countries was 39 tons

without specialisation, which accelerates to 60 tons after specialisa-
M

tion. Therefore, according to the theory of absolute advantage, trade

would be beneficial for both the countries.

2.2.3 THEORY OF COMPARATIVE ADVANTAGE

N

Many questions may arise after reading the theory of absolute advan-
tage. Like, what would be the case if a country has an absolute advan-
tage in all the products, or what if it has no absolute advantage in any
of the products? How would such a country benefit from trade? The
theory of comparative advantage by David Ricardo provides answers
to these questions. This theory states that trade can be beneficial for
two countries if one has an absolute advantage in all the products and
the other has no absolute advantage in any of the products. According
to Ricardo, “a nation, like a person, gains from the trade by exporting
the goods or services in which it has its greatest comparative advantage
in productivity and importing those in which it has the least compara-
tive advantage.”

Based on the assumption that labour is the only factor of production in

two countries with zero transport cost and with no trade barriers within
the countries, this theory is explained through the following example.

Two countries, X and Y, produce two commodities wheat and wine

with labour as the only factor of production. Now basing our assump-
tion on the fact that both the countries have 200 labourers and they

NMIMS Global Access - School for Continuing Education

32  International Business

n o t e s

use 100 labourers to produce wheat and 100 labourers to produce

wine, we have the details before trade, as given in Table 2.4:

Table 2.4: Situation of Country X and

Country Y before Trade
Country X Country Y
Wheat (in units) 20 15
Wine (in units) 40 10

From Table 2.4, we can infer that country X can produce 20 units of
wheat, whereas country Y can produce 15 units of wheat using 100 la-
bourers. Additionally, country X produces 40 units of wine,whereas
country Y produces 10 units of wine by employing 100 labourers. There-
fore, country X has an absolute advantage in producing both the prod-

S
ucts. We see that country X employs same number of labourers (100
labourers for the production of each goods) to produce both wine and
wheat; however, more wine is produced than wheat. It means that coun-
try X has a comparative advantage in producing wine. Similarly, study-
IM
ing the case of country Y, we see that it also employs the same number
of labourers i.e., 100 for the production of each commodity—wheat and
wine. However, its wheat production is more than wine. This indicates
that country Y has a comparative advantage in producing wheat.

Now, going further, if country X decides to produce 60 units of wine by

employing 150 labourers and uses 50 labourers to produce 10 units of
M

wheat, whereas country Y decides to use all the 200 labourers to pro-
duce 30 units of wheat and no wine at all, the data would be as shown
in Table 2.5:
N

Table 2.5: Production of Country X and

Country Y after Specialisation
Country X Country Y
Wheat (in units) 10 30
Wine (in units) 60 0

If country X exchanges 14 units of their wine with 14 units of wheat

produced by country Y, the post trade situation of both the countries
would be as shown in Table 2.6:

Table 2.6: Situation of Country X and

Country Y after Trade
Country X Country Y
Wheat 24 16
Wine 46 14

Here, we see that both the countries have gained and profited through
trade. Country X had 20 units of wheat and 40 units of wine before

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  33

n o t e s

trade; after trade, it has 24 units of wheat and 46 units of wine. While,
country Y had 15 units of wheat and 10 units of wine before trade; post
trade, it has 16 units of wheat and 14 units of wine. Therefore, as per
the comparative advantage theory, trade can be beneficial for both the
countries even though one country has an absolute advantage in the
production of both the goods.

self assessment Questions

1. The classical theories of international trade were formulated

by Adam Smith and David Ricardo. (True/False)
2. The term ‘Mercantilism’ was popularised by the Father of
Economics, Adam Smith, in his book, ____________.
3. Adam Smith stated that it was not the gold reserves of a nation

S
that made it rich, but the ability of the country to produce
‘___________’at a lower cost as compared to the competitors.
4. Theory of comparative advantage states that trade can be
IM
beneficial for two countries if one has an absolute advantage
in all the products and the other has no absolute advantage in
any of the products. (True/False)

Activity
M

Write down the merits and demerits of different classical trade the-
ories and prepare a comparative report on it.

HECKSCHER AND OHLIN THEORY—

N

2.3 MODERN THEORY OF INTERNATIONAL

TRADE
Heckscher and Ohlin theory by Swedish Economists, Eli Heckscher
and Bertil Ohlin, is an addendum to the theory of comparative ad-
vantage. This theory introduces a ‘second factor’ of production that
is ‘capital’. As per the Heckscher Ohlin (HO) model, comparative ad-
vantage develops from differences in factor endowments between the
countries. The different prices of goods in different countries depend
on factors like land cost (capital) and labour cost. Every country has
different factor endowments, and the costs of these factors differ as
per their availability. For example, if a country has abundant trained
manpower, then the cost of labour would be low in that country. Ac-
cording to Heckscher Ohlin theory, a country is likely to export prod-
ucts that are produced using its abundant factor of production. How-
ever, it is likely to import goods, which require use of scarce resources.
International trade takes place because countries having different fac-
tor endowments. For instance, some countries may have more labour

NMIMS Global Access - School for Continuing Education

34  International Business

n o t e s

and less industry and machinery,while some others may possess more
machinery and less labour (manpower). In such a case, the country
with more manpower would specialise in labour-intensive products
and export them to other countries.

Heckscher and Ohlin theory assumes the following factors:

‰‰ Each of the two countries involved have two factors—labour and
capital.
‰‰ Their citizens have same needs.
‰‰ No transportation cost is involved.
‰‰ Both the countries have immobile factors of production.
‰‰ The proportion of factors of production is different in both the
countries.

S
Heckscher and Ohlin theory presents that there is a relationship be-
tween the various variables; they are interlinked. The price of the fac-
tors is determined by its availability, which further determines and
IM
influences the price of the product or commodity. Specialisation and
cost advantage are the results of difference in the factor price and the
product price.

self assessment Questions

M

5. What is the “second factor” of production according to

Swedish economists, Eli Heckscher and Bertil Ohlin?
6. As per the Heckscher Ohlin (HO) model, comparative
advantage develops from differences in _____________
N

between the countries.

Activity

What have been your observations from modern theory of interna-

tional trade? Compare them with classical trade theories.

PORTER’S DIAMOND THEORY OF

2.4
NATIONAL ADVANTAGE
Micheal Porter presented the diamond theory of national advantage.
This postulates that the success of an organisation in the international
market depends on the features of the home country. This theory is
called the diamond theory, as it can be explained through a diamond
framework. The factors that contribute to the success of organisations
involved in global trade are described here.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  35

n o t e s

These factors are called the ‘determinants’ of the national advantage

and are depicted in Figure 2.2:

Factors of
Production

Firm, Strategy, Demand

Structure, Conditions
and Rivalry

S
Related and
IM
Supporting
Industries

Figure 2.2: Determinants of the National Advantage

M

These determinants are further discussed as follows:

‰‰ Factors of Production: Refer to the inputs that are necessary
for producing goods and services. Natural resources and labour
constitute the basic factors for carrying out a business where as
advanced factors include infrastructure, such as machinery and
N

communication systems, etc. The skilled personnel or man pow-

er constitutes the specialised factor. A country would be success-
ful in the global market if it is endowed with all these factors of
production. However, there may be countries with advanced and
specialised factors but may lack in the basic factors. For example,
South Korea lacks in natural resources but has specialised work-
ers/engineers. If countries that lack in natural resources develop
new methods or processes, it may lead to a national comparative
advantage for them.
‰‰ Demand Conditions: Refers to the nature and size or number of
the customers/ consumers in the domestic or home market. The
strong demand for commodities in the home country persuades
the domestic organisations to constantly improve on their product.
More demand in the domestic market can influence the demand
by customers of the foreign market too.
‰‰ Related and Supporting Industries: Applies to industries in a
country that are considered to be the best or a leader in a particu-
lar product. These industries help in innovation, which helps oth-

NMIMS Global Access - School for Continuing Education

36  International Business

n o t e s

er organisations or associates working with them to produce goods

at a lower cost. Thus, the growth of one industry determines and
influences the growth of other industries. For instance, the growth
and development of the automobile industry have enhanced the
growth opportunities of the steel industry too.
‰‰ Organisational Strategy, Structure and Rivalry: Refers to the
important factors that contribute to the success of an organisation.
They differ from nation to nation. . Strategies help in setting new
goals by the organisation, structure helps in managing the opera-
tions and rivalry helps in generating innovative ideas.

These four determinants or the dimensions of the diamond model

help in contributing to the national advantage. According to Porter,
these dimensions are interactive and interdependent and help en-
hance competitiveness of the organisation.

S
self assessment Questions
IM
7. Micheal Porter presented the diamond theory of national
advantage, which states that the success of an organisation
in the international market depends on the features of the
______.
8. Which one of the following is not included in the determinants
of the national advantage in Porter’s diamond theory?
M

a. Factors of Production
b. Demand Conditions
c. Environmental factors
N

d. Organisational Strategy, Structure and Rivalry

Activity

Why Porter’s diamond theory is called the theory of national ad-

vantage?

EVALUATION OF INTERNATIONAL
2.5
TRADE THEORIES
Authors have evaluated the various theories and their validity in in-
ternational trade through various studies. For instance, the study
by MacDougall indicated that classical trade theories are useful in
demonstrating the trade patterns of different countries. The modern
trade theory by Heckscher-Ohlin Postulates that a labour-abundant
country would export labour-intensive goods,whereas a capital-abun-
dant country would produce capital-intensive goods. The HO theory

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  37

n o t e s

was evaluated by the Nobel Prize winner, Leontief, who thoroughly

studied the pattern of world trade and found that the USA, which is a
capital-abundant country, exports labour-intensive goods and imports
capital-intensive goods. His findings contradict to the Heckscher-Oh-
lin theory; therefore, referred to as Leontief paradox.

All trade theories are based on rules and assumptions and are not
practically valid in the real world. First, these theories state that trade
is a bilateral process, implying that it is between two counties; howev-
er, trade is a multilateral process. The second fact assumed by these
theories is that trade takes place between two countries with the same
economic size. However, in reality, the countries involved in interna-
tional trade can be of different sizes economically. Thirdly, the factors
of production are assumed to be immobile, which is true in the case
of land only but not in the case of labour and capital, as globalisation

S
has led to easy transfer and movement of labour and capital among
nations.

Both classical and modern theories have their limitations.

IM
Following are the limitations of classical theory:
‰‰ It assumes labour as the sole and only factor of production, which
is not valid in reality. Other factors, such as capital and land are
equally important for production.
‰‰ Itis a rigid economy model based on two commodities between
M

two countries, instead of multi-lateral and multi-commodity trade.

‰‰ It neglects important international issues, such as currencies, li-
quidity and foreign exchange rates. It also ignores the transporta-
tion cost.
N

Following are the limitations of modern theory:

‰‰ Multilateral trade is not elucidated.
‰‰ Differences in currencies are neglected.
‰‰ Terms of trade between developed and developing countries are
ignored.
‰‰ Trade of capital goods is excluded.

Despite its limitations, the modern theory or the Heckscher Ohlin the-
ory has various merits as compared to the classical theories. Accord-
ing to the classical theories, the cost difference is the only factor that
leads to trade between countries, but these theories do not describe
the reasons for such a difference. On the other hand, the Modern the-
ory rightly describes the difference in factor endowments as the main
reason for the cost differences among countries. Therefore, the mod-
ern theory of trade is considered superior to the classical theories of
trade.

NMIMS Global Access - School for Continuing Education

38  International Business

n o t e s

self assessment Questions

9. The classical theory model is based on multi-lateral and multi-

commodity trade. (True/False)
10. Which one of the following is not a limitation of the modern
theory?
a. Multilateral trade is not elucidated
b. Transportation cost is involved
c. Differences in currencies are neglected
d. Trade of capital goods is excluded

Activity

S
Write a short note on the Leontief paradox.
IM
INDIA’S INTERNATIONAL TRADE
2.6
POLICY—EXIM POLICY
International trade is considered to be a means of growth and devel-
opment for countries. Its main purpose is to not only earn foreign ex-
change but also to stimulate the economic activities. India is fast be-
M

coming a major player in the world trade. The export–import policy

was announced by the Government of India, Ministry of Commerce
and Industry; it is called the EXIM policy or foreign trade policy. It is
announced every five years and updated on 31st of March, every year.
N

Regulating and managing imports and promoting and maintaining ex-

ports are the main aims of the EXIM policy (export–import policy). It
does not allow the export of goods that are scarce and required within
the country by the citizens. The EXIM policy was first announced in
1992 to bring stability and continuity to the Indian economy. The main
objectives of this policy are as follows:
‰‰ Toderive maximum benefits in the global market from expanding
opportunities
‰‰ To stimulate economic growth by providing essential raw materi-
als, components and capital for goods production
‰‰ To enhance the efficiency of agriculture and service sector, and
improve competitiveness
‰‰ To generate new employment opportunities
‰‰ To encourage and attain internationally accepted standards of
quality
‰‰ To provide quality products at reasonable prices
The Exim policy 2009–2014 highlights the following:

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  39

n o t e s

Higher Support for Market and Product

Diversification
‰‰ Expansion of Incentive schemes, under Chapter 3, has been an-
nounced by adding new products and markets.
‰‰ Focus Market Scheme has been expanded by adding 26 new mar-
kets. 16 new markets in Latin America have been included and 10
in Asia-Oceania.
‰‰ The incentive has been raised from 2.5% to 3% under Focus Mar-
ket Scheme (FMS). The incentive under Focus Product Scheme
(FPS) has also been raised from 1.25% to 2%.
‰‰ A variety of products from different sectors have been included
for benefits under FPS. Engineering products, such as agricultur-
al machinery, trailers parts, sewing machines, hand tools, garden

S
tools, musical instruments, clocks and watches, railway locomo-
tives, etc., have been added. Value added products like plastic, jute
and sisal products; technical goods; vegetable textiles; green tech-
nology products like wind mills, wind turbines, electric operated
IM
vehicles, etc.; project goods and certain electronic items have also
been included.
‰‰ Market Linked Focus Product Scheme (MLFPS) has been greatly
expanded by including products classified under as many as 153
ITC(HS) Codes at the 4 digit level. Pharmaceuticals, synthetic
textile fabrics, value added rubber products, value added plastic
M

goods, knitted and crocheted fabrics, glass products, certain iron

and steel products and certain articles of aluminium are among
the different categories included. If exports are made to 13 iden-
tified markets (Algeria, Egypt, Kenya, Nigeria, South Africa, Tan-
N

zania, Brazil, Mexico, Ukraine, Vietnam, Cambodia, Australia and

New Zealand), benefits on these products will be provided.
‰‰ MLFPS benefits have also been extended for export of products
such as auto components, motor cars, bicycle and its parts and
apparels to additional new markets.
‰‰ The simplified, common application form for taking benefits un-
der FPS, FMS, MLFPS and VKGUY has been introduced.
‰‰ Market Development Assistance (MDA) and Market Access Initia-
tive (MAI) schemes have been provided higher allocation.

Technological Upgradation
‰‰ EPCG Scheme at Zero Duty has been introduced to aid technolog-
ical upgradation of the export sector. This scheme will be applica-
ble for engineering & electronic products, basic chemicals & phar-
maceuticals, apparels & textiles, plastics, handicrafts, chemicals &
allied products and leather & leather products. The scheme would
be in operation till 31.3.2011.

NMIMS Global Access - School for Continuing Education

40  International Business

n o t e s

‰‰ The above products are subject to exclusions of current beneficia-

ries under Technological Upgradation Fund Schemes (TUFS) ad-
ministered by the Ministry of Textiles and beneficiaries of Status
Holder Incentive Scheme in that particular year. Certain towns like
Jaipur, Srinagar and Anantnag have been recognised as ‘Towns of
Export Excellence’ for handicrafts. ‘Towns of Export Excellence’
for leather products include Kanpur, Dewas and Amburand Mali-
habad has been recognised for horticultural products.

Export Promotion Capital Goods (EPCG) Scheme

Relaxations
‰‰ Export obligation on import of spares, moulds, etc., (under EPCG
Scheme) has been reduced to 50% of the specified obligation to
increase the life of existing plant and machinery.

S
‰‰ Incase of decline in exports from a country, re-fixation of Annual
Average Export Obligation for that particular financial year has
been extended during the 5 year Policy period 2009–14.
IM
Support for Green Products and Products
from North East
‰‰ For export of ‘green products’ and for exports of products originat-
ing from the North East, the Focus Product Scheme benefit has
been extended.
M

Status Holders
‰‰ There is provision for Additional Duty Credit Scrips for the Status
Holders at 1% of the FOB value of past exports. This has been add-
N

ed to accelerate exports and encourage technological upgradation.

These duty credit scrips can be used for procurement of capital
goods with Actual User condition. The leather sector (excluding
finished leather), textiles and jute, handicrafts, some sectors of en-
gineering (excluding iron & steel, non-ferrous metals in primary
and intermediate form, automobiles & two wheelers, nuclear re-
actors & parts, ships, boats and floating structures), plastics and
basic chemicals (excluding pharmacy products) can benefit from
this facility. This facility would be available up to 31.3.2011and is
subject to exclusions of current beneficiaries under Technological
Upgradation Fund Schemes (TUFS).
‰‰ Permission has been given for Transfer of the Duty Credit Scrips
being issued to Status Holders under paragraph 3.8.6 of FTP un-
der VKGUY Scheme. This is subject to the condition that transfers
would be made to Status Holders only and the scrips would be
utilised for the procurement of Cold Chain equipment only.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  41

n o t e s

Stability/ Continuity of the Foreign Trade Policy

‰‰ Duty Entitlement Passbook (DEPB) Scheme is extended for a year
beyond 31-12-2009 (till 31.12.2010) to impart stability to the Policy
regime.
‰‰ In the Budget 2009–10, the Interest subvention of 2% has been ex-
tended till 31.3.2010 for pre-shipment credit for 7 specified sectors.
‰‰ In the Budget 2009–10, (under Sections 10B and 10A of Income
Tax Act) Income Tax exemption to 100% EOUs and to STPI units
has been extended for the financial year 2010–11. Enhanced ECGC
cover at 95% to be provided to the adversely affected sectors has
been extended till March 2010. This adjustment assistance scheme
was initiated in December 2008.

Marine Sector

S
‰‰ Fishery has been exempted from maintenance of average EO un-
der EPCG Scheme to provide a fillip to the marine sector, which
IM
has been affected by the present downturn in exports. This will
be applicable if the fishing trawlers, boats, ships and other similar
items are not imported, Marine sector has also been granted addi-
tional flexibility under Target Plus Scheme (TPS) / Duty Free Cer-
tificate of Entitlement (DFCE) Scheme for Status Holders Gems &
Jewellery Sector.
M

‰‰ Duty Drawback has been allowed to neutralise duty incidence on

gold jewellery exports.
‰‰ “Diamond Bourse (s)” have been planned to make India a dia-
mond international trading hub.
N

‰‰ A new facility to allow import on consignment basis has been in-

troduced in the sector of cut & polished diamonds for the purpose
of grading/certification. For participation in overseas exhibitions,
and to promote export of Gems & Jewellery, the value limits of
personal carriage have been increased from US$ 2 million to US$ 5
million. The limit, in case of personal carriage, for samples during
export promotion tours has also been increased from US$ 0.1 mil-
lion to US$ 1 million.

Agriculture Sector

‰‰ A single window system has been introduced to facilitate export

of perishable agricultural produce and to reduce transaction and
handling costs. The system will support creation of APEDA ac-
credited multi-functional nodal agencies.

NMIMS Global Access - School for Continuing Education

42  International Business

n o t e s

Leather Sector
‰‰ Re-export of unsold imported raw hides and skins and semi-fin-
ished leather from public bonded ware houses would be allowed.
This would be subject to payment of 50% of the applicable export
duty.
‰‰ FPS rate has been enhanced to 2%. This would significantly ben-
efit the leather sector.

Tea
‰‰ Minimum value addition for export of tea has been reduced from
the existing 100% to 50% under advance authorisation scheme.
‰‰ DTA sale limit by EOU units has been increased from the existing
30% to 50% for instant tea. Export of tea has been covered under

S
VKGUY Scheme benefits.

Pharmaceutical Sector
IM
‰‰ Export Obligation Period has been increased from the existing 6
months to 36 months for advance authorisations issued with 6-APA
as input.
‰‰ For some countries in Africa, Latin America, Oceania and the
Far East, pharmacy sector has been extensively covered under
MLFPS: Handloom Sector.
M

‰‰ The requirement of ‘Handloom Mark’ for availing benefits has

been removed to simplify claims under FPS.

EOUs
N

‰‰ Sale of DTA (Domestic Tariff Area) manufactured products by

EOUs (Export Oriented Units) has been increased up to a limit
of 90%, instead of existing 75%, without changing the criteria of
‘similar goods’, within the overall entitlement of 50% for DTA sale.
‰‰ Clarification would be issued by DOR (Department of Revenue) to
enable procurement of spares beyond 5% by granite sector EOUs.
This would provide clarity to the customs field formations.
‰‰ Procurement of finished goods for consolidation along with the
manufactured goods would be allowed to the EOUs. This would be
subject to certain safeguards.
‰‰ Board of Approvals (BOA) would consider extension of block pe-
riod by one year for calculation of Net Foreign Exchange earnings
of EOUs during the period of downturn.
‰‰ CENVAT Credit facility will be allowed to EOUs for the component
of SAD (Special Additional Duty) and Education Cess on DTA sale.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  43

n o t e s

Thrust to Value Added Manufacturing

‰‰ Advance Authorisation Scheme allows minimum 15% value addi-
tion on imported inputs to encourage value added manufactured
export.
‰‰ FPS and MLFPS have allowed coverage of project exports and a
large number of manufactured goods.

DEPB
‰‰ Factoringof custom duty would be included in the DEPB rates on
fuel component where fuel is allowed as a consumable in Standard
Input–Output Norms.

Flexibility Provided to Exporters

S
‰‰ Debit of Duty Credit Scrips has been allowed for payment of cus-
toms duty for Export Obligation (EO) shortfall under Advance Au-
thorisation / DFIA / EPCG Authorisation. Earlier only cash pay-
ment was allowed.
IM
‰‰ Import of restricted items, to be used as replenishment, has been
allowed against transferred DFIAs. This is in line with the erst-
while DFRC scheme.
‰‰ For participation in exhibitions, the time limit of 60 days has been
extended to 90 days for re-import of exported gems and jewellery
M

items from the USA. Transit loss claims from private approved
insurance companies in India are now being allowed. This is for
the purpose of EO fulfillment under Export Promotion Schemes.
Earlier, this facility was limited to public sector general insurance
companies only.
N

Waiver of Incentives Recovery, On RBI

Specific Write off
‰‰ In cases of export proceeds realisation writes off by RBI, the incen-
tives under the FTP shall now not be recovered from the export-
ers. This is subject to certain conditions.

Simplification of Procedures
‰‰ The number of samples/pieces has been increased from the exist-
ing 15 to 50 to facilitate duty free import of samples by exporters.
Customs clearance of such samples is done on the basis of the dec-
larations given by the importers with regard to the limit of value
and quantity of samples.
‰‰ In case of supply by the domestic intermediate manufacturer to
an advance authorisation holder (against invalidation letter), ex-

NMIMS Global Access - School for Continuing Education

44  International Business

n o t e s

emption for up to two stages from payment of excise duty in lieu of

refund is allowed. Exemption for supplies made to a manufacturer
would also be allowed, if such manufacturer, in turn, supplies the
products to an ultimate exporter. At present, exemption is allowed
up to one stage only.
‰‰ Greater flexibility has been permitted for conversion of Shipping
Bills from one Export Promotion Scheme to another. The time lim-
it of this conversion has been increased to three months by the
customs department, instead of the limited period of one month.
‰‰ Advance Authorisation Scheme allows dispatch of imported goods
(for deemed supplies) directly from the port to the site. This would
reduce transaction costs. Earlier, the duty free imported goods
could be taken to the manufacturing unit of the authorisation
holder or its supporting manufacturer only.

S
‰‰ After payment of applicable excise duty, disposal of manufacturing
wastes / scrap would now be allowed. Fulfillment of export obli-
gation under Advance Authorisation and EPCG Scheme can be
IM
complied with after that.
‰‰ Licenses for import of sports weapons by renowned shooters can
be done by Regional Authorities on the basis of NOC from the Min-
istry of Sports & Youth Affairs.
‰‰ Simplification of the procedure for issue of Free Sale Certificate
has been done, and the validity of the Certificate has been in-
M

creased from 1 year to 2 years. Medical devices industry would

benefit from this.
‰‰ Automobile industries that have their own R&D establishment
would be allowed free import of reference fuels, i.e. petrol and
N

diesel, which are not manufactured in India. The maximum limit

specified is 5 KL per annum.
‰‰ The application and redemption forms under EPCG scheme have
been simplified giving in to the growing demand of trade & indus-
try.

Reduction of Transaction Costs

‰‰ Under the Schemes in Chapter 3 of FTP, no fee shall be charged
for grant of incentives. Further, the maximum applicable fee of
`1,50,000 (for manual applications) is reduced to `100,000 and
`50,000 from the existing `75,000 (for EDI applications), for all oth-
er authorisations/ license applications. Export Promotion Coun-
cils/ Commodity Boards have been advised to issue RCMC through
a web-based online system. Issuance of RCMC has become EDI
enabled by the end of 2009. This would further the EDI initiatives,
‰‰ To obviate the need for verification of scrips by Customs and to
facilitate faster clearances, Electronic Message Exchange between
Customs and DGFT, in respect of incentive schemes under Chap-

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  45

n o t e s

ter 3, has become operational (31.12.2009). For EDI ports, dou-

ble verification of shipping bills by customs for any of the DGFT
schemes have been dispensed, with effect from December ’09.
‰‰ In case of the earlier authorisation being cancelled and a new au-
thorisation being issued, application fee paid earlier would be ad-
justed against the application fee for the new authorisation subject
to payment of a minimum fee of `200.
‰‰ Redressal/ resolution of problems/issues of exporters will be done
by an Inter Ministerial Committee.
‰‰ An updated compilation has been published giving the Standard
Input Output Norms (SION) and ITC (HS) Classification of Export
and Import Items.

S
Directorate of Trade Remedy Measures
‰‰ A Directorate of Trade Remedy Measures is proposed to be set up
to enable the Indian industry and exporters, especially the MS-
MEs to avail their rights through trade remedy instruments.
IM
self assessment Questions

11. EXIM (export–import) policy is announced for a period of five

years by the Central Government of India and is updated on
31st of March, every year. (True/False)
M

12. The EXIM policy was first announced on April 1, 1992 to bring
stability and continuity to the __________.
13. The incentive has been raised from 2.5% to 3% under
_________.
N

14. EPCG (Export Promotion Capital Goods) Scheme at _________

has been introduced to aid technological upgradation of the
export sector.
15. “Diamond Bourse (s)” have been planned to make India a
diamond international trading hub. (True/False)
16. Sale of DTA (Domestic Tariff Area) manufactured products
by EOUs (Export Oriented Units) has been increased up to a
limit of ____ instead of existing 75%.

Activity

Visit the site of “Federation of Indian Export Organisations (FIEO)”

and gather information about the Federation of Indian Export Or-
ganisations.

NMIMS Global Access - School for Continuing Education

46  International Business

n o t e s

INTERNATIONAL ECONOMIC
2.7
INSTITUTIONS
War, military coups and political instability create chaos in global
markets by increasing economic uncertainties in the world economy.
Corruption and scams also shake the economy of the whole coun-
try. Strong regulatory bodies and institutions,which work at national
and global levels, are required to prevent such harmful practices. Af-
ter World War II, various institutions were set up to look into prop-
er functioning of the international trade. World Trade Organisation
(WTO), International Monetary Fund (IMF), World Bank, regional as-
sociations, such as North American Free Trade Association (NAFTA),
South Asian Free Trade Agreement (SAFTA), and European Free
Trade Association (EFTA), are some such regulatory bodies.

S
The major roles of these institutions and organisations are as follows:
‰‰ To promote international monetary cooperation among nations
IM
‰‰ To facilitate balanced growth and expansion of world trade
‰‰ To promote stability in exchange rate in domestic as well as Forex
(foreign exchange) markets
‰‰ To help in establishing multilateral system of payments
‰‰ To safeguard the international economy
M

‰‰ To provide general resources in order to maintain adequate bal-

ance of payments, fiscal deficits and balance of trade among the
countries
‰‰ To provide liberalisation along with proper supervision in finan-
N

cial sector to make it competitive and efficient

‰‰ Tolimit the excessive intervention of the government in the eco-
nomic sector
‰‰ To provide adequate infrastructure in order to promote the trade
across the nations
‰‰ To build strong and impartial judicial system in order to check the
corruption

Almost all nations export and/or import goods in order to benefit from
the growing international trade. If countries follow a common set of
rules, regulations and standards related to import and export, there
would be substantial growth and increase in the international trade.
These common rules and regulations set up by various international
economic institutions aim at providing a levelled playing field for all
the countries and promote economic cooperation. These institutions
also help solve the currency issues among countries by stabilising the
exchange rates. WTO, IMF and United Nations Conference on Trade
and Development (UNCTAD)are the three major international eco-
nomic institutions discussed in detail in the following sub-sections.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  47

n o t e s

2.7.1 WORLD TRADE ORGANISATION (WTO)

World Trade Organisation (WTO) was formed in 1995 to replace the

General Agreement on Tariffs and Trade (GATT), started in 1948.
GATT was replaced by the WTO because GATT was biased and fa-
vored developed countries. The WTO was formed to act as a global in-
ternational organisation and to deal with the implementation of rules
of international trade among countries. The main objective of the
WTO is to help and facilitate global organisations to conduct business.
WTO, headquartered at Geneva, Switzerland, consists of 153 mem-
bers and represents more than 97% of the world trade.
‰‰ The main objectives of WTO are as follows:
 To raise the ‘standard of living’ of people, promote full employ-
ment, expand production and trade and utilise the world’s re-

S
sources optimally
 To ensure that developing and less developed countries have
better share of growth in the world trade
IM
 To introduce sustainable development and ensure that bal-
anced growth of trade and environment goes together
‰‰ The main functions of WTO are as follows:
 Setting the framework for trade policies
M

 Reviewing the trade policies of different countries

 Providing technical cooperation to less developed and devel-
oping countries
 Setting a forum for addressing trade-related disputes among
N

different countries
 Reducing the barriers to international trade
 Facilitatingthe implementation, administration and operation
of agreements
 Setting a negotiation forum for multilateral trade agreements
 Cooperating with the international institutions such as IMF
and World Bank for making global economic policies
 Ensuring the transparency of trade policies
 Conducting economic research and analysis
‰‰ WTO has the following advantages:
 Promoting peace within nations: WTO helps in creating and
maintaining international cooperation, peace and prosperity
among nations.

NMIMS Global Access - School for Continuing Education

48  International Business

n o t e s

 Handling disputes constructively: WTO intervenes to reduce

the trade disputes and tensions among nations, which arise
due to expansion of international trade.
 Helping consumers by providing choices: WTO helps con-
sumers to gain access to a large number of products through
the promotion of international trade.
 Encouraging good governance: WTO formulates rules to en-
courage good governance and discourage unwise policies that
lead to corruption, as good policies accelerate the growth of a
country.
 Stimulating economic growth: The policies of WTO focus on
reducing trade barriers and increasing the quantum of import
and export between nations, as trade leads to creating more

S
jobs and an increase in the national income.

2.7.2  INTERNATIONAL MONETARY FUND (IMF)

IM
In 1945, the International Monetary Fund (IMF) was established. It
has 187 member countries and works for securing financial stabili-
ty, developing global monetary cooperation, facilitating internation-
al trade, reducing poverty and maintaining sustainable economic
growth around the world. Its headquarters are in Washington, D.C.,
United States. The objectives of the IMF are as follows:
M

‰‰ Helping to increase employment, and thus adding to the real in-

come of people
‰‰ Solving the international monetary problems that distort econom-
ic development of nations
N

‰‰ Maintaining stability in the international exchange rates

‰‰ Strengthening the economic integrity of the nations
‰‰ Providing funds to the member nations (as and when required)
‰‰ Monitoring the financial and economic policies of member nations
‰‰ Assisting the under developed countries in effectively managing
their economies
‰‰ WTO and IMF have 150 common members. Thus, they both work
together. WTO’s central focus is on international trade, whereas
the IMF focuses on the international monetary and financial sys-
tem. These organisations together ensure a sound system of global
trade and financial stability in the world.

2.7.3 UNITED NATIONS CONFERENCE ON TRADE

AND DEVELOPMENT (UNCTAD)

The United Nations Conference on Trade and Development (UNC-

TAD), established in 1964, is the principal organ of United Nations

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  49

n o t e s

General Assembly. It provides a conducive platform where the devel-

oping countries discuss problems related to the economic develop-
ment. UNCTAD is headquartered in Geneva, Switzerland and has 193
member countries. These member countries hold a conference every
four years. UNCTAD was created primarily to cater to the problems
faced by developing countries in International trade. UNCTAD’s main
objective is to formulate policies related to areas of development, such
as trade, finance, transport and technology.

The main objectives of UNCTAD are as follows:

‰‰ Eliminating trade barriers that act as constraints for developing
countries
‰‰ Promoting international trade for speeding up the economic de-
velopment

S
‰‰ Formulating principles and policies related to international trade
‰‰ Negotiating the multinational trade agreements
‰‰ Providing technical assistance to developing countries specially
IM
low developed countries
It is important to note that UNCTAD is a strategic partner of the WTO.
Both the organisations focus attention to ensure that international
trade helps the low developed and developing countries in accelerat-
ing their pace of growth. On 16th April 2003, WTO and UNCTAD also
signed a Memorandum of Understanding (MoU) identifying the fields
M

for cooperation and facilitating the joint activities between them.

self assessment Questions

17. World Trade Organisation (WTO) is headquartered at
N

____________.
18. When International Monetary Fund (IMF) was established?
19. International Monetary Fund (IMF) comprises ____________
member countries.
20. UNCTAD is a strategic partner of the WTO. (True/False)

Activity

Discuss the contributions of the World Trade Organisation and

the International Monetary Fund to the Indian economy with your
friends.

2.8 REGIONAL ECONOMIC INTEGRATION

Regional economic integration refers to the agreement between the
group of countries to reduce/minimise and finally remove all the tar-

NMIMS Global Access - School for Continuing Education

50  International Business

n o t e s

iff and non-tariff barriers, and to allow free flow of goods or services
and factors of production among themselves. In other words, it is an
arrangement in which countries agree to coordinate and co-operate
with each other in trade, fiscal and monetary policies. Over the last
few years, unprecedented formation of regional trade arrangements
has occurred. Every member nation of the World Trade Organisa-
tion (WTO) has to notify the WTO about the regional arrangements
it makes. By the end of 2005, nearly every member of the WTO had
one or more associations for regional trade agreements. During 1948
and 1994, there were around 124 notifications for regional trade
agreements with GATT, and after the WTO was established in 1995,
approximately 130 additional arrangements covering trade in goods
and services were created. However, every arrangement could not
survive. They were likely to be withdrawn or redesigned by the mem-
ber countries over a passage of time. It has been observed that out of

S
approximately 250 agreements notified to GATT or WTO, about 170
are currently in force.

As discussed in the last section, economic institutions, such as the

IM
WTO, IMF and UNCTAD aim at promoting economic cooperation
worldwide. Regional Economic Integration makes a similar effort ‘re-
gionally’ i.e., within a geographic region. By entering into a regional
agreement, group countries aim to expand trade with mutual benefits.
Regional economic integration involves removing or reducing trade
barriers rapidly and coordinating the trade policies of the countries.
M

This is possible because of various reasons, which are mentioned as

follows:
‰‰ Shared Culture: Refers to the similarity in language, religion,
norms and traditions of the countries. These factors prompt na-
N

tions to trade with each other. The commonality facilitates smooth

flow of communication and helps the organisations to understand
the complexities of the targeted markets.
‰‰ History of Political and Economic Dominance: Affects alliance
and integration among the countries. For instance, the British rule
introduced English language in India, which later came up as a
widely used language. Thus, the former colonial power facilitated
the shared language. It is easy for organisations to target the mar-
kets, if culture and language are similar.
‰‰ Regional Closeness: Helps in maintaining strong economic re-
lationships among nations. Countries sharing a common border
have access to effective and direct transportation, which increases
the probability of trade between them.

Regional economic integration is done through agreements. These

agreements are called trade blocs, as shown in Figure 2.3:

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  51

n o t e s

Customs
Union

Regional
Political Free
Economic
Union Trade Area
Integration

Common
Market

S
IM
Figure 2.3: Trade Blocs

These agreements are discussed as follows:

‰‰ Customs Union: Allows trading of goods and services among the
member countries without any custom duties and tariffs. Customs
union allows the group countries to formulate mutually beneficial
M

trade policies that decide on a common tariff for trading of goods

and services for the rest of the world and ensures no tariff for the
participating member countries. In customs union, the import du-
ties and regulations are same for all the member countries, thus
implying a free trade zone with a common tariff for the rest of the
N

world.
‰‰ Common Market: Refers to an agreement where countries join to-
gether to eliminate the trade barriers and allow free movement of
goods, labour and capital among the member countries. Common
markets are formed to eliminate the physical and fiscal barriers.
The physical barriers refer to political national borders and fiscal
barriers refer to taxes. These barriers hamper the free movement
of labour and capital between nations. Common markets help in
increasing employment opportunities and gross domestic product
of the participating member nations. In a common market, the or-
ganisations benefit due to lower costs, high profitability and econ-
omies of scale, whereas consumers benefit because of variety/in-
creased choice of products and low prices. The aims and objectives
of the common market can be given as follows:
 To attain sustainable development of the participating nations
 To promote mutual development in all the fields of economic
activities

NMIMS Global Access - School for Continuing Education

52  International Business

n o t e s

 To adopt policies and programmes for raising the standard of

living of the residents and for fostering close and amiable rela-
tions among participating nations
 To facilitate cooperation among participating nations and to
maintain peace, security and stability
 To strengthen relations between the countries of the world

Exhibit

Common Market Examples

The examples of common market are as follows:

‰‰ Latin American Integration Association (LAIA): Includes
Argentina, Bolivia, Brazil, Chile, Columbia, Mexico, Ecuador,

S
Peru, Paraguay, Uruguay and Venezuela. LAIA was established
in 1980 to reduce tariff and non-tariff barriers among member
nations. This association sets the general guidelines regarding
IM
the trade relations among countries. LAIA has replaced the Lat-
in American Free Trade Association (LAFTA), which was failed
due to disparity in the level of the development of member coun-
tries. LAIA is set with the belief that it would lead to balanced
economic and social development of the member countries.
‰‰ Common Market for Eastern and Southern Africa (COME-
M

SA): Includes 19 member counties that are Burundi, Comoros,

Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethio-
pia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda,
Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe.
COMESA was established in 1994 to attain economic prosperity
N

through regional integration. Its main aim is to develop the nat-

ural and human resources and promote the peace and security
in member countries.

‰‰ Free Trade Area (FTA): Refers to a trade bloc that aims at elimi-
nation of tariffs, custom duties and quotas and other trade barri-
ers on all goods and services between the participating countries.
Member countries in FTA do not exchange tariffs with each other,
rather they charge tariffs from the rest of the world i.e., non-mem-
ber countries. FTA, thus, reduces barriers and facilitates easy ex-
change in trade. It aims at promoting economic and governmental
stability among the nations.
‰‰ Political Union: Involves integration of government bodies, legis-
lative bodies and enforcement powers of participating countries.
It is the highest level of integration among the countries. In other
words, it is a form of a common government or a single political
entity. European Union is the successful example of the political
union composed of 27 member nations. This union works on a

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  53

n o t e s

common foreign policy, common defence policy and common legal

system for all the member nations.

self assessment Questions

21. Regional economic integration is done through agreements

and these agreements are called _______.

Activity

List down the factors that hamper regional economic integration.

2.9 SUMMARY
‰‰ The classical theories of international trade were formulated by

S
Adam Smith and David Ricardo. According to them, when a coun-
try enters into foreign trade, it benefits from two factors—special-
isation and efficient resource allocation.
IM
‰‰ The government plays an important role to increase a nation’s
wealth by discouraging import by means of subsidies and taxes.
It also maintains that a nation’s wealth depends on the balance of
trade.
‰‰ The theory of absolute advantage was coined by Adam Smith in
1776, and it stated that a country should specialise in those prod-
M

ucts, which it can produce efficiently. He also stated gold reserves

do not determine the wealth of a nation instead wealth of the coun-
tries depends on the goods and services available to the citizens.
‰‰ Adam Smith wrote in The Wealth of Nations, “If a foreign country
N

can supply us with a commodity cheaper than we ourselves can make

it, better buy it of them with some part of the produce of our own in-
dustry, employed in a way in which we have some advantage.”
‰‰ According to Ricardo, “a nation, like a person, gains from the trade
by exporting the goods or services in which it has its greatest com-
parative advantage in productivity and importing those in which it
has the least comparative advantage.”
‰‰ As per the Heckscher Ohlin (HO) model, comparative advan-
tage develops from differences in factor endowments between the
countries. Factor endowment refers to the amount of resources,
such as land, labour and capital available with a country.
‰‰ Micheal Porter presented the diamond theory of national advan-
tage. This postulates that the success of an organisation in the in-
ternational market depends on the features of the home country.
‰‰ All trade theories are based on rules and assumptions, and are not
practically valid in the real world. First, these theories state that
trade is a bilateral process, implying that it is between two coun-
ties; however, trade is a multilateral process.

NMIMS Global Access - School for Continuing Education

54  International Business

n o t e s

‰‰ The export–import policy was announced by the Government of

India, Ministry of Commerce and Industry; it is called the EXIM
policy or foreign trade policy. It is announced every five years and
updated on 31st of March, every year.
‰‰ Regulating and managing imports and promoting and maintain-
ing exports are the main aims of the EXIM policy (export–import
policy). It does not allow the export of goods that are scarce and
required within the country by the citizens.
‰‰ After World War II, various institutions were set up to look into the
proper functioning of the international trade. World Trade Organi-
sation (WTO), International Monetary Fund (IMF), World Bank, re-
gional associations, such as North American Free Trade Association
(NAFTA), South Asian Free Trade Agreement (SAFTA) and Europe-
an Free Trade Association (EFTA), are some such regulatory bodies.

S
‰‰ World Trade Organisation (WTO) was formed in 1995 to replace
the General Agreement on Tariffs and Trade (GATT), started in
1948. GATT was replaced by the WTO because GATT was biased
IM
and favoured developed countries.
‰‰ Regional economic integration refers to the agreement between
the group of countries to reduce/minimise and finally remove all
the tariff and non-tariff barriers, and to allow free flow of goods or
services and factors of production among themselves.
M

key words

‰‰ Trade Theories: These are the theories that are based on the
nature, mode and assumptions of trade.
N

‰‰ Mercantilism: It is the theory given by Adam Smith, which

maintains that countries should encourage exports and dis-
courage imports.
‰‰ Factor Endowments: It refers to the amount of resources, such
as land, labour and capital available with a country.
‰‰ Diamond Theory: It refers to the theory introduced by Micheal
Porter, which proposes that the success of an organisation in the
international market depends on the features of the home country.
‰‰ Factors of Production: These refer to the inputs that are neces-
sary for producing goods and services.
‰‰ EXIM Policy: It refers to the policy developed to earn foreign
exchange, promote trade and stimulate the economic activities
in the country.
‰‰ Regional Economic Integration: It refers to the agreement be-
tween the group of countries to reduce and finally remove all
the tariff and non-tariff barriers, and to allow free flow of goods
or services and factors of production.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  55

n o t e s

2.10 DESCRIPTIVE QUESTIONS

1. Explain various classical trade theories of international trade.
2. Describe the modern theory of international trade.
3. Why the Porter’s Diamond Theory of National Advantage is so
popular? Explain.
4. Explain the India’s international trade policy—Exim policy and
its benefits.
5. What is World Trade Organisation (WTO)? Explain its functions
and benefits.
6. What is the role of International Monetary Fund (IMF)? Explain
in detail.

S
7. What do you understand by regional economic integration?

2.11 ANSWERS and Hints

IM
answers for Self Assessment Questions

Topic Q. No. Answers

Theory of comparative advan- 1. True
M

tage
2. The Wealth of Nations
3. Goods and services
4. True
N

Heckscher and Ohlin Theo- 5. Capital

ry—Modern Theory of Inter-
national Trade
6. Factor endowments
Porter’s Diamond Theory of 7. Home country
National Advantage
8. c. Environmental
factors
Evaluation of International 9. False
Trade Theories
10. b. Transportation
cost is involved
India’s International Trade 11. True
Policy—EXIM Policy
12. Indian Economy
Outsourcing 13. Focus Market Scheme
(FMS)

NMIMS Global Access - School for Continuing Education

56  International Business

n o t e s

Topic Q. No. Answers

14. Zero duty
15. True
16. 90%
International Economic 17. Geneva, Switzerland
Institutions
18. In 1945
19. 187
20. True
Regional Economic 21. Trade blocks
Integration

S
Hints for Descriptive Questions
1. The classical theories of international trade were formulated
by Adam Smith and David Ricardo. According to them, when a
IM
country enters into foreign trade, it benefits from two factors —
specialisation and efficient resource allocation. Refer to Section
2.2 Classical Trade Theories.
2. Heckscher and Ohlin theory by Swedish economists, Eli
Heckscher and Bertil Ohlin, is an addendum to the theory of
comparative advantage. This theory introduces a ‘second factor’
M

of production that is ‘capital’. Refer to Section 2.3 Heckscher

and Ohlin Theory—Modern Theory of International Trade.
3. Micheal Porter introduced the diamond theory of national
advantage, which postulates that the success of an organisation
N

in the international market depends on the features of the

home country. Refer to Section 2.4 Porter’s Diamond Theory of
National Advantage.
4. International trade is considered to be a means of growth and
development for countries. Regulating and managing imports
and promoting and maintaining exports are the main aims of the
EXIM policy (export–import policy). Refer to Section 2.6 India’s
International Trade Policy—EXIM Policy.
5. World Trade Organisation (WTO) was formed in 1995 to replace
the General Agreement on Tariffs and Trade (GATT), started in
1948. Refer to Section 2.7 International Economic Institutions.
6. The International Monetary Fund (IMF) was established in 1945.
It has 187 member countries and works for securing financial
stability, developing global monetary cooperation, facilitating
international trade, reducing poverty and maintaining
sustainable economic growth around the world. Refer to Section
2.7 International Economic Institutions.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL TRADE THEORIES AND POLICIES  57

n o t e s

7. Regional economic integration refers to the agreement between

the group of countries to reduce/minimise and finally remove all
the tariff and non-tariff barriers, and to allow free flow of goods
or services and factors of production between themselves. Refer
to Section 2.8 Regional Economic Integration.

2.12 SUGGESTED READING FOR REFERENCE

Suggested Readings
‰‰ Aswathappa,A. (2006). International business (1st ed.). New Delhi:
Tata McGraw-Hill.
‰‰ Endres, A., & Fleming, G. (2002). International organizations and
the analysis of economic policy, 1919-1950 (1st ed.). Cambridge:
Cambridge University Press.

S
‰‰ Gandolfo, G., & Gandolfo, G. (1998). International trade theory and
policy (1st ed.). Berlin: Springer.
IM
E-references
‰‰ (2014). Retrieved 15 October 2014, from http://cis01.central.ucv.ro/
iba/files/int_ec2.pdf
‰‰ (2014).
Retrieved 15 October 2014, from http://www.ddegjust.ac.in/
studymaterial/mba/fm-305.pdf
M

‰‰ Fieo.org,.(2014). FIEO : NEW FOREIGN TRADE POLICY 2009-

2014 - HIGHLIGHTS. Retrieved 15 October 2014, from http://fieo.
org/view_section.php?lang=0&id=0,30,155,633
N

‰‰ Zohari, T., & Zohari, T. (2014). Classical International Trade Theo-

ry. DigitPro. Retrieved 15 October 2014, from http://www.digitpro.
co.uk/2014/02/20/classical-international-trade-theory/

NMIMS Global Access - School for Continuing Education

N
M
IM
S
 C h a
3 p t e r

INTERNATIONAL MONETARY SYSTEM AND

EXPORT DOCUMENTATION

CONTENTS

S
3.1 Introduction
3.2 International Monetary System
IM
3.2.1 Evolution of International Monetary System
3.2.2 Essential Features of International Monetary System
3.2.3 Stages in International Monetary System
Self Assessment Questions
Activity
3.3 Concept of Foreign Exchange Market
M

3.3.1 Structure of FOREX market

3.3.2 Factors determining exchange rates
3.3.3 Advantages and disadvantages of FOREX market
Self Assessment Questions
N

Activity
3.4 Balance of Payments
Self Assessment Questions
Activity
3.5 Foreign Direct Investment
Self Assessment Questions
Activity
3.6 Instruments of Payments
Self Assessment Questions
Activity
3.7 Export Import Documentation
Self Assessment Questions
Activity
3.8 Export Import Procedures
Self Assessment Questions
Activity

NMIMS Global Access - School for Continuing Education

60  International Business

CONTENTS

3.9 Direction and Quantum of India’s Exports

Self Assessment Questions
Activity
3.10 Institutional Setup for Export Promotion
Self Assessment Questions
Activity
3.11 Summary
3.12 Descriptive Questions
3.13 Answers and Hints
3.14 Suggested Reading for Reference

S
IM
M
N

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  61

Introductory Caselet
n o t e s

CHINA – AN ATTRACTIVE DESTINATION FOR FDI

After remaining a closed economy for long, China opened up its

economy to the world in 1978. FDI grew at a slow pace in Chi-
na during the 1980s and remained confined to joint ventures be-
tween foreign and Chinese organisations. However, now it has
progressed to attract great investments from multinational com-
panies and became the world’s largest recipient of FDI in 2003.
The growth of FDI slowed down and decreased in China in 2008
because of financial crisis. Despite this, China remained an at-
tractive destination for investors. USA, Europe and Japan have
become the main sources of FDI in China. Its neighbouring econ-
omies, Vietnam, and Thailand are gradually moving towards in-
creasing their competitiveness over China.

S
China’s real estate and infrastructure industries attract a sig-
nificant amount of FDI. Substantial foreign investment is also
received by the service sector, including finance, insurance,
IM
transportation, and utility industries. Research conducted by
Pricewaterhouse coopers showed that a large number of organ-
isations’ plans to invest in China in the coming years as it is con-
sidered to be the world’s fastest growing economy.
China is the best choice for investment according to the United
Nations. The Chinese government regularly updates its policies
to maintain and restore the confidence of foreign investors. FDI
M

helps China in the promotion of employment opportunities and

to develop industries that foster economic growth. China aims
for investment from hi-tech service sectors. World Prospectus
Survey 2010-2012 released in the United Nations Conference on
N

Trade and Development (UNCTAD), has considered China as the

world’s most important FDI destination.
Among developing countries, China has established itself as the
largest FDI recipient. The practice of round tripping of FDI by
China is the reason behind its large FDI. This implies an illegal
transfer of domestic money to foreign countries and then re-in-
vesting it again in the mainland as FDI inflow. China practices
this to get preferential treatment in taxation and other incentives.
About one-fourth of Chinese FDI is round tripped.
China is in a stronger position as compared to India. However,
studies show that India can do better if it eliminates the barriers
for foreign investment and opens more sectors to FDI. India and
China are perceived as the two sides of the same coin by many
organisations. Both countries face the same economic challenges.
While poor roads and insufficient water and electricity affect de-
velopment in India; China suffers from the problem of bad debts.
Both countries, China and India have their individual ways of
solving the problems related to FDI.

NMIMS Global Access - School for Continuing Education

62  International Business

n o t e s

learning objectives

After studying this chapter, you will be able to:

>> Explain international monetary system
>> Describe the concept and structure of foreign exchange
market
>> Discuss the concept of foreign exchange market
>> Explain the balance of payments
>> Describe foreign direct investment
>> Discuss instruments of payments
>> Explain export import documentation
>> Explain export import procedure

S
>> Discuss direction and quantum of India’s export
>> Discuss institutional setup for export promotion
IM
3.1 INTRODUCTION
International trade involves buying and selling of goods and services
between two nations in exchange for money represented in terms of
currencies. Every nation participating in the international trade uses
different currencies; therefore, it becomes very difficult for the na-
M

tions to conduct smooth international trade as every nation tries to

attach maximum value to its currency. In addition, every nation tries
to govern the international trade with its own terms and conditions
where powerful and developed nations may dominate the interna-
tional trade. Therefore, an institution called international monetary
N

system was established. The institution is responsible for devising

and formulating policies and procedures for administering and moni-
toring the international trade among different countries. This system
determines the value (exchange rate) of each currency to facilitate
smooth cross border trade.

Export is an important form of international trade in which goods and

services of domestic organisations are sold in foreign countries. How-
ever, before exporting its goods and services in the foreign country,
domestic organisations require to fulfil certain formalities with the
foreign trade authorities of the domestic and foreign countries. This
process is known as export documentation, which includes the sub-
mission of several commercial, regulatory, and export assistance doc-
uments with international trade regulatory authorities.

The international monetary system influences the international trade

to a large extent. For example, if the international monetary system
assigns a higher value to Chinese yen in comparison to Indian rupee;
it would make Chinese goods expensive in the Indian market. In such

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  63

n o t e s

a situation, China needs to adopt aggressive international marketing

strategies in the Indian market to promote its products. In this chap-
ter, you will study about international monetary system and export
documentation in detail.  

3.2 INTERNATIONAL MONETARY SYSTEM

International monetary system refers to a system that formulates
rules and standards to facilitate international trade. It helps and regu-
lates the reallocation of capital and investment between nations. The
exchange rate of different currencies for international trade is deter-
mined by the global network of governments of different countries and
financial institutions. The rules and regulations are set by a governing
body based on which different nations exchange currencies with each
other. The international monetary system assigns a standard value to

S
international currencies, which helps in sorting out complexities in in-
ternational trade and financial markets. The respective governments
of nations agree to the rules and regulations set by the international
IM
monetary system for regulating and controlling the exchange value of
currencies.

Thus, the decisions made by the international monetary system are af-
fected by the government’s stand. In other words, international trade
of goods and services is affected by the changes in the trade policy of a
government. In order to improve Balance of Payments (BoP) and mi-
M

nimise the trade deficit, the international monetary system motivates

and encourages the nations to participate in international trade. The
international monetary system is the sole architectural body that has
grown over the years with a vision to integrate the global economy.
N

The establishments of World Bank and International Monetary Fund

(IMF) in 1944 are the major achievements of the international mon-
etary system. These establishments are attributed to an agreement
among nations to set up a body for promotion and support of interna-
tional trade.

3.2.1 EVOLUTION OF INTERNATIONAL MONETARY

SYSTEM

During the years 1870 to 1914, trade transactions took place with the
exchange of gold and silver and without any institutional support.
During those days, monetary system was decentralised and mar-
ket-based. Money played a minor role when compared to gold trans-
actions during international trade. After World War I, the use of gold
declined because of increased expenditure and inflation. Although
countries tried to revive the standard of gold, they failed because of
depression. Again in 1944, 730 representatives of 44 nations decided
to create a new international monetary system and met at Bretton

NMIMS Global Access - School for Continuing Education

64  International Business

n o t e s

Woods, New Hampshire, United States. This was also known as the
Bretton Woods system, and became a turning point in the history of
international trade. Its aim was to ensure monetary stability for all
nations by creating a stabilised international currency system. As the
United States held most of the world’s gold, it was decided that all na-
tions would determine the value of their currencies in terms of ‘dollar.’
The task of maintaining a fixed exchange rate with respect to dollar
was assigned to the central banks of nations.

In 1971, the Bretton Woods system came to an end. The value of the
dollar was undermined in the whole world as a result of trade defi-
cit and growing inflation. In 1973, another market based system, the
‘floating exchange rate system’ or the ‘flexible exchange rate system’
was developed.

S
3.2.2 ESSENTIAL FEATURES OF INTERNATIONAL
MONETARY SYSTEM

The following are the essential features of the international monetary

IM
system:
‰‰ Maintains the flow of investment and international trade accord-
ing to the comparative advantages of countries
‰‰ Maintains stability in foreign exchange
‰‰ Prevents disruptions arising out of temporary imbalances by pro-
M

moting balance of payments and adjustments

‰‰ Overcomes temporary balance of payment deficits to provide
funds to countries
‰‰ Allows countries to pursue monetary and fiscal policies inde-
N

pendently

3.2.3 STAGES IN INTERNATIONAL MONETARY SYSTEM

The different stages in the international monetary system are:

‰‰ Classic Gold Standard (1876-1914): The years 1876-1913 was a pe-
riod of unprecedented economic growth with relatively free trade
in goods, labour and capital. Thus, gold standard was followed
during that time. The gold standard refers to an agreement among
member countries (engaged in international trade) to fix a value
of their respective currencies in terms of specific amounts of gold.
The oldest monetary system is the ‘Classical Gold Standard’ in
which conversion of gold into currency notes and vice versa was
done at a fixed rate based on a standard, fixed weight of gold.
According to this system, a par value for its currency in terms of
gold is set by a country. It then tries to maintain this value thus
there is a fixed parity between two currencies.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  65

n o t e s

The price of gold was fixed at $20.67 per ounce by the United States
in 1834 and it remained till 1933. Gold Standard was adopted by
many other major countries in the 1870s. The exchange rate fixed
by Britain was £ 4.2474.
The following three conditions were needed for the gold standard
to be followed as a full-fledged exchange system:
 Each nation needed to define its currency in terms of gold.
 A two-way convertibility at a stable exchange ratio was re-
quired to be maintained and followed between the currency of
a nation and gold.
 No restriction was to be imposed on the import and export of
gold.

S
To simplify, let us assume that Dollar ($) to gold - exchange is $20/
ounce; and Pound (£) to gold exchange rate is £5/ounce; therefore,
the exchange rate between $ and £ is:
IM
 ($20/ounce of gold) / (£5/ounce of gold)
 $4/£; that means –one Pound is equivalent to four Dollars
For the conversion of paper notes into gold and gold into paper cur-
rency, the monetary authority of a country was responsible. This
conversion depended and varied as per the situation demanded.
In most cases, Central Bank of the nation was responsible for the
M

conversion of paper into gold and vice-versa. From 1870s till the
First World War, international trade operated beneficially as the
nations around the world were well integrated. Those nations that
had accepted the gold standard as a mode of economic transac-
N

tions operated efficiently in the international financial market. Of

these, the U.S. and the U.K. were the most powerful in terms of
financial strength and industrial growth.
During the 19th century, due to limited tax revenues and suspend-
ed convertibility of currency into gold, the countries that had ad-
opted the gold standard faced a currency crunch. This happened
because Britain suspended the gold convertibility during Napole-
onic wars and the U.S. government suspended it during the civil
war. The monetary authorities of countries faced a financial crisis
during the First World War. As a result of the strict norms of gold
standard, they were not able to freely convert gold into currency.
Apart from a financial crisis, the classical gold standard was aban-
doned because of Great Depression in the1930s.
The following are the important features of the classical gold stan-
dard:
 A fixed volume of gold was used to determine the exchange
rate of different currencies.

NMIMS Global Access - School for Continuing Education

66  International Business

n o t e s

 The monetary authority of a nation based the conversion of its

paper notes into the paper notes of the other nation at a fixed
rate of gold bullion standard. For example, the Indian rupee
said to be following the gold exchange standard if it is convert-
ed into Pound Sterling, which is freely converted into gold.
 A variation of 1% is allowed in the actual exchange rate; be-
cause of the cost involved in the transportation and storage of
gold. For example, let us assume that if the relation between
$ and £ was -> £ 1 = $ 4 i.e. one Pound is equivalent to four
Dollars. Let the transportation cost be 4 cents, the respective
upper and lower limits would be £1= $4.04 and £1=$3.96.
 The upper limit (in this case $4.04) is called the ‘gold export
point’. The Pound could not have risen higher than this ex-
change rate.

S
 The lower limit ($3.96 described above) is called the ‘gold im-
port point’. The Pound could not have fallen lower than this
exchange rate.
IM
 Monetary authorities of different nations could fix the ex-
change rate of paper currencies once and for all.
 Free flow of gold between countries was facilitated.
 The supply of money is kept in proportion to gold reserves.
M

Exhibit

Monetary System Before 1875 - Bimetallism

N

Before the classical gold standard came into existence, Bimetallism

was followed as a monetary system. As per this system, gold and sil-
ver were the two metals that were majorly used and a country’s
monetary unit was defined in fixed amounts of gold and silver.

In 1865, the Latin monetary union was set up with a view to adopt
and accept bimetallism on a worldwide basis, with France, Bel-
gium, Italy, and Switzerland as members. But in 1867, at a meeting
held in Paris, the maximum number of delegates from all over the
world were in favour of the ‘gold standard’ for determining a global
monetary unit and did not support the bimetallism system.

The major problem in case of bimetallism was that countries used

to set the exchange rate between the two metals independently.
This led to wide differences as handling of two metals was a costly
affair in the bimetallism system, than in the case of using only one
currency.

‰‰ Interwar Period (1918-1939): The period between 1919 -1939 is re-

ferred to as a period of de-globalisation. This is because of shrink-

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  67

n o t e s

ing of international trade and capital flows during this period.

World War 1 ended the gold standard system as countries started
printing money to pay for expenses during war.
‰‰ Bretton Woods System (1944-1971): Under this time, a post war
international monetary system was planned by the British and
American policy makers. The Bretton Woods system had set up
rules for establishing commercial and financial relations among
countries. However, the new financial system aimed at bringing
stability to the exchange rate and providing capital for reconstruc-
tion after the war. The gold exchange standard took the place of
the gold standard system. Under the Bretton Woods system, In-
ternational Monetary Fund (IMF) and the International Bank for
Reconstruction and Development (IBRD) were established.
Under the Bretton Woods system, it was an obligation that each

S
country adopted a monetary policy. The exchange rate of a nation’s
currency was maintained through this policy by tying the currency
to the U.S. dollar. It also enabled IMF to bridge temporary imbal-
ances of payments.
IM
 The important features of the Bretton Woods system are as fol-
lows:
 To adopt the U.S. dollar (and the British pound) as the interna-
tional currencies so that other nations keep them as reserves
for the settlement of international financial transactions.
M

 To allow nations to make upto 10% increase or decrease in the

value of their currencies against the dollar in case of unfavour-
able economic conditions. This is to be done with prior permis-
sion from the IMF.
N

 To lay emphasis on a fixed yet flexible exchange rate system.

The extreme forms of the international monetary system i.e.
fully fixed and free floating exchange rates should not be fol-
lowed.
 Free conversion of the US dollar into gold was allowed at a
fixed value of $35 per ounce. No change in this rate is allowed
to be made by the U.S. The U.S. dollar had a direct exchange
relation (pegging) with gold. Any other currency if pegged to
dollar meant that the currency had indirect pegging to gold.
For example, $35=1 ounce of gold or in other words, $1=1/35
ounce of gold; now if we assume $1= `40, then `40=1/35 ounce
of gold, i.e. `1400= 1 ounce of gold.
 A par rate or an exchange rate was determined by countries
between its own currency and currencies of other countries.
Rise or fall by 1% of the par value was allowed to countries by
buying and selling of dollars and/or gold.

NMIMS Global Access - School for Continuing Education

68  International Business

n o t e s

 A new measure, the system of capital control, was introduced

to protect the nations from capital flight. IMF received funds
through subscriptions from member countries in the form of
gold (25%) and currency (75%) of the respective country. The
member countries that got help from IMF to overcome their
balance of payment deficit and during credit crisis followed the
guidelines of the IMF.
 International Bank for Reconstruction and Development
(IBRD) aimed to help the countries who suffered in World War
II to gain stability and develop economically.
The U.S. dollar got the status of international money through the
Bretton Woods system. Financial transactions started to be con-
ducted by other countries in terms of money. This arrangement
worked on faith that the US monetary authorities would convert

S
dollars into gold but when there was trade deficit in the U.S. econ-
omy and rise in the price of gold, the status of the U.S. dollar as
an international currency became a problem for other countries.
IM
On August 15, 1971, the monetary authorities of U.S. abandoned
the Bretton Woods system and stopped converting dollar into gold.
The world then moved over to a new exchange rate regime called
flexible exchange rate system.
The failure of the Bretton Woods System emerged with the prob-
lem of a lack of international liquidity and it finally came to an end
M

when US unilaterally terminated convertibility of the US dollar to

gold.
‰‰ Floating/Flexible Exchange Rate System: Floating Currency is
the term used for the currency that uses the floating condition of
exchange. The flexible exchange rate helps a nation to avoid the
N

balance of payment deficit by automatically adjusting the curren-

cy to the market conditions. The condition of excess increase or
decrease in the exchange value of the currency can be stabilised
by the intervention of the central bank of the nation.
In the Floating Exchange Rate System, as already discussed,
the exchange rates are determined by the forces of demand and
supply. Free floating exchange rates can be achieved in two ways.
One, where the government does not interfere at all and the second
where the government takes part in the currency market and/or it
can affect the market by use of some policy measures. Thus, we see,
that the ‘difference’ is only based on one parameter, that is, govern-
ment intervention. The two types of floating exchange rate are:
 Freely Floating Exchange Rate System: It refers to a system
in which the exchange rate is determined and is dependent
solely on the market forces. In this system, the Government
and the Central Bank do not participate in the market opera-
tions. These institutions only play a role in regulating and mon-
itoring the market to avoid scams or frauds and to check that

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  69

n o t e s

no mischievous activities take place. Practically, such a system

is not possible. U.S. is the only nation whose economy is closest
to the freely floating exchange rate system as it has adopted the
system of minimum interference in the currency market. The
primary disadvantage of adopting this is the high unpredict-
ability and uncertainty of exchange rates. This makes interna-
tional transactions and trade risk oriented.
 Managed Floating Exchange Rate System: It refers to the
system where the operation of the market forces determines
the exchange rates. There is interference in market operations
by the Central Banks and the Governments of the concerned
countries. These bodies are authorised to buy or sell their own
as well as foreign currencies to increase or decrease the price
of their own currency. Such exchange management interven-

S
tions by countries can make only a negligible difference on the
world foreign exchange market; but there are countries, which
might use this system to manipulate markets to gain in some
or the other way. For example: recently, warning was issued to
IM
China by the U.S. for purposefully and intentionally devaluing
its currency to buy dollars and thus to increase the supply of
its currency. Such an exercise would make its exports cheap-
er and thus it would attract huge export orders. This tactic by
China affected the U.S. exports negatively and prompted the
U.S. government to take strict preventive measures.
M

‰‰ Present International Monetary System (1971 onwards): This

era is also known as ‘Washington consensus’ and is a period of
transition from the state led (Bretton Woods) to the market led
system. This monetary liberalisation brought benefits to various
countries.
N

Post Bretton Woods era witnessed the rise of liberalisation in most

parts of the world. The new exchange rate regime also brought signif-
icant growth in international trade. Now, with the flexible exchange
rate regime in force, the market forces of demand and supply deter-
mine the exchange rate of different currencies.

self assessment Questions

1. International monetary system refers to the system that

formulates rules and standards to facilitate ________________.
2. In 1973, which monetary system was adopted after Bretton
Woods system?
3. What was the fixed rate allowed for the free conversion of the
US dollar into gold?
4. What determines the exchange rate of different countries as
per present international monetary system?

NMIMS Global Access - School for Continuing Education

70  International Business

n o t e s

Activity

Using the Internet, study the present international monetary sys-

tem.

CONCEPT OF FOREIGN EXCHANGE

3.3
MARKET
The trade and exchange of currencies of different countries with each
other is facilitated through the financial market. The foreign exchange
market is regarded as the biggest financial market in the world which
is about half a trillion dollars worth of currencies (average), from dif-
ferent countries, are traded annually. Institutional investors, who ac-
count for 80-85% of currency trading, are the most active participants

S
in the foreign exchange market. The remaining percentage is through
the trade of goods and services. Financial institutions and commercial
banks operating in the market provide assistance to individual inves-
tors (involved in currency trading). An inventory of currencies is held
IM
by these organisations to provide to the investors for trading. Trade
of currencies by large organisations, like MNCs and investment and
commercial bankers makes for the most exciting business.

Individual investors and speculators also participate in the currency

trade. In the foreign exchange market, comparison between different
M

currencies determines its market value. For example, comparing the

Indian Rupee with the U.S. dollar, the Pound Sterling and the Euro
will determine its exchange value. Generally, the exchange of curren-
cies takes place between the major currencies of the world, such as
the U.S. dollar, the Pound Sterling, the Swiss Francs, the Japanese
N

Yen, the Euro, the Singaporean Dollar, the Australian Dollar, and the
Canadian Dollar. The exchange rate of each currency is fixed by the
international monetary authority.

3.3.1 STRUCTURE OF FOREX MARKET

Structural hierarchy differentiates the FOREX market from the stock

market based on the transaction and access to the market. Inter-bank
market,which comprises commercial banks, investment bankers, cen-
tral banks, and non-financial corporations, occupies the top level of
the FOREX market,which comprises commercial banks, investment
bankers, central banks, and non-financial corporations account foral-
most 53% of transactions. The successive levels are occupied by small
banks, multi-national corporations, hedge funds, and retailers respec-
tively. The FOREX market is composed of two segments (i) the whole-
sale segment which includes interbank dealings, and (ii) the retail seg-
ment wherein travellers can exchange the currency of one country for
another. The wholesale market segment is the largest in the foreign

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  71

n o t e s

exchange market. The following are the components that contribute

to the structure of the foreign exchange market:
‰‰ Banks: These are commercial banks that facilitate speculative
trading as well as generate a large scale commercial turnover
of currencies. Millions of dollars a day are traded by some large
banks. The banks trade in foreign exchange mostly to augment
their own account and partly on behalf of the customers. Advance-
ment in banking organisation has led to the use of electronic sys-
tems for which the bank charges a nominal fee.
‰‰ Central bank: It is the apex body, also called a banker’s bank. It
monitors the financial market and the exchange market of a coun-
try. It intervenes in the operations of the market to control money
supply(directly or indirectly), to check inflation and interest rates.
When the exchange rate is low, the central bank buys foreign cur-

S
rency and sells it when the rate is higher. Foreign reserves accu-
mulated by it are used to stabilise the market conditions in times
of crisis. Thus, trading by the central bank is profitable as it uses
precise and accurate information to bring stability and controls
IM
the monetary affairs inside the country.
‰‰ Multinational companies: These are large business organisations
that take an active part in the activities of the FOREX market.
These companies also deal with the payment for goods and ser-
vices. However, the volume of transactions of multinational com-
panies is comparatively low than that of inter-bank transactions.
M

Therefore, these MNCs have a small and short-term effect on the

market rate. Sometimes, because of the unavailability of other
market players, these companies hold a major stake in the ex-
change market. In that scenario, the trade flow might be affected
N

by these companies.
‰‰ Hedge funds: It is a widely used source of financial investment.
Market speculation is a major factor governing foreign transac-
tions compared to the marketing principles of demand and supply
of currency. It implies that most buying and selling of currencies
by individuals or/and organisations is done on the basis of market
speculation and is done in an unplanned manner as compared to
the movement of currency. Hedge fund is that source of invest-
ment which is available to limited/selected investors who hold a
wide range of long- term investment funds. Hedge funds have be-
come a source of aggressive investment in the last one decade; in
the form of equity and bonds.
‰‰ Investment bankers: They are the investment organisations/insti-
tutes act as intermediaries between the FOREX market and indi-
vidual investors or organisations. An investment bank invests in
endowments, pension funds and foreign securities on behalf of its
customers. It also generates revenue for its clients and minimises

NMIMS Global Access - School for Continuing Education

72  International Business

n o t e s

their market risk through the currency overlay operations on the

basis of speculation.
‰‰ Retail foreign exchange traders: They are indirect players who
participate through banks or brokers or investment institutions
in the foreign exchange market. The number of retail traders is
increasing day by day along with the volume and value of transac-
tions. The retail traders who facilitate speculative currency trad-
ing can be classified into two types: the brokers and professional
dealers or primary price makers. The brokers are the agents of
retail customers who provide assistance in buying and selling of
currencies and in turn charge some commission for their services.
The dealers; however, quote prices in two ways and thus make a
two way market for customers. They provide an option to custom-
ers to buy or sell currencies. They quote one price to buy the cur-
rency and the other price to sell it, leaving the final decision to the

S
customer.
‰‰ Non-banking financial companies: These are corporations that
are involved in the exchange of currencies and arrange/provide
IM
international payments to private organisations. They can also be
called brokers but with a different kind of operation; they deal in
physical transaction of currencies to the accounts and are not in-
volved in a transaction through market speculation. In compari-
son to banks, these corporations excel in services. Their exchange
rates are better; they offer high value services and cheaper pay-
M

ments with manageable risk.

‰‰ Money transfer companies: These companies offer transfer of
money at a low transaction cost and at high-volume to individuals
or organisations. Their market scope is vast as they facilitate the
N

transfer of money from one country to another. India, China, Mex-

ico, and Philippines are the top four markets that receive approx-
imately US $95 billion. Western Union is the best and the largest
company with 3,45,000 agents across the world. It is followed by
UAE Exchange & Financial Services.

3.3.2  FACTORS DETERMINING EXCHANGE RATES

It is easy to calculate the change in the exchange rate of a curren-

cy but difficult to find the reasons behind this change. As discussed
earlier, the price of a currency is denoted by its exchange value at a
particular point of time and is determined on the basis of the demand
and supply of the currency in the FOREX market. Therefore, shift in
the demand and supply of the currency corresponds to an increase or
decrease in the exchange value of the currency. Various factors influ-
ence the exchange rate of a currency:
‰‰ Interest rate: Investment in the FOREX market is affected by the
interest rate. High interest rate means that the demand of curren-
cy is on the lower side. Low demand of a currency results in depre-

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  73

n o t e s

ciation of exchange rate. However, low interest rate means that the
demand of currency is high. This will result in appreciation of the
exchange rate of currency.
‰‰ Inflation rate: The demand of a currency decreases in the inter-
national market due to inflation. Excess of supply over demand
may increase the inflation rate of the currency or sometimes infla-
tion may increase due to decreased supply and increased demand
of the currency.
‰‰ Income level: It either increases or decreases the exchange rate
of a currency. The interest rate is affected with the change in the
income level and subsequently the exchange value of the currency
increases or decreases. The exchange rate of the currency would
increase when the income of investors increases as they would
then have more money to spare and would invest more in the fi-

S
nancial market.
‰‰ Government control: The government norms and rules, which
affect the exchange rate of the currency are referred to as gov-
IM
ernment control. Liberal approach of the government towards
foreign exchange increases the demand of the currency automat-
ically, while a restrictive or conservative approach decreases the
demand of the currency, which, in turn, affects the exchange rate
of the currency.
‰‰ Market speculation: It refers to the traders’ expectations regard-
M

ing the future exchange rate of the currency. Market speculation

can either be positive or negative. In case of positive speculation
about the future value of a currency, the demand of the curren-
cy increases subsequently resulting in an increase in its exchange
value. On the other hand, negative speculation decreases the de-
N

mand of the currency resulting in depreciation of the exchange

value of the currency.

3.3.3 ADVANTAGES AND DISADVANTAGES OF

FOREX MARKET

The advantages of the FOREX market are:

‰‰ High leverage can be gained. The FOREX market can produce
easy profits even with small amount of deposits.
‰‰ Trading is open 24 hours a day, 6 days a week.
‰‰ Online trading means brokerage free trading.
‰‰ High volume and global trading offer great liquidity.

The disadvantages of the FOREX market:

‰‰ There are risks due to high leverage.
‰‰ There is likely manipulation of data by brokers because of exces-
sive decentralisation.

NMIMS Global Access - School for Continuing Education

74  International Business

n o t e s

‰‰ Instruments to trade are less.

‰‰ TheFOREX market requires study of complex fundamentals that
must be done on a global scale.

self assessment Questions

5. The trade and exchange of currencies of different countries

with each other is facilitated through the financial market.
(True/False)
6. ______________ is regarded as the biggest financial market in
the world with about half a trillion dollar worth of currencies
from different countries, are traded annually.
7. The FOREX market is composed of two segments (i) the
wholesale segment which include interbank dealings, and

S
(ii) the retail segment wherein travellers can exchange the
currency of one country for another. (True/False)
8. Which one of the following is not a factor that determines
IM
exchange rates?
a. Interest rate
b. Mortality rate
c. Inflation rate
d. Market speculation
M

Activity

Discuss with your friends what factors determine the exchange rate
N

of a country and how.

3.4 BALANCE OF PAYMENTS

The systematic accounting statement maintaining a record of all the
monetary transactions between a nation and its citizens and another
nation and its citizens, over a fixed period of time is referred to as
balance of payments (BoP). Inflow and outflow of capital and the pay-
ment transactions during export and import of goods and services are
included in BoP. Thus, BoP can be defined as asummarised record of
international transactions. These transactions can be conducted with
other countries; by the public and/or the private organisations of a
country. It is an indicator of a country’s capital inflow and outflow and
helps in estimating the trend of cash flow.

BoP is an important source of information for local companies, MNCs,

and the government. The monetary policy and fiscal policy can be for-

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  75

n o t e s

mulated and implemented by the government and the Central Bank

of the country on the basis of information from the BoP. The debit and
credit columns show the inflow and the outflow of capital respectively.
The credit side mentions the sources of capital, such as export of goods
and services, while the debit side states the uses of capital, such as im-
port of goods and services and investment in foreign securities etc.

Theoretically, the debit and credit in the BoP should always match.
In other words, the sum of all assets should be equal to the sum of all
liabilities. This situation is, however, very rare in reality. Generally,
the BoP of a country is either in surplus or in deficit. BOP would be
in surplus when the inflow of foreign currency is more than the out-
flow. On the other hand, if the inflow of foreign currency is less than
the outflow, the BOP would be in deficit. Transactions in goods and/
or services, purchase/sale of financial assets, foreign aids, military ex-

S
penditures, and unilateral transfers are the various transactions that
may take place between countries. Some transactions are as follows:
‰‰ Purchase or sale of goods and services between citizens of differ-
IM
ent countries in return for money or some other goods or services.
‰‰ Give and take (exchange) of unilateral gifts in kind between na-
tions.
‰‰ Giving and receiving of unilateral financial gifts between coun-
tries.
M

‰‰ Investment in foreign securities.

Importance of BOP

The financial position of a country can be analysed on the basis of BoP.

N

It also plays an important role in comparing the financial status of a

country with other countries of the world. The monetary authority of
a country prepares and publishes the BoP to adjudge the trend of the
financial flow and act accordingly. Important financial decisions can
be made on the basis of the useful information contained in the BoP
statement. This information can be utilised by organisations, banks,
individuals and economists.

There is a direct relation between the BoP and the economy of a coun-
try. The BoP reflects the financial performance and the state of the
economy of a country at a particular period, in comparison with other
countries, during that period. If the BoP of a country is positive, it
implies that the condition of the financial market of the country is
healthy. It further implies that the income and standard of living of
the country is increasing and getting better and its foreign debt or
liabilities are decreasing. The negative BoP reflects that the financial
market of a country is not in a favourable condition and the external
liability of the country is increasing. It could be in the form of foreign
debts, loans and advances, and/or trade deficits.

NMIMS Global Access - School for Continuing Education

76  International Business

n o t e s

Changes in BOP, in the short run, directly affect the foreign exchange
market of a country. The demand for a country’s domestic currency in
the international market decreases with deficit in BoP. Consequent-
ly, the value of the domestic currency also decreases in comparison
with the foreign currency. Surplus in BoP implies an increase in the
demand of the domestic currency in the international market. Con-
sequently, there is an increase in the value of the domestic currency
against the foreign currency.

Thus, the BoP determines the exchange rate of currency of a country.

The link between BoP and the exchange rate can be described as a
cyclic process. For instance, if there is a change in the exchange rate
(ER) of a country; it will affect the BoP as the exchange rate would
have a direct effect on the export and import of a country. Cheap cur-
rency would enhance exports while and with costly currency, the ex-

S
ports are not expected to increase. Alternately, if there is a change in
BOP, the exchange rate of a country would be affected. Assume that
the capital and financial accounts show a change in the international
capital flow. The capital flows (in the capital/financial account) and the
IM
current account finance each other’s deficit if a balance is achieved
in both of these accounts. It means that if both the accounts show a
deficit, ER would be stable; the position of ER would not be good if
both the accounts are in surplus implying a strong ER situation. If one
account shows a deficit and the other account is in surplus, then the
overall balance maybe positive or negative.
M

The types of business opportunities and challenges that exist in an

economy can be assessed by measuring and taking a note of BoP
data. A favourable BOP encourages the investor to invest in port-
folios and debt instruments, such as bonds and stocks. The central
N

bank of a country is encouraged to increase its foreign currency and

gold reserves in case the BoP is positive. If a country’s BoP shows
that it heavily imports a particular type of item (in abundance in the
country), the country would probably find a new export destination.
Economists and other interested persons assess whether a deficit or
a surplus condition is building up in the economy by looking at BoP
statistics of the country. Strong position is indicated through surplus
while deficit indicates the weak position of an economy.

The central bank of a country is compelled to intervene directly or

indirectly in the foreign exchange market when there is an imbalance
in BOP. The international financial market is regulated by the central
bank through certain monetary and fiscal policies of the country. This
helps in bringing necessary changes in domestic and international
policies.

Limitations of BOP

Statistically, BoP is very useful for a country; however, it has some

major limitations:

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  77

n o t e s

‰‰ The BOP statement is based on information provided by the Ex-

port-Import (EXIM) Bank, the Central Bank of the country (RBI
in India), custom authorities, etc. Clear cut uniformity in the statis-
tics of these organisations is not possible.
‰‰ As per the double-entry book keeping, the two sides, that is, the
debit and credit sides should balance each other, but practically,
almost always, debit and credit entries have differences.
‰‰ BOP is made in the national currency and does not take account of
transactions that take place in currencies other than the national
currency which leads to exchange gain or loss. Therefore, alter-
nately, the BOP should be prepared in more than one currency.
‰‰ BOP is based on transactions and not on settlements or delivery.
The date of transactions may not be the same as the settlement
date in most cases.

S
‰‰ Each country follows its own classification of the accounts. Dis-
crepancies arise when one country reconciles its data with that of
another country.
IM
‰‰ According to IMF guidelines, the services are divided into 15 parts,
out of which only seven services are included in India.
‰‰ The discrepancies in BOP account balances are taken care through
the errors and omissions account. Now, let us understand why
BOP is so important for a country.
M

self assessment Questions

9. The systematic accounting statement maintaining a record of

all the _______________ between a nation and its citizens and
N

another nation and its citizens, over a fixed period of time is

referred to as a BOP.
10. There is a direct relation between the BOP and the economy
of a country. (True/False)

Activity

Find out the impact of negative BOP on an economy.

3.5 FOREIGN DIRECT INVESTMENT

According to the Organisation for Economic Cooperation and Devel-
opment (OECD), FDI simply means “An investor based in one country
acquires an asset in another country with the intent to manage that
asset.” FDI is a tool to enter into foreign markets, and also the most
important source of capital for nations, especially developing nations.
Market size, growth rate of the market, exchange rates, political stabil-

NMIMS Global Access - School for Continuing Education

78  International Business

n o t e s

ity, level of corruption, availability of human capital, economic infra-

structure, taxes, incentives, economic freedom and openness are the
major determinants of FDI for a country. Usually, in FDI, production
facilities in the foreign markets have to be built. Per IMF rules, FDI
is possible only when a foreign investor acquires 10% or more equity
and voting rights in a company. FDI is a long-term investment and has
been classified into different types, as shown in Figure 3.1:

Types of FDI
Types of FDI Types of FDI

Based on Direction
Based on DirectionBased on Direction Chryssochoidis,Chryssochoidis,
Millar & Millar &
Chryssochoidis,
Dunning's Classification
Dunning's Classification
Dunning's Classification
of Funds Flow of Funds Flow of Funds Flow Clegg Classification
Clegg ClassificationClegg Classific

S
Inward ForeignInward
Direct Foreign Direct
Inward Foreign Direct Gain Access to Specific
Gain Access to Specific
Gain Access to S
Resource Seeking FDI Seeking FDI
Resource Resource Seeking FDI
Investment Investment Investment Factors of Production
Factors of Production
Factors of Prod
IM
Outward ForeignOutward Foreign Outward Foreign Gain Access to Gain Access to Gain Acces
Direct Investment
Direct Investment Direct Investment Material Seeking FDI Seeking FDI
Material Material Seeking FDIParticular Markets
Particular Markets Particular Ma

Raymond's Product
Raymond's Product
Raymond's Pr
Cycle Hypothesis
Cycle HypothesisCycle Hypot
M

Mutual Investment
Mutual Investment
Mutual Inves
N

Trade Diversionary
TradeAspect
Diversionary
Trade
Aspect
Diversiona
of Regional Integration
of Regional Integration
of Regional Inte

Figure 3.1: Classifications of FDI

In the first classification, FDI can be sub-divided into two types based
on the direction of capital flows:
‰‰ Inward FDI or positive FDI: It is based on the capital flow, this
FDI is made into the home country by foreign investors. Since the
funds enter into the country, it is taken as a positive entry in BOP.
‰‰ Outward FDI or negative FDI: It is also based on the capital flow,
this FDI is made in foreign countries by the home country inves-
tors. Since the funds leave the country, it is taken as a negative
entry in the BOP.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  79

n o t e s

Net FDI is calculated when outward FDI is netted from inward FDI.
Positive net FDI implies that capital flows into the country on a net ba-
sis, and negative net FDI implies that capital flows out of the country
on a net basis.

In the second classification given by Dunning, FDI is sub-divided into

two types:
‰‰ Resource seeking FDI: This FDI is made to get access to certain
specific factors of production like raw materials, resources, and
technical know-how, etc. A company or investor has to get access
to such resources and factors of production (if they are not avail-
able in a country) by making FDI in the country in which these
resources are available.
‰‰ Market seeking FDI: This is made to get access into new markets/

S
countries and new customers to sell goods and services. In some
cases, it may not be possible for a foreign investor to export prod-
ucts and services to another country. This is referred to as limited
tradability of goods and services. In such cases, the company sets
IM
up production facilities in foreign countries itself.

self assessment Questions

11. Who gave the definition of FDI as “An investor based in one
country acquires an asset in another country with the intent
M

to manage that asset”?

12. Net FDI can be calculated when outward FDI is netted from
inward FDI. (True/False)
N

Activity

Use the Internet or other sources, determine the impact of the move
recently taken by the Government of India to allow 100% Foreign
Direct Investment (FDI) in defence on Indian economy.

3.6 INSTRUMENTS OF PAYMENTS

Various instruments for payment are used by exporters and importers
in international trade. Payment instruments are the documents need-
ed to fulfil formalities and legal requirements of a contract between an
exporter and importer. Figure 3.2 shows these instruments:

NMIMS Global Access - School for Continuing Education

80  International Business

n o t e s

Letter of
Credit

Clean Payment Other

Payment Instruments Methods

Payment
Collection

S
Figure 3.2: Payment Options in International Trade
IM
The trade instruments are discussed below:
‰‰ Letter of credit: This is a document issued by the bank of the buy-
er promising to pay an agreed amount to the seller. In interna-
tional trade, letter of credit is the most significant instrument of
payment. The bank issues the letter of credit on the request of the
M

buyer after assessing the paying capacity of the buyer. According

to International Chamber of Commerce (ICC), letter of credit is
defined as “an arrangement, however named or described, where-
by a bank (the Issuing bank) acting at the request and on the in-
structions of a customer (the Applicant) or on its own behalf:
N

1. Is to make a payment to or to the order third party (the bene-

ficiary) or is to accept bills of exchange (drafts) drawn by the
beneficiary.
2. Authorised another bank to effect such payments or to accept
and pay such bills of exchange (draft).
3. Authorised another bank to negotiate against stipulated docu-
ments provided that the terms are complied with.”

The different types of letters of credit are discussed as follows:

‰‰ Confirmed Letter of Credit: This letter of credit is guaranteed by
the bank in addition to the issuing bank
‰‰ Unconfirmed Letter of Credit: It is the letter of credit which is not
confirmed or guaranteed by any bank.
‰‰ Transferable Letter of Credit: It is a letter of credit in which the
beneficiary is allowed to transfer the right of the letter of credit
to the third party, which is marketer or middleman in most of the
cases.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  81

n o t e s

‰‰ Revocable Letter of Credit: This letter of credit can be cancelled

or revoked by the bank which has issued it at the request of the
applicant.
‰‰ Irrevocable Letter of Credit: It is a letter of credit that cannot be
cancelled by the issuing bank without the consent of the beneficia-
ry. In addition, irrevocable letter of credit can only be cancelled if
the beneficiary has given approval on the same.
‰‰ Back-to Back Letter of Credit: In this letter of credit, one letter
of credit is opened with another letter of credit. The latter is re-
garded as the security of the former. The letter of credit which is
considered as security is also called overriding or principal credit.
‰‰ Deferred Payment of letter of Credit: It is the letter of credit in
which the issuing bank makes the payment to the beneficiary in
instalments. The timings and amount of the payment is predeter-

S
mined between both the parties.
‰‰ Revolving Letter of Credit: It is a letter of credit in which the
credit available to the beneficiary gets reinstated once the amount
IM
is utilised. The LC limit cannot exceed the overall limit of the cred-
it facility provided.

Exhibit

Steps to be Followed while Issuing the Letter of Credit

M

The buyer’s bank issues the letter of credit, also known as docu-
mentary credit, in favour of the seller or beneficiary. Below listed
steps are involved in the working of the letter of credit:
N

1. Dispatch of order to the exporter by the importer

2. Application by the importer to the buyer’s bank for issuing
the letter of credit
3. Assessment of payment credibility of the importer by the
issuing bank
4. Receipt of Advice regarding the letter of credit from exporter’s
bank
5. Delivering of goods, to the point of departure, by the exporter
6. Dispatch of the required documents, like the invoice and
insurance certificate to the exporter’s bank, by an exporter
7. Transfer of documents to the issuing bank by the exporter’s
bank
8. Receipt of immediate payment from the importer or in case
credit period was decided in the export contract, then receipt
of draft
9. Importers to produce documents to the custom at the time of
getting the goods

NMIMS Global Access - School for Continuing Education

82  International Business

n o t e s

‰‰ Clean payment: When the bank’s role is limited to clearing the

payment only, the method is referred to as clean payment method.
It is an easy method of payment for both importers and exporters.
Two types of clean payment methods are:
 Advance payment: It is made by the importer before the ex-
porter delivers goods (through TT).
 Open account: It is a method adopted when the exporter deliv-
ers goods prior to the payment by the importer. This is a risky
case for the exporter based on the assumption that the import-
er would pay on time.
‰‰ Payment collection: It is the method where in the bank handles
the commercial and financial documents given by the exporter. All
important instructions regarding the release of documents to the

S
importer are followed by the bank. Payment collection documents,
discussed below, are of two types:
 Document against payment: It is the document submitted to
IM the importer only after the payment is made.
‰‰ Document against acceptance: It is the document submitted to
the importer against the acceptance of a draft.
‰‰ Other methods: Includes:
 Direct debits: This is the simplest method of payment. The
M

account holder gives written instructions to his/her bank to

collect money directly from another bank. This method is also
called the pre-authorised debit. Pre-authorised payment is
used primarily by exporters and/or is often used in case of re-
curring payments.
N

 Payment cards: These are debit or credit cards issued by a fi-

nancial institution. Any of these cards may be presented to the
bank by the importer to make a payment to the exporter. A
certain credit limit is assigned to a credit card and an importer
can borrow to pay an amount within this limit. Debit and credit
cards transfer funds directly to and from the bank account.
 Cheque: It is a document that involves a drawer and drawee.
The drawee is the party/person who pays the required amount
on demand to the drawer or to the party specified in the cheque.
 Electronic money: It refers to money that is exchanged only
electronically. This involves the use of the Internet for money
transfer from one bank account to the other.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  83

n o t e s

self assessment Questions

13. ____________ are the documents needed to fulfil the formalities

and legal requirements of a contract between the exporter
and importer.
14. Letter of credit (LC) refers to the document which is issued
by the bank of the buyer promising to pay an agreed amount
to the seller. (True/False)

Activity

Identify various methods of payments used in international trade

and compare them with the domestic trade payment methods.

S
3.7 EXPORT IMPORT DOCUMENTATION
IM
Significant documentation processes are involved during trade be-
tween two nations. In domestic trade, a simple invoice against cus-
tomers is required and an organisation has to fulfil the requirements
of the taxation department of the own country only. However, in case
of international trade, a number of documents from different institu-
tions have to be submitted by exporters and importers. These institu-
tions are:
M

‰‰ Organisations that import or have placed the order.

‰‰ Organisations that export or sell goods/services.
‰‰ Custom control, exchange control and taxation authorities of both
N

the countries.
‰‰ Port authorities involved in loading and unloading of goods.
‰‰ Shipping and warehousing authorities looking after the transpor-
tation and storing of goods.
‰‰ Inspection agencies involved in the inspection and verification of
products.
‰‰ Banks (if involved) of countries that export and import.

A vital role is played by export-import documentation in the process

of smooth flow and movement of goods and services in international
markets. Heavy and cumbersome paper work is involved by export-
ing organisations to complete documentation. Therefore, organisa-
tions outsource this job to various agencies/ experts who prepare doc-
uments on behalf of the organisation involved and charge a fee for
it. Every document is important and missing out any document may
result in cancellation of the contract. The export import documents
can be classified into four types as shown in Figure 3.3:

NMIMS Global Access - School for Continuing Education

84  International Business

n o t e s

Customer
Management

Export
Commercial E-Export Import
Assistance
Documents Documentation
Documents

Documents
Prescribed by
Importer’s

S
Country

Figure 3.3: Export Import Documents

IM
These documents are discussed as follows:
‰‰ Regulatory documents: These are pre-shipment documents pre-
scribed by the exporting country. For an export import contract,
compliance of these documents is mandatory. These regulatory
documents are:
M

 Shipping bill
 Export application prescribed by port authorities
 Certificate of insurance payment
N

 Excise gate pass for goods clearance

‰‰ Commercial documents: These are important documents re-
quired for the transfer of ownership from the exporter to the im-
porter and are necessary to meet the rules of the export trade. The
documents include:
 Bills of exchange
 Letter of credit
 Marine insurance policy
 Bills of lading
 Shipping instructions
 Shipping order
 Inspection documents
 Certificate of origin of goods

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  85

n o t e s

Exhibit

Specimens of Important Export Import Documents

Following is the specimen of invoice:

S
IM
The specimen of bill of lading is as follows:
M
N

NMIMS Global Access - School for Continuing Education

86  International Business

n o t e s

Following is the specimen of bill of exchange:

S
IM
Specimen certificate of origin is as follows:
M
N

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  87

n o t e s

‰‰ Export assistance documents: are the documents (export-import

contract and certificate of quality control) required for getting gov-
ernment assistance, in the form of subsidies.
‰‰ Documents prescribed by importer’s country: These include
documents related to pre-inspection, quality approval, and child
labour norms. The importer insists that the exporter submit these
documents to fulfill the laws and regulations of his country.

The export documents acquire importance from the stage when the
exporter receives the order up to the final stage of receipt of payment
from the importer. These documents facilitate and regulate trade and
export operation.

Exhibit

S
Classification of Export Documents on The Basis
of Their Functions

Based on their functions, export documents can be classified into

IM
four types:
‰‰ Trade documents: Commercial bills, bills of exchange, marine
insurance policy, and letter of credit are included in this cate-
gory.
‰‰ Regulatory documents: Documents required for fulfilling the
M

rules and regulations related to export transactions, such as

foreign exchange regulations, customs formalities, and export
inspection come under this category.
‰‰ Export assistance documents: Documents related to import
N

licenses, custom duties, and credit facilities are required from

time to time for getting assistance in exports.
‰‰ Foreign documentation: Documents needed by the importer to
fulfil and satisfy the requirements of the government include
the certificate of origin, quality control certificate, and inspec-
tion certificate.

self assessment Questions

15. Regulatory documents refer to the __________ documents

prescribed by the exporting country. For an export import
contract, compliance of these documents is mandatory.
16. Write the name of any two commercial documents.
17. Commercial documents are the documents required for the
transfer of ownership from the exporter to the importer and
are necessary to meet the rules of the export trade. (True/
False)

NMIMS Global Access - School for Continuing Education

88  International Business

n o t e s

Activity

Using the Internet, find out the important documents required

while exporting goods to other countries.

3.8 EXPORT IMPORT PROCEDURES

To initiate exports and imports in India, organisations have to follow
some procedures. First, the organisation should be registered with the
Director General of Foreign Trade. The regional licensing authority
issues the registration to exporters when they forward an application
to the regional office of Directorate General of Foreign Trade with the
following documents attached:
‰‰ Individual’s profile

S
‰‰ Copy of PAN number
‰‰ Copy of sales tax registration certificate
IM
‰‰ Three passport size photographs
‰‰ Bank Certificates ensuring the credibility of exporters and import-
ers
‰‰ Prescribed government fee
M

On taking membership of the export promotion councils, the export-

ers can gain relevant information regarding trade. The councils assist
exporters in the following ways:
‰‰ Provide knowledge regarding the emerging trends and opportuni-
ties in the global market.
N

‰‰ Provide an opportunity to interact with importers and exporters of

other countries.
‰‰ Provideassistance in getting useful information regarding export
development.
‰‰ Provide help in getting advice or information on technological up-
grading

Exporters would benefit to join one of the councils related to their

field of business. The membership is subject to the rules and regula-
tions by the respective council.

To become a successful exporter, an organisation needs to follow the

steps shown in Figure 3.4:

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  89

n o t e s

Naming the
Setting the Selecting the
organisation and
organisation mode of operation
selecting the product

Selecting the
Selecting the
channels of Selecting buyers
markets
distribution

Processing an Entering into Deciding export

export order export contract pricing and costing

S
Figure 3.4: Steps for Starting an Export Business

These steps are described as follows:

IM
1. Setting the organisation: It involves a decision of forming a
partnership, a sole proprietary organisation, or a company.
2. Selecting the mode of operation: An exporter can act as a
merchant exporter or manufacturer exporter, as explained
below:
M

 Merchant exporter: Is the one who buys goods from the

manufacturer and sells them to foreign customers.
 Manufacturer exporter: Is the one who charges a commis-
sion to manufacture goods for the exporting agent (who acts
N

on behalf of the seller).

3. Naming the organisation and selecting the product: The name
of the export organisation influences it to a large extent and
therefore naming of the organisation is an important step. The
name should be attractive and meaningful. In fact, the name and
logo of the organisation should be as per the trade and should
reinforce its image in the minds of its customers. Complete and
thorough analysis should go in when selecting the product to be
exported. All governmental policies should be adhered to while
selecting the product.
4. Selecting the markets: The target markets to export products
should be selected/decided before hand keeping in mind various
factors, such as political stability, demand stability, tariff and
non-tariff barriers, language and transportation issues, etc. The
export promotion councils, Indian Institute of Foreign Trade
(IIFT), foreign embassies, and research documents provide
reliable information about the international market.

NMIMS Global Access - School for Continuing Education

90  International Business

n o t e s

5. Selecting buyers: The targeting customers for selling products

should be selected with caution with the help from export
promotion councils, international yellow pages, trade research
journals and international magazines. Organising trade
exhibitions and advertisements in newspapers and magazines
also attract customers.
6. Selecting channels of distribution: For the effective delivery of
products, opting for the best distribution channel is necessary.
Some of the international distribution channels are:
 Export consortia: Organisations form a voluntary alliance to
promote each other’s products through joint actions. In an
export consortia, co-operation comes before competition.
 Direct exports: Implies direct distribution of products to the

S
distributors or retailers in the foreign country.
 Export agent: Refers to an individual(s) or organisation (s)
who charge a commission to act as an exporter on behalf of
IM local manufacturers. It is the job of the export agent to help in
promoting the products, find new markets and locate foreign
customers.
7. Processing an export order: Processing involves verifying,
checking and carefully examining various items, products and
goods after receiving an export order. This is done by checking
M

the following details:

 Compliance to product description, such as style, colour, la-
belling, packing etc.
 Terms of payment
N

 Terms of shipment
 Inspection requirements
 Insurance requirements
8. Entering into export contract: Disputes can be avoided if an
export contract is signed between an importer and exporter. It
can take be executed through the following three types of forms:
 Performa invoice: A bill issued by the exporter to the im-
porter and has to be signed by the importer after accepting
all the terms and conditions. The signed copy is sent back to
the exporter.
 Purchase order: It is an order from the importer to the ex-
porter. The exporter, after checking the order, accepts and
signs it and sends it back to the importer.
 Letter of credit: It is a form of a contract that is issued by the
importer’s bank in favour of the exporter.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  91

n o t e s

9. Deciding export pricing and costing: Pricing variance takes

place due to various factors and differs from exporter to exporter.
Some factors that determine pricing are:
 Range of products offered
 Frequency of purchase
 Aggressiveness of marketing and investment in sales promo-
tion
 After-sales service of products
 Brand image and product differentiation
 Supply of products
 Competitor’s prices

S
Exhibit

Conditions of Export Contract

The export contract should be made with due care taking into con-
IM
sideration all the relevant details and conditions. It should include
details like:
‰‰ Product name and description, standards and specifications
‰‰ Quantity of goods
‰‰ Packing, labelling, and marking details
M

‰‰ Inspection

‰‰ Licenses and permits

‰‰ Total value of contract
N

‰‰ Taxes, duties, and charges applicable/paid

‰‰ Terms of delivery
‰‰ Period of delivery/shipment
‰‰ Terms of payment; currency or credit
‰‰ Discounts and commissions if any
‰‰ Insurance

‰‰ Documentary requirements
‰‰ Guarantee of goods

self assessment Questions

18. _____________ is the one who buys goods from the

manufacturer and sells them to foreign customers.
19. What is the name of licensing authority for exports and
imports in India?

NMIMS Global Access - School for Continuing Education

92  International Business

n o t e s

Activity

Use different sources like Internet, books, etc. to determine the dif-
ference between merchant exporter and manufacturer exporter.

DIRECTION AND QUANTUM OF

3.9
INDIA’S EXPORTS
India has emerged as one of the fastest growing economy in the world
in the last decade. India’s trade relations with other countries across
the world have developed and enriched its economy through the per-
sistent reform processes. Indian exports has increased to 28903.28 USD
Million in September 2014 from 28135.90 USD Million in September
2013. The cumulative value of exports calculated from April-Septem-

S
ber 2014 is 163701.40 USD Million. The growth rate of exports is 8.20%
in rupee terms in year 2014 .
IM
India also exports engineering goods, chemical and pharmaceutical
products, gems and jewellery, agricultural and allied products and
textiles and clothing. Main export partners of India are United Arab
Emirates (12.1 percent of the total exports), the United States (12 per-
cent), Singapore (4.5 percent), China (4.5 percent), Hong Kong (4 per-
cent) and Netherlands (3.5 percent).
M

India is planning further to expand its trade more with countries like
United States, China, Japan, and France in the future. Due to the di-
versification, there is ample scope to expand the trade where the glob-
al demand is high.
N

Exhibit

Export Import Data of India

The table depicts the export import data of India:

(Source: RBI Press Release dated 14th October, 2014) 

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  93

n o t e s

self assessment Questions

20. Who are the major exporting partners of India?

Activity

Using the internet, identify the name of India’s top international

trading partners at present.

INSTITUTIONAL SETUP FOR EXPORT

3.10
PROMOTION
To promote exports and help organisations in export processes and
documentation, various institutes have been set up by the govern-

S
ment of India. Additionally, Indian entrepreneurs are provided with
government assistance through export subsidies and export credit.
Trade policies and programs are formulated by the Ministry of Com-
merce. It has also set up various institutes for export promotion. Some
IM
of these are discussed:
‰‰ Trade Fair Authority of India: Fulfils the following objectives:
 Assists in development of new products for export expansion
 Helps sale of products by setting up showrooms in India as well
as abroad
M

 Organises fairs and exhibitions for promotion of exported

products
The journals Udyog Vyapar Patrika, Journal of Industry and Trade,
Indian Export Service Bulletin, and economic and commercial
N

news, issued by Trade Fair Authority of India, provide information

to exporters.
‰‰ Indian Institute of Foreign Trade (IIFT): It is a government body
set up to increase exports. It performs the following activities:
 Conducts area survey, commodity survey and market survey
 Organises and undertakes research associated with interna-
tional trade
 Arranges training programs to provide and enhance the use of
modern techniques of international trade
 Undertakes research on exploration of raw materials for the
packaging industry
 Keeps Indian organisations updated with on-going changes in
international field
‰‰ Export promotion councils: Non-profit organisations that exam-
ine different aspects of export promotion, like the price, market-
ing, transportation, packaging, and labelling fall into this category.
These councils:

NMIMS Global Access - School for Continuing Education

94  International Business

n o t e s

 Develop trade contracts

 Participate in trade fairs and exhibitions
 Publish information related to foreign trade
 Sponsor the foreign tours
 Conduct market surveys

India has about 10 export promotion councils working under the ad-
ministrative control of the Department of Commerce and export pro-
motion councils in the textile sector working under the administrative
control of the Ministry of Textiles.

Exhibit

S
Export Promotion Councils in India

Export promotion councils under Department of Commerce are as:

IM
1. Engineering Export Promotion Council
2. Project Exports Promotion Council of India
3. Basic Chemicals, Pharmaceuticals, and Cosmetics Export
Promotion Council
4. Chemicals and Allied Products Export Promotion Council
M

5. Council for Leather Exports

6. Sports Goods Export Promotion Council
7. Gem and Jewellery Export Promotion council
N

8. Shellac and Forest Products Export Promotion Council

9. Cashew Export Promotion Council
10. Pharmaceutical Export Promotion Council

Export promotion councils under ministry of textiles are :

1. Apparel Export Promotion Council
2. Carpet Export Promotion Council
3. Cotton Textile Export Promotion Council
4. Export Promotion Council for Handicrafts
5. Handloom Export Promotion Council
6. Indian Silk Export Promotion Council
7. Power Loom Development and Export Promotion Council
8. Synthetic and Rayon Textile Export Promotion Council
9. Wool and Woollens Export Promotion Council

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  95

n o t e s

In India, Small and Medium Enterprises are helped and assisted by

the Export promotion council for Small and Medium Enterprises
(SME) to export their products, establish contact in foreign markets,
and are also provided financial assistance for growth and expansion.
The following assistance, guidance, and support to Indian SMEs is
provided by this council:
‰‰ Marketing assistance
‰‰ Identification of overseas buyers / importers / suppliers
‰‰ Identification of investors and partners for joint ventures
‰‰ Appointment of marketing representatives / agents
‰‰ Conducting market research and market survey
‰‰ Providing of due diligence reports about overseas buyers /suppli-

S
ers
‰‰ Arranges information on sources of raw materials and quality
products at competitive cost
IM
‰‰ Sets up permanent display centres in various countries
‰‰ Arranges buyer-seller meets
‰‰ Provides exclusive platform to Indian SMEs during Indian and
overseas exhibitions and trade fairs
‰‰ Organises trade fairs / exhibitions, conclaves, conferences and
M

seminars
‰‰ Assists in taking appointment of foreign representatives

Export Credit Guarantee Corporation (ECGC)

N

It plays a significant role in export promotion. Established in 1964,

ECGC is owned by the Government of India and located in Mumbai,
Maharashtra. It provides risk coverage to exporters who export on
credit. Its main functions are:
‰‰ Toassist in providing information about the credit worthiness of
importers
‰‰ To guide exporters during difficult times
‰‰ To provide insurance protection to exporters against credit risks
‰‰ To arrange finance from financial institutions

Export houses

Export houses are trading houses that specialise in the export of prod-
ucts. An exporter can become a member of the export house if he ful-
fils the eligibility criteria of a turnover of at least `15 crores for the
three preceding years.

NMIMS Global Access - School for Continuing Education

96  International Business

n o t e s

Export houses can act as:

‰‰ International traders; exporting and importing for their own ac-
count
‰‰ Export agents; who receive commission for acting on behalf of an-
other party
‰‰ Export management organisations; handling exports and indulg-
ing in counter trade, i.e. exchanging goods with goods rather than
cash

self assessment Questions

21. Write the name of any of the two Export Promotion Councils
under the Department of Commerce in India.

S
Activity
IM
Determine the role of institutions that have been set up by the Gov-
ernment of India for export promotion in the Indian economy using
the Internet.

3.11 SUMMARY
M

‰‰ International trade involves buying and selling of goods and ser-

vices between two nations in exchange for money, which is repre-
sented in terms of currencies.
‰‰ The establishments of World Bank and International Monetary
N

Fund in the year 1944 are the major achievements of the interna-
tional monetary system.
‰‰ As per the bimetallism system, gold and silver were the two metals
that were majorly used and a country’s monetary unit was defined
in fixed amounts of gold and silver.
‰‰ The exchange rates are determined by the forces of demand and
supply in floating exchange rate system.
‰‰ Freelyfloating exchange rate system refers to the system in which
the exchange rate is determined and is dependent solely on the
market forces.
‰‰ The trade and exchange of currencies of different countries with
each other is facilitated through the financial market.
‰‰ Institutional investors, who account for 80-85% of currency trading,
are the most active participants of the foreign exchange market.
‰‰ There are various factors which determine the exchange rates like
interest rates, inflation rates, income level, and market specula-
tion etc.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  97

n o t e s

‰‰ Balance of payments is an accounting statement maintaining a re-

cord of all the economic transactions between its citizens and that
of rest of the world.
‰‰ An investor based in one country acquires an asset in another coun-
try with the intent to manage that asset. FDI is a tool to enter into
foreign markets, and also the most important source of capital for
nations, especially developing nations.
‰‰ Thevarious methods of payments are: letter of credit, clean pay-
ment, advance payment, direct debits, payment cards, etc.
‰‰ Significant
documentation processes are involved during trade
between two nations.
‰‰ Commercial Documents are important documents required for
transfer of ownership from the exporter to the importer and are

S
necessary to meet the rules of the export trade.
‰‰ To initiate export import in India an organisation must get it reg-
istered with Director General of Foreign Trade (DGFT) which is a
IM
licensing authority for export and import in India.
‰‰ India has got very health trade relations with Asian countries as
47% of India’s exports were meant for Asia and Oceania in terms
of the dollar in the year 2005-06.

key words
M

‰‰ Exchange rate: Rate at which one currency is converted into

another.
‰‰ Foreign exchange market: Worldwide market for trading cur-
N

rencies.
‰‰ Monetary transactions: Transaction involving deposits, with-
drawals, or transfers of money.
‰‰ Letter of credit: Trade document issued by the buyer’s bank
promising to pay to the seller.
‰‰ Export documentation: A process of collecting important docu-
ments by the exporter to fulfil legal requirements.
‰‰ Pre-shipment documents: Documents that are required before
shipping goods.
‰‰ Currency floating: Free flow of currency in the market without
any regulation.

3.12 DESCRIPTIVE QUESTIONS

1. What is international monetary system? Explain its evolution,
essential features and stages?

NMIMS Global Access - School for Continuing Education

98  International Business

n o t e s

2. Describe the concept of foreign exchange market and its

structure.
3. What are the determinants of exchange rates? Describe
advantages and disadvantages of the FOREX market.
4. Explain the balance of payments.
5. What is foreign direct investment (FDI)? Also explain the various
options of payment instruments in international trade.
6. What is export import documentation? Explain all the commercial
documents required in international trade in detail.
7. Which institutions are set up by the Government of India to
promote international trade? Explain.

S
3.13 ANSWERS and hints

answers for Self Assessment Questions

IM
Topic Q. No. Answers
International 1. International trade
Monetary System
2. Floating exchange rate system or
the flexible exchange rate system
M

3. $35 per ounce

4. Demand and supply
Concept of Foreign 5. True
Exchange Market
N

6. Foreign exchange market

7. True
8. B. Mortality rate
Balance of 9. Monetary transactions
Payments
10. True
Foreign Direct 11. Organisation for Economic Cooper-
Investment ation and Development (OECD)
12. False
Instruments of 13. Payment instruments
Payments
14. True
Export Import 15. Pre-shipment
Documentation
16. Bills of exchange and bills of lading

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MONETARY SYSTEM AND EXPORT DOCUMENTATION  99

n o t e s

Topic Q. No. Answers

17. True
Export Import 18. Merchant exporter
Procedures
19. Director General of Foreign Trade
(DGFT)
Direction and 20. Main export partners of India are
Quantum of India’s United Arab Emirates (12.1 percent
Exports of the total exports), the United
States (12 percent), Singapore (4.5
percent), China (4.5 percent), Hong
Kong (4 percent) and Netherlands
(3.5 percent).9.2%

S
Institutional setup 21. Engineering Export Promotion
for Export Council and Council for Leather
Promotion Exports
IM
hints for Descriptive Questions
1. International monetary system refers to a system that formulates
rules and standards to facilitate international trade. It helps and
regulates reallocation of capital and investment between nations.
Refer to Section 3.2 International Monetary System.
M

2. The trade and exchange of currencies of different countries with

each other is facilitated through the financial market. Structural
hierarchy differentiates the FOREX market from the stock
market; these divisions are based on the transaction and access
to the market. Refer to Section 3.3 Concept of Foreign Exchange
N

Market.
3. It is easy to calculate the change in the exchange rate of a
currency but difficult to find the reasons behind this change.
Various factors influence the exchange rate of a currency like
interest rate, inflation rate, income level, market speculation,
etc. Refer to Section 3.3 Concept of Foreign Exchange Market.
4. The systematic accounting statement maintaining a record of
all the monetary transactions between a nation and its citizens
and another nation and its citizens, over a fixed period of time is
referred to as BoP. Refer to Section 3.4 Balance of Payments.
5. According to OECD, FDI simply means “An investor based in
one country acquires an asset in another country with the intent
to manage that asset.” There are various payments instruments
in international trade such as, letter of credit, payment cards,
cheque, and electronic money. Refer to Section 3.5 Foreign
Direct Investment and Section 3.6 Instruments of Payments.

NMIMS Global Access - School for Continuing Education

100  International Business

n o t e s

6. Significant documentation processes are involved during trade

between two nations. Commercial documents include bills
of exchange, bills of lading, letter of credit, marine insurance
policy, shipping order etc. Refer to Section 3.7 Export Import
Documentation.
7. To promote exports and help organisations in export processes
and documentation, various institutes have been set up by the
Government of India, like Trade Fair Authority of India, Indian
Institute of Foreign Trade (IIFT), Export Promotion Councils etc.
Refer to Section 3.10 Institutional Setup for Export Promotion.

3.14 SUGGESTED READING FOR REFERENCE

‰‰ Bade, D., & Johnson, T. Export/import procedures and documen-

S
tation (1st ed.).
‰‰ Paul, J. (2011). International business (1st ed.). New Delhi: PHI
Learning.
IM
‰‰ Solomon, R. (1982). The international monetary system, 1945-
1981 (1st ed.). New York: Harper & Row.

E-REFERENCES

‰‰ (2014). Retrieved 17 October 2014, from http://www.imf.org/exter-

M

nal/pubs/ft/wp/2013/wp13224.pdf
‰‰ Agriexchange.apeda.gov.in,.
(2014). EXPORT DOCUMENTATION
AND PROCEDURES. Retrieved 17 October 2014, from http://agri-
exchange.apeda.gov.in/Ready%20Reckoner/EXPORT_DOCU-
N

MENTATION.aspx
‰‰ D’Arista, J. (2009). The evolving international monetary sys-
tem.  Cambridge Journal Of Economics,33(4), 633-652. doi:10.1093/
cje/bep027
‰‰ HubPages,. (2014). Major Documents needed in Connection with
Export Transaction. Retrieved 17 October 2014, from http://dilip-
chandra12.hubpages.com/hub/Major-Documents-needed-in-Con-
nection-with-Export-Transaction
‰‰ Starfishfx.com,. (2014). Lesson 6 –Key Factors Affecting Exchange
Rate | Starfishfx. Retrieved 17 October 2014, from http://starfishfx.
com/en/learn-forex/learn-forex-lesson-6/

NMIMS Global Access - School for Continuing Education

 C h a
4 p t e r

INTERNATIONAL BUSINESS ENVIRONMENT

CONTENTS

S
4.1 Introduction
4.2 Concept of International Business Environment
IM
Self Assessment Questions
Activity
4.3 Forces of International Micro Environment
4.3.1 Customers
4.3.2 Competitors
4.3.3 Media
M

4.3.4 Suppliers
4.3.5 Marketing Intermediaries
4.3.6 Public
Self Assessment Questions
N

Activity
4.4 Forces of International Macro Environment
4.4.1 Demographic Environment
4.4.2 Economic Environment
4.4.3 Political and Legal Environment
4.4.4 Socio-cultural Environment
4.4.5 Technological Environment
4.4.6 Natural Environment
4.4.7 Competitive Environment
Self Assessment Questions
Activity
4.5 Risks in International Business Environment
Self Assessment Questions
Activity

NMIMS Global Access - School for Continuing Education

102  International Business

CONTENTS

4.6 Role of Intellectual Property Law in International Business

4.6.1 Intellectual Property and International Business
Self Assessment Questions
Activity
4.7 Summary
4.8 Descriptive Questions
4.9 Answers and Hints
4.10 Suggested Reading for Reference

S
IM
M
N

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL BUSINESS ENVIRONMENT  103

Introductory Caselet
n o t e s

ENVIRONMENT ANALYSIS OF TESCO

With its headquarters in the UK, Tesco, is the second largest retail
organisation in the world in terms of profit and the third largest
retailer in the world (after Walmart and Carrefour), in terms of
revenue. Tesco is the market leader in the UK and enjoys as much
as 30% of the market share of the total retail industry, with more
than 5400 stores, and strength of more than 47000 employees. Tes-
co deals in the retailing of diversified products such as food items,
beverages, books, garments, furniture, electronic appliances, pet-
rol and financial services.

Selling its own branded products is one of the most successful

strategies of this retail giant and accounts for more than 50% of

S
the company’s total sales. Retail, being a very competitive indus-
try, the organisation pays special attention to external environ-
ment and industry analysis.
IM
External Environment Analysis
‰‰ Political environment: With presence in more than 14 coun-
tries across Europe, Asia and North-America, Tesco is a highly
diversified organisation. Therefore, its working is hugely af-
fected by the government policies of these countries, as well as
that of the European Union.
M

‰‰ Economic environment: The sales and profit figures of Tes-

co are conjointly affected by economic factors. A significant
chunk of the organisation’s total sales is dependent on the UK
market. Therefore, in case of a slowdown or holdup, in the UK
N

retail industry Tesco’s revenue can be affected considerably.

‰‰ Socio-cultural environment: Various studies suggest that
customers and clients in the UK now prefer one-stop shop-
ping and bulk shopping. As a result, Tesco has been stimulated
to sell diversified products at one place.
‰‰ Technological environment: Technological changes and in-
ventions have so far been successfully done by Tesco, resulting
in a more convenient and personalised shopping experience
for customers. There are various technologies used by Tes-
co, such as intelligent scale, wireless devices, radio frequency
identification (RFID), electronic point of sale (EPOS) and elec-
tronic funds transfer system (EFTS).
‰‰ Legal environment: Legal factors prevailing in the respective
countries of operation have also affected the performance and
activities of Tesco. Tesco has adopted and follows the strategy

NMIMS Global Access - School for Continuing Education

104  International Business

Introductory Caselet
n o t e s

of driving out competition from the industry. As a result, the

organisation invariably comes under the scanner of monopoly
and competition laws of different countries.
‰‰ Ecological environment: Tesco’s commitment and objective
towards minimising environmental damage are achieved by
minimising the wastage of natural resources, recycling and
promotion of environmental friendly products. The organisa-
tion recycles 70% of its store waste, consisting predominantly
of plastic materials and cardboards.

S
IM
M
N

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL BUSINESS ENVIRONMENT  105

n o t e s

learning objectives

After completing this chapter, you will be able to:

>> Explain the concept of international business environment
>> Describe the forces of international micro environment
>> Discuss the forces of international macro environment
>> Explain the risks in international business environment
>> Describe the role of intellectual property law, such as copy-
rights, patents and trademarks in international business 

4.1 INTRODUCTION

S
In the previous chapter, you have studied about the working of inter-
national monetary system in the global business environment. Under-
standing the functioning of the international monetary system con-
stitutes an important part for the success of international business.
IM
Apart from this, another driving force for the success of an interna-
tional business is the understanding of the international business en-
vironment.

International business environment encompasses various factors,

such as political factors, social factors, cultural factors and economic
factors. It affects the business strategies and decisions of an organ-
M

isation in a global scenario. Thus, it is of utmost importance for an

organisation to have a clear understanding of international business
environment before making any foreign trade related decisions.
N

It may be very surprising to know that how these factors affect the
business strategies of an organisation. Let us take a real-life scenar-
io to know why an organisation, entering a foreign market, needs to
study the factors affecting international business environment. Kel-
logg’s entered India to introduce corn, wheat and basmati rice flakes
in 1994. It marketed and traded its products as a healthy breakfast
option but its business plans failed to attract the attention of Indian
consumers. This happened because the Indians were more inclined
towards taking traditional and cultural dishes, such as paranthans,
poha, and idly in breakfast. Moreover, corn flakes offered by Kellogg’s
were meant to be used with cold milk. Indian did not like the taste
because they generally use boiled milk. Consequently, initial products
offered by Kellogg’s in the Indian market were ineffective because the
organisation failed to adapt products according to the Indian environ-
ment and culture. Thus, it indicates that it is very important for an
organisation to analyse factors affecting the business environment of
a country before entering that country. It is possible with the help of
research and comprehensive study of the international business envi-
ronment.

NMIMS Global Access - School for Continuing Education

106  International Business

n o t e s

International business research and study of environment aim at

identifying the requirements of consumers in the foreign market. It
also enables an organisation to be aware of the type and size of the for-
eign market and level of competition in the foreign market. It helps an
organisation in deciding whether to enter a particular market/country
or not. International business environment also benefits an organisa-
tion in accessing the profitability of a potential business. Next time in
this chapter, you will study about international business environment
in detail.

CONCEPT OF INTERNATIONAL
4.2
BUSINESS ENVIRONMENT
International business environment comprises all controllable and

S
non-controllable factors that influence the organisation’s decisions
related to business activities, directly or indirectly at an international
level. International business environment can be broadly divided into
the internal and external environment.
IM
Internal environment encompasses an organisation’s objectives,
strengths, weaknesses, behaviour, and competencies. On the other
hand, external environment involves social factors, technological fac-
tors, economic factors, etc. External environment is further divided
into micro environment and macro environment, which are discussed
later in the chapter.
M

Analysing business environment helps organisations to predict the

changes that may take place in the future in the international mar-
ket. Thus, constant examination of external and internal environment
should be done by organisations entering into international business.
N

This helps organisations to identify possible threats or opportunities

for their businesses.

self assessment Questions

1. International business environment can be broadly divided

into internal and _________ resources.
2. Constant examination of internal and external environment
is to be done by organisations entering into international
business. (True/False)

Activity

Using the Internet, find out how the international business envi-
ronment benefits an organisation.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL BUSINESS ENVIRONMENT  107

n o t e s

FORCES OF INTERNATIONAL
4.3
MICRO ENVIRONMENT
Micro environment is closely linked to an organisation and affects its
activities directly. Figure 4.1 shows various forces that influence the
international micro environment:

Customers

Public Competitions

S
Forces of
International
IM
Micro-environment

Market
Media
Intermediaries
M

Suppliers
N

Figure 4.1: Forces of International Micro Environment

Let us discuss these forces of international micro-environment in detail.

4.3.1 CUSTOMERS

Customers are the buyers or users of products that help an organi-

sation to earn revenue. Thus, customer satisfaction is the main goal
of every organisation. This can be done by taking care of needs and
requirements of customers. Apart from addressing the needs and re-
quirements of customers, the organisation needs to analyse the char-
acteristics of the target market. ‘Customer is always right’ or ‘Custom-
er is king’, such catch phrases, highlight the importance of customers
for an organisation’s success. Understanding the behaviour and na-
ture of customers is integral to customer satisfaction and necessary
for an organisation if it wants to capture the market share. This fact
is true irrespective of whether an organisation is operating globally or
domestically.

NMIMS Global Access - School for Continuing Education

108  International Business

n o t e s

The most significant role in running the business is played by custom-

ers. They can be classified into the following types:
‰‰ Loyal customers: These customers are completely satisfied with
the products of an organisation and promote more sales through
recommendations thus increasing the profit of the organisation.
Loyal customers, though less in number, frequently purchase
products from the same organisation. Therefore, to keep in touch
with loyal customers and interact with them on a regular basis be-
comes crucial for an organisation. These customers expect a polite
and respectful response from the organisation.
‰‰ Discount customers: These customers buy products only when
discounts are offered. This set of customers buy low cost products
only; thus, more the discounts, the more they buy. These customers
generally relate to small industries that focus on low cost products.

S
‰‰ Impulsive customers: These customers are ones who buy what-
ever catches their fancy. Such customers are difficult to convince
as their buying decision is ruled by impulsiveness. Handling such
IM
customers becomes a challenging task as they want to see and se-
lect from all the products that the shopkeeper has to offer. The
organisation that in convincing impulsive customers earns high
profits.
‰‰ Need-based customers: These customers buy only those specific
products they need. Need-based customers are regular buyers.
M

‰‰ Wandering customers: These customers are the least profitable

for an organisation as they only investigate the features of various
similar products in the market but do not buy any of them. Most
of the times, these customers themselves do not know what to buy.
N

4.3.2 COMPETITORS

When various organisations offer similar products, competition oc-

curs. It is a situation where organisations try to gain market share by
adopting various business strategies. Competition helps in determin-
ing a reasonable price of products in the market.

Persuasion tactics are used by competitors to persuade organisations

to differentiate their products to attract more customers. To maintain
a secure position in the market, organisations always try to provide
better products than that of their competitors. Organisations conduct
competitor analysis to know the strategies of their competitors and
gain market share. The various types of competitive market struc-
tures are as follows:
‰‰ Monopoly: Such type of competition takes place when an organi-
sation faces no competition and has full control over the supply of
a product.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL BUSINESS ENVIRONMENT  109

n o t e s

‰‰ Oligopoly: This competition takes place when the number of com-

petitors selling similar products is less in the market.
‰‰ Monopolistic competition: This competition takes place when a
significant number of organisations/sellers sell a similar product.
The differentiating factors between products are quality, packag-
ing and appearance.
‰‰ Perfect competition: This competition exists when the same prod-
uct is sold by a large number of sellers/organisations. However,
such type of situation is not realistic. The price of the product can-
not be influenced in perfect competition.

4.3.3 MEDIA

Media is the most influential communication tool that helps organisa-

S
tions in promoting their products at the right time to the right audi-
ence. It gives customers ready and detailed information about differ-
ent products and services available in the market. Media also plays a
constructive role in the society as television channels and newspapers
IM
bring up social issues in the public glare.

Media provides information about an organisation’s activities, products

and financial position to its stakeholders. It also keeps the organisation
informed about customers’ feedback on various products and services.
The goodwill and position of an organisation in the market can be in-
M

fluenced by positive or negative media response about its products or

services. The following are the important functions of media:
‰‰ To monitor and evaluate government policies and programs
‰‰ To provide information about the action and reaction of an event
N

or situation in the market

‰‰ To inspire change by highlighting success stories for motivating
people
‰‰ To give voice to the helpless

4.3.4 SUPPLIERS

Suppliers are an important force of international micro environment.

They provide raw materials for the production of goods and services.
A business would fail to deliver finished goods to its customers in the
absence of suppliers. Suppliers, therefore, have a direct influence on
the profits of businesses as the final price of the product is determined
by the price of raw material. Organisations keep in touch with suppli-
ers on a regular basis regarding the supply shortages and change in
the price of inputs.

NMIMS Global Access - School for Continuing Education

110  International Business

n o t e s

4.3.5  MARKETING INTERMEDIARIES

The organisation-customer link is made by marketing intermediaries.

They help in promotion, sales and distribution of products to custom-
ers. Marketing intermediaries include:
‰‰ Resellers: They purchase products from producers and sell them
to customers at a margin, thus helping producers to gain profits.
Wholesalers and retailers are examples of resellers.
‰‰ Distribution firms: These are organisations that store goods until
they are delivered to customers. These organisations also ensure
that the right products are distributed to the right customers.
‰‰ Marketing agencies: They promote products in the market, like
marketing research and advertising firms.
‰‰ Financial intermediaries: These are organisations that provide

S
finance for business transactions for example, banks, credit com-
panies and insurance companies.
IM
The organisations must be careful regarding their intermediaries to
analyse the changes as these might come as a threat or an opportunity
for the organisation.

4.3.6 PUBLIC

Public is the group of common man that takes an interest in the busi-
M

nesses and policies of an organisation. Organisations keep in mind

their respective public while preparing their marketing plans. The dif-
ferent types of public are:
‰‰ Financial public: It helps in procuring funds to carry on business
N

activities.
‰‰ Government public: It takes due care in the development of an
organisation and its effect on the economy.
‰‰ Media public: It helps organisations to analyse their position with
respect to their competitors through news and editorial opinion.
‰‰ Local public: It includes neighbourhood residents and community
organisations.
‰‰ General public: It helps to make an organisation aware of custom-
ers’ attitudes towards the product
‰‰ Internal public: It includes the board of directors, managers and
employees of an organisation.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL BUSINESS ENVIRONMENT  111

n o t e s

self assessment Questions

3. The environment that is closely linked to the organisation and

affects its activities directly is known as _______ environment.
4. Customers are the buyers of products and help an organisation
to earn revenue. (True/False)
5. Which of the following is not among the forces of international
micro environment?
a. Customers b. Suppliers
c. Government Policies d. Media

Activity

S
Using the Internet, find out what role customers play in the micro
environment of an international business.
IM
FORCES OF INTERNATIONAL MACRO
4.4
ENVIRONMENT
Macro environment involves forces that are beyond the control of an
organisation. These forces have a significant influence on the activ-
ities of an organisation. To keep themselves updated, organisations
M

monitor these factors constantly as they can be instrumental in bring-

ing opportunities or threats for organisations. Figure 4.2 shows some
of the important forces present in international macro environment:
N

Demographic environment

Economic environment
Forces of international
macro-environment

Political and legal environment

Socio-cultural environment

Technological environment

Natural environment

Competitive environment

Figure 4.2: Forces of International Macro Environment

Let us discuss these forces of international macro-environment.

NMIMS Global Access - School for Continuing Education

112  International Business

n o t e s

4.4.1  DEMOGRAPHIC ENVIRONMENT

Demographic environment refers to the scientific study of human pop-

ulation with respect to elements called demographic variables. These
variables may include age, gender, education, occupation, income and
location. Before marketing a product, a marketer collects information
about the type of the market where he/she wishes to introduce prod-
ucts. This helps in gaining knowledge of whether a particular market
needs the product and/or is ready to accept it or not. Some demo-
graphic trends are discussed as follows:
‰‰ Increase in education
‰‰ Change in the age structure of population
‰‰ Increase in diversity
‰‰ Movement of people from rural to urban and to metropolitan cities

S
‰‰ Change in family structures-joint, nuclear, single or married
IM
4.4.2 ECONOMIC ENVIRONMENT

The cost structure of an organisation and the purchasing power of

customers are affected by the economic environment. The purchasing
power of customers is based on the current income, price of goods,
credit availability and savings. A nation’s high economic growth leads
to high employment and subsequently high income, which in turn in-
M

creases the purchasing power of customers. Organisational activities

are also affected by economic factors as their marketing plans and
programs are influenced by interest rates, money supply, and price
level. Recession is an economic activity that may affect the price and
promotion policies of an organisation. Change in the purchasing pat-
N

tern of customers may be due to increasing inflation and may thus

eliminate or reduce the demand for a product.

Figure 4.3 depicts economic factors that affect the economic environ-
ment of an organisation:

Inflation
Economic environment

Customer income

Exchange rate

Monetary and fiscal policy

Unemployment

Interest rates

Figure 4.3: Economic Environment

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL BUSINESS ENVIRONMENT  113

n o t e s

These factors are discussed as follows:

‰‰ Inflation: It controls customer spending. For example, demand for
cars falls with high petrol prices.
‰‰ Customer income: It is the regulator of the buying behaviour of a
customer. Change in the customer’s income leads to a change in
the spending patterns for products.
‰‰ Exchange rate: It involves the imports and exports of a country.
Fluctuations in exchange rates may make imports or exports ex-
pensive or cheaper.
‰‰ Monetary and fiscal policy: These policies have an effect on all or-
ganisations. Stabilisation in an economy is achieved on the basis of
monetary policies such as controlling the interest rates and money
supply in an economy, whereas fiscal policy aims at government

S
spending by means of tax collection from customers.
‰‰ Unemployment: It affects the purchasing power of an individual
as it leads to no income state.
IM
‰‰ Interest rates: They determine an organisation’s borrowing activ-
ities. For example, businesses may cut down their important activ-
ities due to an increase in interest rates for loan.

4.4.3  POLITICAL AND LEGAL ENVIRONMENT

M

Government agencies, laws, and influential groups that limit organi-

sations and individuals constitute the political and legal environment.
Each marketing activity is controlled by various governmental laws.
It is mandatory for organisations to follow rules and regulations for
successful completion of business activities and achieve their objec-
N

tives. Government does not consider ignorance of laws as an excuse.

International marketers and organisations should update themselves
and be aware of these laws so that they can formulate their strategies
accordingly.

The political situation of a country also impacts its economic environ-

ment. The stability or instability has a strong influence on the pace
and direction of economic growth of a country. This is determined by
the development and growth of organisations operating in the coun-
try. For example, in the regions of Uttar Pradesh, India, Reliance Fresh
had to shut down its stores because of a lack of political support.

The following legislations affect the marketing activities of organisa-

tions:
‰‰ Anti-pollution laws: These laws affect the production and manu-
facturing of certain products.
‰‰ Customer legislation: It protects customers’ interest through con-
sumer forums.

NMIMS Global Access - School for Continuing Education

114  International Business

n o t e s

These legislations also prevent unfair trade practices by organisations,

such as price discrimination and misleading advertisements. Political
environment may either create greater opportunities or affect busi-
ness activities negatively.

Political and legal environment has led to:

‰‰ Development of a framework for business laws: It is provided
with the following objectives:
 To protect organisations from unfair competition
 To safeguard customers from unfair business practices
 To safeguard interests of the society
‰‰ Growth of social interest groups: It strengthens the buyers’
rights and powers in relation to sellers. For example, as per the
Consumer Protection Act, 1986, six major rights of consumers

S
have been recognised. They are basic needs, safety, information,
choice, redressal and consumer education. In addition to this, var-
ious consumer groups take voluntary and active participation in
IM
addressing consumer problems and grievances and bring them to
the government’s notice. Thus, marketers are forced to work with-
in these laws for the welfare of the society by such social groups.
‰‰ Consumer protection legislation: It mandates the rules for the
packaging of food products such as marking all vegetarian food
products with a green dot and non-vegetarian food products with
M

a red dot.

4.4.4 SOCIO-CULTURAL ENVIRONMENT

Forces, such as a society’s basic values, attitudes, perceptions and be-

N

haviour, form the socio-cultural environment. These forces explain

the characteristics of a society and may act as an indication of an op-
portunity or a threat to an organisation. For example, fast changing
lifestyles and women contributing to the earnings of the family has
led to less shopping hours. Thus, leading to the development of shop-
ping malls and supermarkets, where one can buy everything under
one roof and save time. Different views of people that affect the socio-
cultural environment are listed in Figure 4.4:

Views about Views about

themselves society

Different views
Views about affecting social Views about
organisations environment nature

Figure 4.4: Different Views of People Affecting Social Environment

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL BUSINESS ENVIRONMENT  115

n o t e s

These views are discussed in detail as follows:

‰‰ Views about themselves: These are peoples opinion about them-
selves. Priorities differ from person to person. For example, health
conscious people prefer to spend their time in exercising, yoga,
jogging and indulging in health activities. They prefer to buy
healthy products and thus they contribute to the benefits of the
health and nutrition industry. Adventurous, fun loving and out-
going people, benefit the tourism industry. Thus, recognising the
individuals’ views about themselves helps marketers before mar-
keting a product.
‰‰ Views about society: These are the views of people about other
people in the society. The focus of people has now shifted from
‘me’ to ‘we’. Today, good society and relations are sought by peo-
ple. Thus, marketers should associate their products with the wel-

S
fare of the society.
‰‰ Views about organisations: These are views and opinion of the
people about an organisation. Organisations indulging in social ac-
IM
tivities have a better reputation in the market increases and peo-
ple have a positive approach towards them.
‰‰ Views about nature: These views prompt people to follow a healthy
lifestyle. The growing trend towards conservation of natural re-
sources has led to this change. The latest example of such shift is
the use of jute bags instead of polythene or paper bags. Therefore,
M

marketers have to shift focus to nature friendly and biodegradable

products.

The values, attitudes and aspirations of people show considerable vari-

ation across different customer groups and religions. Today, children
N

too influence the buying behaviour in households by buying products,

like biscuits and goodies, computers, toothpastes, toys, etc.

Social changes and trends may work in favour or against the growth
of an organisation. Thus, awareness about the changing trends in the
society helps marketers develop and update plans and policies.

4.4.5 TECHNOLOGICAL ENVIRONMENT

Technology refers to tools or techniques used to perform various tasks

be it producing goods or services or solving a problem. Increase in
knowledge, improvement in skills or introduction of some new and
improved methods to enhance people’s ability to perform a given task
are the factors that attribute to technological innovation.

The rapid pace of technology change creates new opportunities for

marketers to acquire the market share. Today, their hi-tech products
like computers, mobiles, and laptops are bringing profits to some or-
ganisations. The eating habits and working style of people has changed
due to the influence of technology. Thus, knowledge of the latest ad-

NMIMS Global Access - School for Continuing Education

116  International Business

n o t e s

vancement in technology is necessary for marketers to introduce new

products in the market. However, organisations need to ensure that
technologies contribute to the growth of the economy and have no
negative effect on the society.

4.4.6 NATURAL ENVIRONMENT

Natural resources (raw materials) of a country influence natural en-

vironment that enables an organisation to produce output/goods. The
condition of the natural environment is deteriorating day-by-day and
has become a global problem. This affects the marketing strategies of
organisations. For instance, in a region witnessing high rainfall dis-
tribution of products may be hampered. Figure 4.5 explains factors
affecting the natural environment:

S
Factors affecting natural environment

Shortage of natural resources

IM
Weather conditions

Government interventions
M

Pollution
N

Figure 4.5: Factors Affecting Natural Environment

These factors are explained in detail as follows:

‰‰ Shortage of natural resources: It refers to the scarcity of resourc-
es, such as water, oil or coal, needed for the production of goods
and services. These are used and consumed by every organisation
during the production process leading to depletion of natural re-
sources. Therefore, judicious use of natural resources is advisable
to organisations.
‰‰ Weather conditions: It is another vital factor that affects the
marketing activities of an organisation. Suppose an organisation
markets products like water coolers, air conditioners, and cotton
clothes, during the summer season in India, wishes to enter a Eu-
ropean market. The organisation needs to modify its products and
marketing strategies to suit the requirement of European coun-
tries. As when there is summer in India, Europe enjoys the winter
season. Thus, the weather of a region affects the marketing strate-
gies of an organisation.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL BUSINESS ENVIRONMENT  117

n o t e s

‰‰ Government interventions: Rules and regulations by the gov-

ernment vary from country to country. Restriction on import of
goods that causes ecological damage has been imposed by some
countries. For example, the US has banned the import of shrimp
from India. Thus, government intervention forces organisations to
adopt environment friendly ways and strategies.
‰‰ Pollution: Air, water and noise pollution lead to environmental
degradation. Realising the ill effects of pollution, marketers have
now started using environment friendly products, like replacing
polythene bags with paper and jute bags. For example, plastic bags
were banned in Delhi in January 2009.

4.4.7  COMPETITIVE ENVIRONMENT

High competition is a characteristic of every industry; therefore, to

S
sustain in the market, every organisation formulates a competitive
strategy. Some organisations acknowledge competitors within the in-
dustry only and do not bother about competitors from other indus-
IM
tries. It is important to conduct industry analysis to find and study all
the aspects of external environment. The five forces model by Por-
ter analyses the industry in which a particular organisation operates.
Figure 4.6 explains the Porter’s five forces model:
M

Threat of substitutes

Threat of new entrants

Rivalry within
the Industry

Industry rivalry

Bargaining power of suppliers

Bargaining power of buyers

Figure 4.6: Porter’s Five Forces Model

The Porter’s five forces model is discussed as follows:

‰‰ Threat of substitutes: It refers to ‘close competition’ within the
industry by the way of substitutes or alternatives of a product
available in the market. Examples of substitutes are tea and cof-
fee bulbs and tube lights. Pricing strategies have to be formulated
according to the presence or absence of substitutes in an industry.
‰‰ Threat of new entrants: It refers to the entry of new players/com-
petitors in the industry. A profitable industry attracts new entrants
leading to lesser sales volume and revenue for an existing organ-

NMIMS Global Access - School for Continuing Education

118  International Business

n o t e s

isation. High investment requirements, government policies, lack

of access to raw materials and lack of experience are certain fac-
tors that act as de-motivators for new entrants. Nevertheless, new
entrants may enter the market with higher and better quality
products at low prices. Existing organisations need to identify and
monitor the strategies of new entrants.
‰‰ Industry rivalry: It implies the degree of competition in the mar-
ket and is the most powerful competitive force leading to industrial
rivalry. Some major factor that contribute to Industry rivalry are:
 Slow industry growth
 High raw material cost
 More competitors

S
 Lack of differentiation in products
 Exit barriers restricting organisations from leaving
IM
 Consumers switching brands easily
‰‰ Bargaining power of suppliers: It acts as a driving force of compe-
tition in an industry. The bargaining power of the suppliers of raw
materials may be high or low. High bargaining power of suppliers
may raise the cost of raw materials for an organisation. The forces
adding to the strength of the suppliers are:
M

 Few suppliers in the market

 Unity in suppliers
 Unique and easily available products of suppliers
N

 High switching cost for the buyer

 Importance of suppliers for producers
‰‰ Bargaining power of buyers: It refers to the degree to which buy-
ers can influence the price of products. High bargaining power of
buyers puts pressure on an organisation to sell its products at a
low price. Low bargaining power, on the other hand, enables the
organisation to pass the cost to buyers. Forces that makes buyers
strong are as follows:
 Purchases made in bulk
 Less number of buyers of the product
 Low switching cost for buyers
 Standard and undifferentiated products purchased by buyers

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL BUSINESS ENVIRONMENT  119

n o t e s

self assessment Questions

6. The forces beyond the control of an organisation are referred

to as ______ environment.
7. Which one of the following economic factors does not affect
the economic environment?
a. Inflation
b. Media
c. Interest rate
d. Exchange rate
8. Pollution and weather conditions are not among the factors of
natural environment. (True/False)

S
9. Forces, such as a society’s basic values, attitudes,
perception,and behaviour form the _______________.
IM
Activity

How does the political and legal environment affect an interna-

tional business? Discuss with your friends.
M

RISKS IN INTERNATIONAL BUSINESS

4.5
ENVIRONMENT
To expand in foreign countries, an organisation has to bear various
N

risks to implement its strategies. There are mainly two types of risks
in international environment, which are shown in Figure 4.7:

International
risks

Political Economic
risks risks

Figure4.7: Types of International Risks

These risks are explained as follows:

‰‰ Politicalrisk: The risk due to an unstable government is a major
concern for organisations starting operations in other countries.

NMIMS Global Access - School for Continuing Education

120  International Business

n o t e s

This is because political instability may affect their investments.

Foreign organisations should try to avoid countries with high-risk
of unstable government and make limited investments in such
countries.
‰‰ Economic risk: It refers to risks of fluctuating foreign exchange,
inflation, and per capita income of countries. High economic risks
are faced by organisations in countries where the government and
economic policies change quite frequently.

Apart from these risks, an organisation may face management prob-

lems, which are listed in Figure 4.8:

S
Co-ordination
problems
IM
Management
Problems
M

Trade Cultural
barriers differences
N

Figure 4.8: International Management Problems

These international management problems are discussed as follows:

‰‰ Coordination problems: These problems arise due to large geo-
graphical distances between countries.
‰‰ Trade barriers: Tariffs and import and export licenses are barri-
ers that complicate the implementation of international strategy
by organisations. Rise in the price of products can be attributed to
these barriers.
‰‰ Cultural differences: These are an important element for the suc-
cess or failure of an organisation. Cultural differences can be re-
flected in religion, language, attitudes and values of a nation and
may hinder the progress of the organisation.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL BUSINESS ENVIRONMENT  121

n o t e s

self assessment Questions

10. There are two basic types of risks in international business

environment, such as political risks and ___________.
11. Coordination problems, trade barriers and cultural differences
are known as management problems. (True/False)

Activity

As an entrepreneur, what major risks do you think will you bear

while expanding your business globally?

ROLE OF INTELLECTUAL PROPERTY

4.6

S
LAW IN INTERNATIONAL BUSINESS
Unique creation of human intellect that requires imagination and cre-
ativity is termed as Intellectual Property (IP). It can be divided into
IM
two categories, namely, industrial property and copyright. The for-
mer includes commercial names, trademarks, inventions (patents),
layout and designs and geographic indications while the latter is re-
lated to artistic works and literary creations, such as novels, music,
poems, photographs, drawings, paintings, and symbols.
M

To promote creativity and innovation, several IP laws have been

formed granting exclusive rights to the owners of artistic works. These
laws help owners to safeguard their intellectual properties.

Creative, artistic and innovative works of an individual or enterprise

N

are intangible assets. An entrepreneur should understand the impor-

tance of his/her IP and take responsibility to safeguard it. Patents,
trademarks, copyrights and trade secrets are the most common types
of IPs which are explained as follows:
‰‰ Patent: A patent is granted for new inventions and is an exclusive
component of IP. It is granted to individuals, who discover machines,
new processes and technologies for inventions that are novel and
can be applied in industries. An individual who has been granted
a patent gets special rights to prevent others to make, sell, or dis-
tribute his/her invention. The validity of a patent is generally for
20 years from the date of filing an application. The Department of
Industrial Policy & Promotion, Ministry of Commerce & Industry,
and the Government of India perform statuary duties related to the
granting of patents. In respect to patents, India is also a member of:
 World Intellectual Property Organisation (WIPO)

NMIMS Global Access - School for Continuing Education

122  International Business

n o t e s

 Trade Related Aspects of Intellectual Property Rights (TRIPS)

 Patent Cooperation Treaty (PCT)
 Budapest Treaty
In India, there are five types of patent applications:
 Ordinary applications
 Convention patent applications
 PCT International and National Application
 Application of addition
 Divisional applications
‰‰ Trademark: It refers to any word, name, symbol(s) or device to
identify the source or origin of a product or service. It acts as a
distinguishing feature of one particular product from the other.

S
Brands are recognised and identified because of their unique logo
(symbol), name, sign or any other feature. Nowadays, most organ-
isations provide a 2-D or 3-D shape to their brand name which dif-
ferentiates their product from other available products in the mar-
IM
ket. The latest amendment has introduced the concept of service
mark, used in the service sector, which includes hotels, laundry,
education, airlines and IT-enabled services. The Trade and Mer-
chandise Marks Act 1958 has been replaced with the new Trade-
marks Act, 1999, according to which:
 Service marks registration is allowed in addition to trademarks
M

 Single application should be used for different categories of

goods and/or services
 Trademark registration is for a 10 year term
N

 Extension of application of convention countries

The following are the functions of a trademark:
 The origin and source of goods or services can be identified.
 Assurance of unaltered quality of goods or services.
 It acts as an advertisement for goods and services.
 The image or logo helps to differentiate the product from other
available brands in the market.
‰‰ Copyright: Rights to owners of innovative works related to arts,
plays, music, lectures, software and photographs are granted
through copyright, denoted with the symbol of ©. It is valid for the
entire lifetime of the owner and thereafter for a minimum of 50
years after the death of the owner. In India, the Ministry of Human
Resource Development takes care of the issues related to copy-
right. The Indian Copyright Law is very sound and is entirely well-
matched with TRIPS. With amendments in Copyright Act, 1999,
the Indian Copyright Law has become one of the significant and
contemporary laws across the world. India’s vast cultural heritage

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL BUSINESS ENVIRONMENT  123

n o t e s

is protected within the framework of copyright legislation called

the protection of neighboring rights. Foreign activities are also
copyright protected in India. Table 4.1 lists the materials under
different categories that can be guarded under copyright:

Table 4.1: Protection of Materials

under Copyright
Category Examples
Literary works Books, speeches, advertising copy, employ-
ee manual, games, computer programs
Musical compositions Musical score, CD, DVD, Cassette tape,
MP3 files
Dramatic activities Play, movies, newscast, TV shows
Pantomimes and choreo- Gestures and facial expressions, dance
graphic work movements, mime works

S
Graphic and sculptural Photographs, prints, maps, cartoons, fab-
activities rics, games, posters, toys
Additional activities Audio-visual works, sound recording, ar-
IM
chitectural work, motion picture

‰‰ Trade secrets: North American Free Trade Agreement (NAFTA)

defines trade secrets as “information having commercial value,
which is not in the public domain and for which reasonable steps
have been taken to maintain its secrets”.
M

Present competitive environment demands that organisations

make sure that their business processes and technological infor-
mation is protected from competitors. Leakage of confidential
business information may lead to heavy losses to an organisation;
therefore, it needs to protect business information legally. Any
N

data or information relating to the business processes of an or-

ganisation is called trade secret. This information is confidential
and not to be made public. It is kept secret by the organisation.
Trade secret may be a business plan, a formula, employee roster,
or any other relevant information vital for the organisation to gain
a competitive edge in the market. The medium for storing this in-
formation, such as computers, video tapes, or written documents
can be protected from unauthorised disclosure. Trade secret has
no particular governing agency like the other three types of IPs. It
is universally protected through agreements, such as NAFTA and
General Agreement on Tariffs and Trade (GATT).
An organisation can ensure the following to protect its trade secrets:
 Sign a non-disclosure agreement with employees and the third
parties to keep their information unexplored.
 Determine the impact of stolen or misused information on
business.
 Define clear terms and conditions in case of impeachment of
an agreement.

NMIMS Global Access - School for Continuing Education

124  International Business

n o t e s

 Maintain adequate records through documents to prove and

claim their rights to the trade secret.
 Implement security software and other security systems to
prevent business information theft.

A restrictive clause stating that ‘any disclosure of business information

of an organisation is subject to litigation’ to be included in an employ-
ment contract;has been advocated by The Supreme Court of India.

4.6.1 INTELLECTUAL PROPERTY AND INTERNATIONAL

BUSINESS
IP forms an integral part of international trade. Knowledge of IP is
important for countries indulging in international trade to contribute
to national economic prosperity. It is crucial to protect and enforce IP
to encourage innovation and competition in the global economy. Intel-

S
lectual Property Rights (IPRs) prevent creators and business organ-
isations from exploitation, piracy and counterfeiting of their brands
and products. A strong IPR legal framework to enforce IP rights and
IM
make them an important part of the global trading system is required.

Trade Related Aspects of Intellectual Property Rights (TRIPS) agree-

ment is an international agreement that sets down the minimum stan-
dards for IP regulation in countries. IP laws were introduced through the
TRIPS agreement for the first time in the international trading system.
M

Exhibit

Intellectual Property Rights

Intellectual property rights are customarily divided into two main

N

areas:
(i) Copyright and Rights related to Copyright
The rights of authors of literary and artistic works (such as books
and other writings, musical compositions, paintings, sculpture,
computer programs and films) are protected by copyright for a
minimum period of 50 years after the death of the author.
Also protected through copyright and related (sometimes referred
to as “neighbouring”) rights are the rights of performers (e.g. ac-
tors, singers and musicians), producers of phonograms (sound re-
cordings) and broadcasting organisations. The main social purpose
of protection of copyright and related rights is to encourage and
reward creative work.

(ii) Industrial Property

Industrial property can usefully be divided into two main areas:

One area can be characterised as the protection of distinctive signs,
in particular trademarks (which distinguish the goods or services of

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL BUSINESS ENVIRONMENT  125

n o t e s

one undertaking from those of other undertakings) and geograph-

ical indications (which identify a good as originating in a place
where a given characteristic of the good is essentially attributable
to its geographical origin).

The protection of such distinctive signs aims to stimulate and en-

sure fair competition and to protect consumers by enabling them
to make informed choices between various goods and services. The
protection may last indefinitely, provided the sign in question con-
tinues to be distinctive.

Other types of industrial property are protected primarily to stim-

ulate innovation, design and the creation of technology. In this cat-
egory fall inventions (protected by patents), industrial designs and
trade secrets.

S
The social purpose is to provide protection for the results of invest-
ment in the development of new technology, thus giving the incen-
tive and means to finance research and development activities.
IM
A functioning intellectual property regime should also facilitate the
transfer of technology in the form of foreign direct investment, joint
ventures and licensing. The protection is usually given for a finite
term (typically 20 years in the case of patents).

While the basic social objectives of intellectual property protection

M

are as outlined above, it should also be noted that the exclusive

rights given are generally subject to a number of limitations and
exceptions, aimed at fine-tuning the balance that has to be found
between the legitimate interests of right holders and of users.
N

Source: http://www.wto.org/english/tratop_e/trips_e/intel1_e.htm

TRIPS maximises the contribution of intellectual property systems to

economic growth by:
‰‰ Establishing minimum standards for the protection of IPR
‰‰ Administering and enforcing intellectual property rights
‰‰ Creating a transparency mechanism
‰‰ Creating a rule-based system to settle disputes
‰‰ Supporting public policy objectives like stamping out unfair com-
petition and promoting environmental protection

self assessment Questions

12. Unique creation of human intellect that requires imagination

and creativity is termed as _______________.
13. What does TRIPS stand for?

NMIMS Global Access - School for Continuing Education

126  International Business

n o t e s

14. Any word, name, symbol(s) or device to identify the source

or origin of a product or service is termed as trademark.
(True/False)

Activity

Using the Internet, list down all the major bodies that regulate In-
tellectual Property (IP) acts.

4.7 SUMMARY
‰‰ International business environment involves all controllable and
non-controllable factors that influence an organisation’s decisions

S
related to business activities, directly or indirectly.
‰‰ Today, media has become the most influential communication tool
which helps organisations in promoting their products at the right
IM
time to the right audience.
‰‰ Suppliers are an important force of the international business en-
vironment as they provide raw materials for production of goods
and services.
‰‰ The cost structure of the organisation and the purchasing power
of the customers are affected by the economic environment.
M

‰‰ Government agencies, laws and influential groups that limit the

organisations and individuals constitute the political and legal en-
vironment.
‰‰ To expand in foreign countries, an organisation has to bear various
N

risks, such as political risks and economic risks to implement its

strategies.
‰‰ A unique creation of human intellect that requires imagination
and creativity is called Intellectual Property (IP).
‰‰ A patent is granted for new inventions and is an exclusive compo-
nent of intellectual property (IP).

key words

‰‰ Monopoly: When an organisation faces no competition and has

full control over the supply of a product it is referred to as mo-
nopoly.
‰‰ Suppliers: Suppliers refer to those people who provide raw ma-
terials for the production of goods and services.
‰‰ Marketing intermediaries: Marketing intermediaries work as
a link between an organisation and customers to help in the
promotion, sale and distribution of products.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL BUSINESS ENVIRONMENT  127

n o t e s

‰‰ Increased regulation: It refers to governmental regulations on

the use of unsafe products.
‰‰ Economic Risk: It refers to risks of fluctuating foreign ex-
change, inflation and per capita income of countries.
‰‰ Patent: A patent is granted for new inventions and is an exclu-
sive component of intellectual property (IP).
‰‰ Copyright: It refers to the rights granted to owners of innova-
tive works related to arts, plays, music, lectures, software and
photographs, denoted with the symbol of ©.

4.8 DESCRIPTIVE QUESTIONS

S
1. Explain the concept of the international business environment.
2. Describe the forces of international micro environment in detail.
IM
3. What is international macro environment? Explain all the factors
that affect the economic environment.
4. Write a short note on the political and legal environment.
5. What are the risks involved in international business
environment? Explain.
M

6. What is the role of intellectual property in international business?

Explain all types of intellectual properties.

4.9 ANSWERS AND HINTS

N

answers for Self Assessment Questions

Topic Q. No. Answers

Concept of International 1. External
Business Environment
2. True
Forces of International 3. Micro
Micro Environment
4. True
5. c.  Government policies
Forces of International 6. Macro
Macro Environment
7. b. Media
8. False

NMIMS Global Access - School for Continuing Education

128  International Business

n o t e s

Topic Q. No. Answers

9. Socio-cultural environment
Risks in International 10. Economic risks
Business Environment
11. True
Role of Intellectual Prop- 12. Intellectual Property (IP)
erty Law in International
Business
13. Trade Related Aspects of
Intellectual Property Rights
(TRIPS)
14. True

S
hints for Descriptive Questions

1. International business environment refers to all controllable

and non-controllable factors that influence the organisation’s
IM
decisions related to business activities, directly or indirectly. Refer
to Section 4.2 Concept of International Business Environment.
2. The environment that is closely linked to an organisation and
affects its activities directly is called micro environment. The
factors that affect an organisation and its strategies include
customers, suppliers, employees, media, and competitors. Refer
M

to Section 4.3 Forces of International Micro Environment.

3. The forces beyond the control of an organisation are referred to
as macro environment. There are factors that affect economic
environment, such as inflation, interest rates, unemployment,
N

and exchange rates. Refer to Section 4.4 Forces of International

Macro Environment.
4. Government agencies, laws, and influential groups that limit
organisations and individuals constitute the political and legal
environment. Refer to Section 4.4 Forces of International Macro
Environment.
5. An organisation has to bear various risks to expand in foreign
countries and implement its strategies. These risks include
political risks and economic risks. Refer to Section 4.5 Risks in
International Business Environment
6. A unique creation of human intellect that requires imagination
and creativity called intellectual property. Patents, trademarks,
and copyrights are different types of intellectual properties.
Refer to Section 4.6 Role of Intellectual Property Law in
International Business.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL BUSINESS ENVIRONMENT  129

n o t e s

SUGGESTED READINGs FOR

4.10
REFERENCE

Suggested Readings

‰‰ Bouchoux,D. (2005). Intellectual property. Clifton Park, N.Y.:

Thomson/Delmar Learning.
‰‰ Cherunilam, F. (2007). International business. New Delhi: Pren-
tice-Hall of India.
‰‰ Hamilton, L., & Webster, P. (2012). The international business envi-
ronment. Oxford: Oxford University Press.

E-references

S
‰‰ (2014). Retrieved 30 October 2014, from http://www.cuts-interna-
tional.org/Consumer-Rights.htm
‰‰ (2014).
IM
Retrieved 30 October 2014, from http://www.cigionline.org/
sites/default/files/no.3.pdf
‰‰ Slideshare.net,. (2014). International business-environ-
ment-1220943187483599-8 (1). Retrieved 30 October 2014, from
http://www.slideshare.net/tengsonjojie/international-businessen-
vironment12209431874835998-1
M

‰‰ Ujdigispace.uj.ac.za,. (2014). Retrieved 30 October 2014, from

https://ujdigispace.uj.ac.za/bitstream/handle/10210/256/Chapter4.
pdf?sequence=6
N

NMIMS Global Access - School for Continuing Education

N
M
IM
S
 C h a
5 p t e r

CULTURAL ENVIRONMENT FACING

INTERNATIONAL BUSINESS

CONTENTS

S
5.1 Introduction
5.2 Concept of Culture
IM
5.2.1 Elements of Culture
5.2.2 Understanding Cultural Differences–Cultural Dimensions
Self Assessment Questions
Activity
5.3 Culture and International Business
5.3.1 Cultural Change, Convergence and Divergence in the Era
M

of Partial Globalisation
5.3.2 Role of Multiculturalism
5.3.3 Process of Cultural Change
5.3.4 Factors that Facilitate Cultural Change
N

Self Assessment Questions

Activity
5.4 Summary
5.5 Descriptive Questions
5.6 Answers and Hints
5.7 Suggested Reading for Reference

NMIMS Global Access - School for Continuing Education

132  International Business

Introductory Caselet
n o t e s

CULTURAL ISSUES FACED BY FAIR & LOVELY

Companies use different methods to advertise its products in the

market. Advertisements enable clients and customers to know the
worth and utility of a product. They influence the choice of cus-
tomers by telling them how a particular product can affect their
lives.

India has a huge demand for cosmetic products. The Indian cos-
metic market accounts for US $950 million with an annual growth
of 20%. Due to a change in lifestyle and rise in income levels of
women, there is a surge in demand of these cosmetic products.

The first ever skin lightening cream for women was launched in

S
India by one of the world’s fastest growing company Hindustan
Unilever Limited in 1975. It is known to use world’s finest skin
technology. Catering to near 250 million women and girls in the
world, Fair and Lovely believes in the beauty that brings change
IM
in their lives. In Asian countries, especially, India, fair skintone
is marked with beauty and higher position in society. This prod-
uct was a big hit. HUL’s research on beauty preferences helped
promotional activities in India. Even then the advertisement had
many flaws. Fair and Lovely showcased a girl with fair tone avail-
ing a better job or a mate, while the darker one was not able to
M

get so. HUL faced criticism against it from All India Democratic
Women’s Association and National Human Rights Commission
for the advertisement being derogatory to women.

Some of the advertisements used were as follows:

N

‰‰ After using Fair and Lovely cream, a dark complexioned girl

became fair and got a rich groom.
‰‰ Use of Fair and Lovely cream enabled a girl with darker tone
to get a job of a news reader which she was unable to grab
before.

Two things were objected in advertisements:

‰‰ Racism was shown in the advertisement
‰‰ Feminine gender was being humiliated in advertisements

All India Women’s Association criticised HUL the way it show-

cased the looks of a girl being far more important than her qual-
ifications for getting a job. As per many protesters, despite most
Indians being dark toned, HUL dishonoured the Indian adver-
tisement values by humiliating them.

NMIMS Global Access - School for Continuing Education

 CULTURAL ENVIRONMENT FACING INTERNATIONAL BUSINESS  133

Introductory Caselet
n o t e s

HUL responded to the blame by indicating skin tone as a param-

eter of prettiness and measurement of individual’s persona. How-
ever, HUL recognised its blunder later and modified its commer-
cials by altering their slogans that displayed the fame of Fair and
Lovely and its innovative know-how. Fair and lovely Foundation
also came into existence to deliver educational learning to Indian
females.

Different cluster of people possess different racial ethics. Some-

where white tone and somewhere black tone is preferred. Sellers
earn huge profits by targeting different clusters of people having
different choices of tones. Different preferences were used by
marketers by targeting these different clusters of people to earn
huge profits.

S
The blame on HUL was that the company targeted female confi-
dence more than prettiness. They showed females gaining self-as-
surance after using their product.
IM
M
N

NMIMS Global Access - School for Continuing Education

134  International Business

n o t e s

learning objectives

After completing this chapter, you will be able to:

> Discuss the concept of culture
> Relate culture and international business
> Discuss cultural changes, convergence and divergence in
the era of partial globalisation
> Explain the role of multiculturalism
> Describe the process of culture change
> Discuss the factors that facilitate cultural change

5.1 INTRODUCTION

S
Every country has a culture of its own, which guides the thinking pat-
tern, purchasing behaviour and orientation of its residents. An inter-
national marketer needs to gain a deeper understanding of cultural
IM
differences to know the nitty-gritty of the overseas market. Learning
the cultural differences is one of the most challenging tasks, as it great-
ly influences the survival of an organisation in a foreign market. The
failure to understand the culture of foreign countries could have an
adverse impact on the goodwill and reputation of an organisation. In
addition, the organisation may lose its customers and face legal con-
M

sequences. To prevent a cultural mistake, the international marketer

should frame specific marketing strategies for each foreign country af-
ter considering different cultural elements, such as language, cultural
values, cultural norms, religion, education, and technology. 
N

Let us take up a real life scenario to acknowledge why it is essential

for an international marketer to understand the cultural intricacies of
a foreign market. The UK sports good manufacturer, Umbro launched
its new sneakers called Zyklon in Germany. This product received se-
vere criticism from residents and government officials of Germany
because Zyklon was the name of the gas used by the Nazi regime to
murder millions of Jews in concentration camps. As a result, the or-
ganisation had to withdraw its products from Germany. Therefore, it
can be concluded that the understanding of culture plays a crucial
role in shaping the future of an organisation in a foreign market.    

5.2 CONCEPT OF CULTURE

Culture incorporates the shared meaning, ceremonies, rules and cus-
toms of a society. It is an intellectual design that goes on from one
generation to another. The following are the popular definitions of cul-
ture:

NMIMS Global Access - School for Continuing Education

 CULTURAL ENVIRONMENT FACING INTERNATIONAL BUSINESS  135

n o t e s

According to Terpstra & David, “Culture is a learned, shared, compel-

ling, interrelated set of symbols whose meanings provide a set of orien-
tations for members of society. These orientations taken together provide
solutions to problems that all societies must solve if they are to remain
viable.”

Some contemporary anthropologists define culture as “the distinctive

way of life of a group of people, their complete design for a living”.
Hofsetede defines culture as “the collective programming of the mind
that distinguishes the members of one group or category of people
from another”.

According to Johansson, “Culture is usually defined as the underlying

value framework that guides an individual’s behaviour.”

There are different ways in different cultures to express feelings and

S
happiness. For example, in some cultures, there are specified prin-
cipals that how the gifts should be presented. In some societies, the
gifts should be presented in private; however, in others, gifts should
IM
be presented in public. General etiquettes, manners, and gestures are
also defined distinctively and are meant for different meanings in dif-
ferent cultures.

Exhibit

Western Factors Defining Culture

M

The factors that define culture in various western societies are dis-
cussed as follows:

Individual Collective
N

In the US culture, people give more In the Japanese culture, peo-

importance to themselves. ple prioritise teamwork.
Extended Family Limited Family
In many Asian and European coun- In the US, joint families gener-
tries, parents, kids, grandparents, and ally do not live together in the
even aunts and uncles live together in same house.
the same house.
Adult Child
In some South American countries, In the US, teenagers below
when children reach the age of 14 or the age of 18 are considered
15, they become adults. In the Hebrew children.
culture, a boy becomes a man at the
age of 13. In the Hispanic culture, a
girl becomes an adult at the age of 15.
Immediate Gratification Postponed Gratification
The American culture focuses on im- Indian culture focuses on post-
mediate gratification, for example, poned gratification, for exam-
I want it now. ple, I will eat it tomorrow.

NMIMS Global Access - School for Continuing Education

136  International Business

n o t e s

It should be noted that only cultural knowhow does not assure an or-
ganisation’s achievement in the market. However, if an organisation is
not able to understand a country’s culture, it will lead to a downfall.
There are many organisations that enter a country without research-
ing about its culture and thus fail in their first attempt.

The culture of every country has a number of features. Let us discuss

some of the important features of culture:
‰‰ Culture is rigid: Culture suggests the behaviour that is suitable in
a society. Culture acts as a mentor for making the decisions of an
organisation concerning various issues, such as selling of products
in a society. Sometimes, glitches rise for the products that are not
suitable as per the cultural beliefs of consumers.
‰‰ Culture is learned: It suggests that culture is attained. Learning

S
culture refers to socialisation or enculturation that occurs when
a person adopts or learns the culture in which he/she is grown up.
Acculturation occurs when a person learns the culture of the soci-
ety apart from the one in which he/she has grown.
IM
‰‰ Culture is subjective: It implies that culture in every country de-
pends on different concepts. Thus, what is suitable in one culture
may not be certainly suitable in another
‰‰ Culture is socially shared: It indicates that a culture is not self-ex-
isting. It is shared by the members of a society.
M

‰‰ Culture facilitates communication: It implies that culture helps

in easy communication within a group. The absence of shared cul-
ture may obstruct communication within the group. Thus, inter-
national organisations face problems in using homogeneous ad-
vertisements in all countries.
N

‰‰ Culture is dynamic: Although culture is carried forward from one

generation to another, it is not stationary. Culture regularly chang-
es and adapts itself to new circumstances and atmosphere.
‰‰ Culture is enduring: It indicates that culture sometimes remains
the same from one generation to the other. Some habits are difficult
to break and are therefore carried on as it is from years to years.
‰‰ Culture is cumulative: It implies that culture is based on collec-
tive circumstances and situations practiced by the society over the
years. Every generation has some inputs for the culture, thus mak-
ing culture broader over time. Conservative ideas may be rejected
and new ideas are added.

5.2.1 ELEMENTS OF CULTURE

Culture can be explained as a blend of components, such as informa-

tion, beliefs, ethics, civilisation and behaviour gained by the members
of a society. The essentials of culture are shown in Figure 5.1:

NMIMS Global Access - School for Continuing Education

 CULTURAL ENVIRONMENT FACING INTERNATIONAL BUSINESS  137

n o t e s

Education

Cultural
Technology
Values

Elements of
Culture
Cultural
Religion
Norms

S
Social
Language
Organisations
IM
Figure 5.1: Different Elements of Culture

The elements of culture are discussed as follows:

‰‰ Language: It plays an important role in the culture of a country.
M

The language is a means of communication with each other. Lan-

guages of countries vary from each other and languages within
a country also vary from region to region. People who speak the
same language share the same culture. Organisations going global
need to know the language of the target market in order to pro-
N

mote their products in an efficient manner.

Language, as a medium of communication, is bifurcated into two
parts, namely vocal and silent. Vocal language can be defined as
vocal sounds or written symbols that individuals use as a means
of communication with each other; whereas, a silent language
refers to the non-verbal communication that comprises languag-
es, such as space, material possessions, friendship patterns, time
and promises. Space indicates the conversation distance between
people. Material possession indicates the status of individuals in
a society gained through materialism. Friendship pattern covers
the idea and dealing of friends. The time opinions vary across the
culture, such as importance of regularity differs among cultures.
The clarifications of agreements differ among countries. Some
countries trust the agreement to trade with each other; whereas,
some have the trust among each other; thus they do not pay much
attention on the agreement.
Many regard language as a reflection of culture. A variety of lan-
guages across countries causes many problems for multinational

NMIMS Global Access - School for Continuing Education

138  International Business

n o t e s

organisations. There are many countries, such as India and Swit-

zerland, which have various languages. Meanings and pronuncia-
tions also differ within a language. For example, meanings and pro-
nunciations of many English words differ from country to country.
Ambiguity in the use of language can create advertising errors
when slogans and product labels get wrongly interpreted. Some of
the famous examples of wrong interpretations of slogans by organ-
isations are given as follows:
 Copenhagen airline ticket office: We take your bags and send
them in all the directions.
 Swedish furrier: Fur coats made for ladies from their own skin
 Japanese medicine bottles: Adults: 1 tablet 3 times a day until
passing away

S
 A tailor shop in Greece: Order your summers suit because in
big rush, we will execute customers in strict rotation
IM
The wrong transformation of slogans may create the wrong pic-
ture of organisations in front of customers. Usually, organisations
use a multi-lingual speaker to translate documents/messages in
the foreign language. In some cases, organisations also change the
brand name for accepting a local strategy. For example, Oracle ad-
opted a name JiaGu Wen (means data and information) in China.
Organisations have also started using multiple languages on their
M

product covers now. Symbols used in promotions differ in mean-

ing. For example, white symbol portrays purity in the US; where-
as, in China, white symbol is considered as a death symbol.
Thus, it is important that proper language should be used by the
N

organisations to target foreign markets.

‰‰ Religion: It acts as important factor of conduct of an individual.
The purchasing decisions, family systems, family approaches, prin-
ciples and consumption likings are dependent on the religion. The
Hindu religion does not support the consumption of animal prod-
ucts specifically beef. Islam religion discourages the consumption
of pork products and alcohol. Buddhism also does not believe in
the worldly desire as it ignores materialism. Directing a market
research involving women is not allowed in Islam. Also, this reli-
gion does not allow peddler selling and forbids women to drive car.
Women are allowed to indulge in tasks that involve females only.
For example, women can go in women’s bank only. Thus, most or-
ganisations do not target the women audience. Thus, the marketer
should take into consideration the religious beliefs of the targeted
customers before introducing a product in a specific market.
‰‰ Cultural norms: It refers to the rules that indicate what is right
or wrong and what is acceptable or unacceptable. Cultural norms
are driven by values. An organisation before starting operations

NMIMS Global Access - School for Continuing Education

 CULTURAL ENVIRONMENT FACING INTERNATIONAL BUSINESS  139

n o t e s

in other countries should gather permission from authorised body

before building any plant or conducting any market research. A
marketer planning to sell goods in other countries should know
the following:
 Do’s and Don’ts for an outsider (cultural imperative norms).
 What locals may do but an outsider cannot (cultural exclusive
norms).
 What an outsider may or may not do (cultural adiaphora
norms)?
As discussed earlier, authoritative/imperative norms lay guidelines
for the do’s and don’ts in a certain culture. For example, in Ger-
many, individuals who maintain proximity with each other and do
business together have to address each other formally by their last

S
names. A female marketing manager in Saudi Arabia has to cover
her wrists, ankles, hair and face while dealing in the market. Ex-
clusive norms denote the activities from which a foreign country is
IM
omitted but is appropriate for local country individuals. Adiaphora
norms denote the norms that a foreign organisation can accept;
however, it is not necessarily expected to do so.
‰‰ Cultural values: These are beliefs about a particular conduct that
guide individual’s behaviour. People’s outlooks, activities and de-
cisions are guided by values. Values are also referred to as guiding
M

principles that are inherent to a person’s identity and inner self.

Western cultures focus on the success, accomplishment, and com-
petitiveness; whereas, eastern cultures focus more on social wel-
fare. Cultural values are learned from individuals, such as family,
friends, media and teachers. Norms and standards for individu-
N

als are designed by a value system in every culture. These values

are intensely rooted in individuals. Thus, sometimes people resist
change and this affects the organisation’s selling strategies.
Consumption behaviour is greatly affected by values of individu-
als. Individuals with similar values react similarly to the prices and
other changes in the market. Values differ from country to country.
Americans give higher value to easiness, which has given rise to
the concept of breakfast bars that allow customers to eat on the go.
A marketer going abroad should have the good know-how of the
values of a country or the market he/she is targeting. This is vital to
frame the sound promotional strategy for the target country. The
image of an organisation could be hampered if the marketer fails
to consider the cultural values of the target country while framing
its promotional strategies. For example, in 2004, Nike advertise-
ment showing the US basketball star LeBron James in a battle
with animated Chinese cartoon Kung Fu Masters and two dragons
was banned in China. It is because the pair of dragons is consid-

NMIMS Global Access - School for Continuing Education

140  International Business

n o t e s

ered holy in Chinese culture and the advertisement hurt the senti-
ments of the Chinese people.
‰‰ Education: It refers to the literacy level of customers in a coun-
try. The level, values and nature of education differ from country
to country. Radio advertising involving audio message and visual
media, such as billboards are used by the marketers preferably
in countries with low education level. The written communication
that is through newspapers or pamphlets would be avoided. The
product labelling also differs according to educational levels.
‰‰ Social organisations: It involves different family patterns in which
an individual grows and matures. Generally, different family pat-
terns and cultures form a society or social organisation. The fam-
ily is the vital component of a social organisation. Children in the
family learn how they are expected to behave, what to believe, and

S
what not to believe. The family is divided into nuclear and com-
prehensive family. A nuclear family includes wife, husband, and
children as members, whereas a comprehensive family, also called
joint family, includes several generations from grandparents to un-
IM
cles and cousins. In a comprehensive family, the cultural values
are very strong, such as great regards for elders, faithfulness, fam-
ily values, and obedience towards each other.
‰‰ Technology: It refers to a significant aspect of a culture today.
Technology is nesting continuously in a culture day by day. The
role of technology can be seen in the fields of medicine, education
M

and new product innovations by organisations. The distribution

aspect of marketing is highly affected by the technology and raise
questions, such as whether there is a transport infrastructure to
dispense goods to consumers abroad and does the local port have
N

enough cranes to offload containers from ships.

5.2.2 UNDERSTANDING CULTURAL DIFFERENCES –

CULTURAL DIMENSIONS

Culture can be defined from the perspective of a nation, culture and

organisation. National culture is a culture that relates to a nation. A
culture that relates to a particular section of a society is called sub-
culture; whereas, a culture that exists in an organisation is known as
corporate culture. A culture in a nation, society or organisation differs
from culture in another country, society or organisation. Thus, it is a
culturally diverse world.

Understanding cultural differences that exist among different coun-

tries play a vital role in the success of organisations. The organisations
should design their promotional strategies for foreign countries post
gaining in depth knowledge about the culture of those countries.

Table 5.1 shows different interpretations of behaviour in different

cultures:

NMIMS Global Access - School for Continuing Education

 CULTURAL ENVIRONMENT FACING INTERNATIONAL BUSINESS  141

n o t e s

Table 5.1: Different Behavioural Interpreta-

tions in Different Cultures
Behaviour Interpretation in Interpretation in other Cultures
the US
Consuming Those under the In European countries, it is com-
wine and beer age of 21 are not mon for children to drink wine/beer
allowed to drink at family meals. In Korea, when you
alcohol. are in a bar, you serve drinks for
your friends and family first, and
then wait for them to serve drink
for you.
Drinking Generally, adults In Turkey, coffee is a special drink
coffee drink coffee in the that you serve to guests. In Italy,
morning and they coffee is enjoyed after a family meal;
do not prefer giving whereas in China, tea is preferred

S
coffee to children. over coffee.
Cooking pork Grilled outside at a Jewish and Muslims do not eat pork
ribs backyard party
Using Lucky number
IM
Unlucky number in Kenya, Singa-
number 7 pore, and Ghana
Kissing To express roman- In many cultures, kissing is accept-
tic feelings about able while greeting a friend
someone

An organisation’s achievement or failure is largely affected by the dif-

M

ference in culture. Every country has its own cultural ethics and rules
that highly affect communication strategies of organisations. There
might be a difference in the acceptance of values or norms among
different societies. The following factors show the need to understand
cultural differences:
N

‰‰ Differences in tastes and preferences across countries: There

are various reasons for differences in the tastes and preferences of
people. The level of income of consumers regulates products that
they can afford. The luxury goods are less in demand in less de-
veloped countries. Products sold in one country do not necessarily
have the ready markets in other countries. Even if the demand
is the same, communication messages may vary according to the
country.
‰‰ Managing and motivating employees: It depends on the manage-
ment technique followed by the organisation. In every country, the
factors of job contentment of employees differ from each other.
Thus, if an organisation is commencing its business globally, the
techniques for managing and motivating employees in those coun-
tries may differ. The cultural values of one organisation may differ
from another.
‰‰ Differences in the selection and training of employees for in-
ternational assignments: It leads to failures and high costs to in-
ternational organisations. The criteria of selection and training an

NMIMS Global Access - School for Continuing Education

142  International Business

n o t e s

employee vary from organisation to organisation and thus from

country to country. Training skill sets that are required for a job
profile in one country may not be applicable for the same job pro-
file in other countries.
Muddling through cultural differences is a big task. There are
three ways to manage differences in culture. These are discussed
as follows:
 Acting as a change agent
 Selecting people and training them according to the foreign
culture
 Utilising people who can easily adapt in two or more cultures

There is no shortcut to understand cultural differences. Learning the

S
culture enhances the ability of organisations to deal globally.

Cultural differences can be learned by bifurcating them into dimen-

sions. A famous Dutch organisational sociologist, Gerard Hendrik-
IM
Hofstede studied interactions between national cultures and organ-
isational cultures. He has given four dimensions of culture, as shown
in Figure 5.2:
M

Small versus
large power
distance
N

Individualism Masculinity
Dimensions
versus versus
of Culture
collectivism femininity

Weak
versus strong
uncertainty
avoidance

Figure 5.2: Dimensions of Culture

The dimensions of culture are discussed as follows:

‰‰ Small versus large power distance: It refers to the range in which
there is a strong difference between individuals based on rank.
A manner in which interpersonal relationships are developed

NMIMS Global Access - School for Continuing Education

 CULTURAL ENVIRONMENT FACING INTERNATIONAL BUSINESS  143

n o t e s

when there are differences in power between individuals can be

named as power distance. In various countries, relationships are
based on equality; whereas, in some countries, relationships are
based on inequality. For instance, in the United States, individ-
uals are addressed by their names rather than by their ranks. In
case of Eastern Europe and Latin America, seniors have to be ad-
dressed formally by their sub-ordinates. In organisations of these
countries, the role of senior management is more important for de-
cision making. Small power distance includes relations that treat
each other similarly regardless of positions. High power distance
includes relations that are formally defined and categorised.
‰‰ Individualism versus collectivism: It describes the extent to
which people believe in individual responsibility and recompense.
The United States is an example where individuality and freedom
are valued the most. However, in Japan, value is focused on team-

S
work and shared responsibility. In individualism, individuals make
decisions themselves and focus on self-interest; whereas, in case of
communism, individuals act in the interest of groups rather than
IM
being self-centric.
‰‰ Masculinity versus femininity: It refers to the importance that
is placed on masculine and feminine values. Manly cultures focus
on boldness, competitiveness, motivation and addition of wealth
and material possessions; whereas, feminine cultures focus on
relationships, equalities, stabilising the weak and quality of life.
M

Countries such as Japan, Australia, US, Britain and Canada are

more inclined towards masculine culture; whereas, Sweden and
Chile are more feminine culture centric.
‰‰ Weak versus strong uncertainty avoidance: It refers to the lev-
N

el to which individual accept behaviours to avoid risk and uncer-

tainty. In countries with strong uncertainty avoidance culture,
everything different and exclusive is treated as harmful. Individ-
uals resist change and focus on avoiding and overlooking risk.
In countries with low uncertainty avoidance culture, new things
are considered stimulating and worth exploring. Countries such
as Greece, Japan, France and Spain shows strong uncertainty;
whereas, low uncertainty is seen in countries, such as India, Hong
Kong, UK and Malaysia.

self assessment Questions

1. What can be defined as the pattern of behaviour that human

beings generally pursue?
2. Different elements of culture include education, language,
technology, cultural norms, cultural values, religion and social
organisations. (True/False)
3. Cultural _______ can be learned by dividing them into
dimensions.

NMIMS Global Access - School for Continuing Education

144  International Business

n o t e s

Activity

Identify cultural differences prevalent in your society or organisation.

CULTURE AND INTERNATIONAL

5.3
BUSINESS
It is imperative that no business in the world is possible until there is
someone to run it and some people to work for it. Thus, involvement of
people in business is axiomatic. Global business involves dealing with
people with different cultural backgrounds. Different cultural back-
ground may include different nationality, civilisation, faith, gender,
age, occupation, political viewpoint and income level. Cultural diver-
sities of people mould their behaviour, mental state, and beliefs which

S
impact their standard of living along with their taste and inclinations,
purchasing power, and consumption patterns. Thus, a manager or an
entrepreneur dealing in international business must take care of cul-
IM
tural factors while catering to the international market.

The pattern of behaviour that human beings generally follow is de-

scribed as culture. It includes customs, practices, philosophies, un-
derstanding, social systems, food, attire and so on. Thus, different
people follow different practices and give rise to different cultures.
For instance, people from South India have different customs, beliefs,
M

eating habits, and dressing style, which is generally different from the
people of North India. Similarly, Indian culture is altogether different
as compared to Americans or British.

Many people believe that culture is an elusive topic to study due to

N

differences in various parameters, such as psychological and demo-

graphical features. However, cultural know how is important because
many business decisions rely on factors that either control or affect
the culture of a specific region or group. For example, every business
function, such as managing human resource, sales and marketing, fi-
nancial affairs, logistics and legal compliance is subject to probable
differences, such as individual values, due to difference in culture.

Nurturing cultural diversity helps to achieve a competitive edge

globally. Bringing together people of different cultures enables an
organisation to gain tremendous and deep understanding about the
products and services and the manner to produce and deliver them.
Several researchers believe that Multinational Corporations (MNCs),
such as PepsiCo, IBM and Citibank have grown in recent years due to
the cultural diversity in their workforce.

NMIMS Global Access - School for Continuing Education

 CULTURAL ENVIRONMENT FACING INTERNATIONAL BUSINESS  145

n o t e s

5.3.1 CULTURAL CHANGE, CONVERGENCE, AND

DIVERGENCE IN THE ERA OF PARTIAL
GLOBALISATION

Change and transformation in cultural values between the people

of a particular group over a passage of time is described as cultural
change. Such a change may primarily take place because some peo-
ple believe that change in culture is beneficial to them. Soon they are
followed by the other members of the same group or community and
thus, the change may occur at a big scale. Nowadays, philosophers of
many business organisations focus on culture and believe that culture
plays a vital role for the overall performance of employees in business
organisations. The culture in the organisation mainly relates to dif-
ferent values and beliefs held by employees. These values and beliefs
determine the employee’s attitude towards the job, which helps them

S
to develop job satisfaction and organisational obligation. It is apparent
from the study of organisational behaviour that satisfied employees
perform better.
IM
At times, senior management attempts to bring change in the existing
culture of the organisation to take it to new heights. A particular cul-
ture becomes synonymous with a particular organisation or industry.
For example, the Japanese style and the American style of manage-
ment differentiated on the basis of the way of managing people in the
organisation. In the Japanese style of management, managers show
deep affection or faithfulness with the organisation; once they become
M

the members of a particular organisation, they remain there for a long

time. However, in the American style of management, managers of-
ten switch from one organisation to another, gaining more experience
in dealing with dubious situations. Culture change becomes evident
N

during the time of mergers or acquisitions, when organisations with

different cultures merge together.

In this age of globalisation, business organisations function in different

countries of the world. Therefore, managers of business organisations
interact with people of different culture, and this forms the basis for
cultural change. Giant multinational organisations hire people from
different countries and backgrounds practicing different cultures;
thus, the interaction between people of different cultures takes place.
This gives rise to the tendency when different cultures influence each
other while people with these cultures interact. This at times leads to
a new culture altogether. This phenomenon is called cultural conver-
gence.

In other words, cultural convergence may be defined as the predis-

position of different cultures to unite and become alike. For example,
Indians living in London for the past many years hold a mixed culture,
comprising some aspects of both Indian and English cultures. This
exemplifies the occurrence of cultural convergence in their habits.
Similarly, in business organisations, some factors, such as the use of

NMIMS Global Access - School for Continuing Education

146  International Business

n o t e s

the same type of expertise, communication system, and organisational

arrangement lead to cultural convergence.

Cultural divergence, on the other hand, is defined as the trend among

cultures to be contrasting and different from each other in almost ev-
ery aspect. Hence, different cultures differ from each other. Such a dif-
ference occurs when there is nothing common between two cultures
or communities. The people; however, adopt a revolutionary stand on
their culture. In business organisations, some factors, such as com-
pletely different technology, communication system, and organisa-
tional structure, lead to cultural differences. For example, comparison
of Indian Postal Department with the UPS mail service of the United
States of America clearly highlights the existing cultural difference.

Conducting business in the international province without making a

complete research on the cultural aspects of a country is not the best

S
methodology. A business organisation must find out practices and cul-
ture of the partner country or the country where it plans to start its
own subsidiary. It is not easy to build awareness on other cultures and
IM
there is no complete or correct way to do it. Travellers and tourists’ re-
marks on cultural diversity of a particular nation and experts’ reviews
provide bases for managers engaged in international business to anal-
yse cultural differences and their effects on business operations.

Several academicians believe that culture cannot be separated from

factors such as economic and political conditions. In business organi-
M

sations, economic environment and political stability play a vital part

in developing a respective culture. For example, Gujarat has favour-
able economic conditions along with political stability and govern-
ment support for businesses, due to which it is a popular destination
N

among business houses in India to carry out their activities. In the

same way, bestowed with political stability and encouraging economic
conditions, Europe is considered to be a safe bet to carry out business
activities by MNCs.

Commonly, most variables of culture are universal in nature. For ex-

ample, every country or society has its own guidelines, regulations,
codes of conduct, social relations, language, way of appearance, and
religious beliefs. However, these variables differ from culture to cul-
ture; with reasonable differences even in the same culture, resulting
in the development of subcultures. For example, India is multi cul-
tured as compared to the western world. However, in India too, differ-
ent religions, such as Hindus, Sikhs, Muslims and Christians, vary in
cultures.

Three important points that must be kept in mind while studying cul-
ture are:
‰‰ People may not respond to a questionnaire to ascertain the culture
correctly or realistically. They may hide their true feelings and at-
titudes and do not express themselves in a complete manner.

NMIMS Global Access - School for Continuing Education

 CULTURAL ENVIRONMENT FACING INTERNATIONAL BUSINESS  147

n o t e s

‰‰ Individual dissimilarities get unnoticed when research is focused

on studying differences in culture at a national level. Every indi-
vidual may not think similar to what his/her countrymen do in
general.
‰‰ As the time passes, cultural changes give rise to a new culture be-
cause of the changing attitude of individuals or the society as a
whole.

5.3.2  ROLE OF MULTICULTURALISM

The term multiculturalism indicates the acceptance of various cul-

tures in order to introduce diversity in a demographic orientation of
a specific place, such as business organisation, school, university, and
city or nation. In India, Delhi and the National Capital Regions (NCR)
can be called a place representing multiculturalism as people of differ-

S
ent cultures can be seen living together.

The members of diverse groups within a society or country are al-

IM
lowed by official policies of many countries to celebrate and maintain
their different cultures or cultural identities. Such policies endorse
multiculturalism as a way to promote social bonding. In this context,
multiculturalism advocates a society that extends equitable status to
dissimilar ethnic and religious groups with no identifiable ethnic, reli-
gious, and/or cultural community values around which to unite.
M

Multiculturalism in a country is seen officially when a government of

that particular country may endorse the following practices:
‰‰ Festivals, holidays and celebrations of minorities are accepted.
‰‰ Traditional religious dresses in schools, colleges, military camps,
N

and social gatherings are allowed.

‰‰ Forming new rules and laws to benefit and promote a particular
community.

Cultural uniqueness is generally defined as the identity of a culture,

which determines its specific features. Cultural identity contains the
aspects with which a culture is recognised. For instance, turban is a
symbolic object to identify Sikhs.

An important role played by multiculturalism and cultural identity is

that they open door for new opportunities, such as different kind of
skilled employees, and advanced technology. However, there are cer-
tain negative features associated with multiculturalism. Many people
believe that they encourage discrimination and biasness which are
not good for a society as people may adopt a certain set of behaviour
towards a particular community or culture.

Many business organisations have accepted the idea of multicultural-

ism to endorse employer branding and make a favourite choice among

NMIMS Global Access - School for Continuing Education

148  International Business

n o t e s

prospective and present employees. In order to adopt the local culture

of a particular country or region, many MNCs follow a region-centric
approach at different branches. Therefore, it can be said that multi-
culturalism and cultural identity have both pros and cons.

5.3.3  PROCESS OF CULTURAL CHANGE

The procedure of culture change defines the stages involved in bring-

ing change in the current culture so that it becomes parallel to the
target culture. It is essential to know the present and target culture to
design and undertake the process of change in an organisation. At the
social level, culture change takes place gradually and steadily when
some people adopt certain other practices and beliefs and with the
passage of time other people follow them. Culture change at social
level is aconstant process.

S
However, culture change in an organisation is a problematic process
as culture has deep roots in any organisation. Therefore, to make an
organisation productive, the employees of an organisation should un-
IM
derstand that there is a need to bring cultural change.

Figure 5.3 shows the phases involved in the culture change of an or-
ganisation:
M

Identifying core values and culture

Defining the desired culture

N

Communicating to employees

Controlling the change

Figure 5.3: Process of Culture Change

As shown in Figure 5.3, the phases involved in the process of culture

change are as follows:
1. Identifying core values and culture: This is the first step of
the change process where core values and beliefs of employees
are uncovered and identified. These core values and beliefs
are often perceived in the form of organisational descriptions,
mythologies, and even in individuals’ conduct. This step informs
employees about the present situation and analyses the present
difference between core values and beliefs of different sub-
cultures prevailing in the organisation.
2. Defining the desired culture: It includes the planning and
designing of the desired culture. After recognising differences

NMIMS Global Access - School for Continuing Education

 CULTURAL ENVIRONMENT FACING INTERNATIONAL BUSINESS  149

n o t e s

and the effects of various beliefs of employees, the management

sets the desired cultural values appropriate for the organisation.
3. Communicating to employees: It involves conveying the desired
behavioural norms and practices to employees. Apart from this,
desired culture is communicated by regular workshops organised
by the organisation.
4. Controlling the change: This step involves developing new
cultural practices on a continuous basis. It further repeatedly
calculates progress in the change. Management of cultural
change is a long process; therefore, this stage is also known as
the follow-up stage.

5.3.4  FACTORS THAT FACILITATE CULTURAL CHANGE

S
Various factors facilitate cultural change. Some of the factors operate
at an unambiguous level, that is, at the level which can be seen and
understood easily; while, the others function at an implicit level, that
is, at the level which is difficult to understand and conclude the reason
IM
for their operation.

Some factors that facilitate cultural change in an organisation are as

follows:
‰‰ Communication: It acts as a simple and dominant tool to facili-
tate change in culture besides being cost-effective and less time
M

consuming. Communication of top management with employees

or immediate boss with the team can bring change in the culture
of the desired target community. Simple guidelines on do’s and
don’ts, how to reply, react, and behave enable change in culture.
Communication in proper and complete terms is important as any
N

communication gap may not bring the desired result.

‰‰ Cultural awareness training: It acts as a device that enables
change in culture. However, training is generally costly and time
consuming. In such type of training, directions can be given by
an expert trainer to change the culture to the desired level. The
training may involve sessions on personality development and
guidelines on the expected behaviour. In many organisations, emi-
grants or employees who came from abroad are trained on cultur-
al awareness. Individuals, who work with different clients globally,
or even when the organisation itself is planning for new mergers
and acquisitions, so as to make the employees aware of the differ-
ent organisational culture. Such training may be carried out with
the objective of creating an anticipated environment in the organ-
isation.
‰‰ Technology: It acts as a significant tool that enables change in the
culture. Different technology is used by different organisations at
different levels. For example, MNC’s can be seen using latest tech-
nology at a large scale in every department. However, many gov-

NMIMS Global Access - School for Continuing Education

150  International Business

n o t e s

ernment departments in India do not use the latest technology to

such a large extent. MNCs frequently use e-mails for communica-
tion in written form with colleagues or seniors, while government
departments and Public Sector Undertakings (PSUs) prefer typed
letters. MNCs use video conferencing and Web conferencing fre-
quently to hold meetings but government departments do not use
any such medium. Thus, the use of technology is said to bring a
change in a culture. A person who joins a government department
after working for some years in MNC may find it difficult to accli-
matise to that culture and is likely to take long time to adopt that
culture. Therefore, a change in culture can be brought by adopting
new technology and using it extensively.
‰‰ Compensation: It refers to the financial compensation paid to em-
ployees in exchange of efforts made by them for the accomplish-
ment of individual and organisational goals. Psychological stud-

S
ies reveal that compensation acts as a major feature in bringing
change in the culture at the individual level. For instance, consid-
ering other factors such as monotonous job responsibilities, with
IM
continuous salary hike shows remarkable changes in employees’
behaviour. For example, employees feel more inspired, highly
gratified with job, and highly committed towards the organisation
because it fulfils his/her basic needs. Monetary benefit rendered
to the entire team or a group of people is likely to have the same
effect. Therefore, highly motivated and contented employees en-
courage a more friendly and conducive work environment in the
M

organisation.
‰‰ Promotion: It implies promotion of employees from a lower level
to a higher level in the organisational pyramid. It is observed that
promotion also affects the culture. When an individual is promot-
N

ed, the behaviour of an individual may change and his/her devo-

tion and obligation towards the work as well as organisation may
also increase. The individual has to take care of greater responsi-
bilities and should become more responsible for the proper execu-
tion of organisational values.

self assessment Questions

4. Nurturing cultural diversity helps to achieve __________

globally.
5. Culture change at the social level is a constant process. (True/
False)
6. Festivals, holidays and celebrations of minority are officially
accepted by the government to promote __________.
7. There are factors that facilitate cultural change, such as
communication, technology, cultural awareness training,
compensation, traditions and customs. (True/False)

NMIMS Global Access - School for Continuing Education

 CULTURAL ENVIRONMENT FACING INTERNATIONAL BUSINESS  151

n o t e s

Activity

Find out how multiculturalism has benefitted Indian people and

businesses.

5.4 SUMMARY
‰‰ Culture can be defined as the pattern of behaviour that human
beings generally follow.
‰‰ Culture enables easy communication within a group. The absence
of shared culture may obstruct communication within the group.
‰‰ Various elements of culture include language, religion, cultural
norms, cultural values, education, social organisations and tech-

S
nology.
‰‰ Cultural norms refer to the rules that direct what is right or wrong
and what is acceptable or unacceptable.
IM
‰‰ Differences in the selection and training of employees for interna-
tional assignments lead to failures and high costs to international
organisations.
‰‰ Cultural divergence, on the other hand, is defined as the trend
among cultures to be contrasting and different from each other in
M

almost every aspect.

‰‰ The term multiculturalism indicates the acceptance of various cul-
tures in order to introduce diversity in a demographic orientation
of a specific place like family, school, etc.
N

‰‰ Process of cultural change involves various phases, which are

identifying core values and culture, defining the desired culture,
communicating to employees and controlling the change.
‰‰ Factorsthat facilitate change include communication, cultural
awareness training, technology, compensation and promotion.

key words

‰‰ Culture:It can be defined as the pattern of behaviour that hu-

man beings generally pursue.
‰‰ Cultural change: Cultural change refers to the transformation
of cultural values and standards between the people of a partic-
ular group over a passage of time.
‰‰ Cultural values: It refers to the beliefs about a particular con-
duct that guide individual’s behaviour.
‰‰ Individualism: It refers to the philosophy or tendency of focus-
ing on individual efforts and responsibility.

NMIMS Global Access - School for Continuing Education

152  International Business

n o t e s

‰‰ Cultural convergence: It can be defined as the tendency of dif-

ferent cultures to unite and become similar.
‰‰ Multiculturalism: It is the acceptance of numerous cultures to
introduce diversity in a demographic orientation of a particular
place, such as school, family, business organisation, and city or
nation.

5.5 DESCRIPTIVE QUESTIONS

1. Define the concept of culture. Also, list its various elements.
2. What do you understand by cultural change?
3. Describe the role of multiculturalism.

S
5.6 ANSWERS and hints
IM
answers for Self Assessment Questions

Topic Q. No. Answers

Concept of Culture 1. Culture
2. True
M

3. Differences
Culture and International 4. Competitive edge
Business
5. True
N

6. Multiculturalism
7. True

hints for Descriptive Questions

1. Culture can be explained as a blend of components, such as

information, beliefs, ethics, civilisations and behaviours gained
by the members of a society. Refer to Section 5.2 Concept of
Culture.
2. Cultural change may be defined as a transformation in cultural
values and standards between the people of a particular
group over a passage of time. Refer to Section 5.3 Culture and
International Business.
3. The term multiculturalism indicates the acceptance of various
cultures in order to introduce diversity in a demographic
orientation of a specific place, such as business organisation,
school, university, and city or nation. Refer to Section 5.3 Culture
and International Business.

NMIMS Global Access - School for Continuing Education

 CULTURAL ENVIRONMENT FACING INTERNATIONAL BUSINESS  153

n o t e s

5.7 SUGGESTED READING FOR REFERENCE

SUGGESTED READINGS

‰‰ Elliott,
M. (2002). The culture concept. Minneapolis: University of
Minnesota Press.
‰‰ Fludernik, M. (2003). Diaspora and multiculturalism. Amsterdam:
Rodopi.
‰‰ Lesser, A., & Mintz, S. (1985). History, evolution, and the concept
of culture. Cambridge [Cambridgeshire]: Cambridge University
Press.
‰‰ Steinberg, S. (2009). Diversity and multiculturalism. New York: Pe-
ter Lang.

S
E-REFERENCES

‰‰ (2014). Retrieved 28 October 2014, from http://www.igcollege.org/

IM
files/pdf/p%2010.pdf
‰‰ (2014).Retrieved 28 October 2014, from http://www.ntm.org.in/
download/ttvol/Volume7/Articles/06%20-%20Indian%20Liter-
ature,%20Multiculturalism%20and%20Translation%20-%20
Guru%20Charan%20Behera.pdf
M

‰‰ Flat World Knowledge,. (2014). Sociology: Understanding and

Changing the Social World, Brief Edition 1.0 | Flat World Education.
Retrieved 28 October 2014, from http://catalog.flatworldknowl-
edge.com/bookhub/2?e=barkbrief-ch02_s02
N

NMIMS Global Access - School for Continuing Education

N
M
IM
S
 C h a
6 p t e r

ENTERING INTERNATIONAL MARKETS

CONTENTS

S
6.1 Introduction
6.2 Concept of International Market
IM
6.2.1 Choice of Strategy in International Market
Self Assessment Questions
Activity
6.3 Ways to Enter International Market
6.3.1 Exporting
6.3.2 Licensing
M

6.3.3 Franchising
6.3.4 Mergers and Acquisitions
6.3.5 Joint Ventures
6.3.6 Strategic Alliance
N

6.3.7 Turnkey Projects

6.3.8 Contract Manufacturing
6.3.9 Wholly Owned Subsidiary
Self Assessment Questions
Activity
6.4 Reasons for Entering International Markets
Self Assessment Questions
Activity
6.5 Timing of Entering International Markets
Self Assessment Questions
Activity
6.6 Benefits of Global Involvement for Associates and Managers
Self Assessment Questions
Activity
6.7 Summary
6.8 Descriptive Questions
6.9 Answers and Hints
6.10 Suggested Reading for Reference

NMIMS Global Access - School for Continuing Education

156  International Business

Introductory Caselet
n o t e s

NESTLÉ’S ENTRY IN INTERNATIONAL MARKET

Nestlé founded by Henri Nestle in 1866 in Switzerland, is one of

the largest nutrition and food organisations in the world. It start-
ed with infant food made from powdered milk, baked food and
sugar. In its early years, the organisation looked for opportuni-
ties for business expansion across the world. The main reason for
making global entry was that Switzerland was lacking in natural
resources that were essential for manufacturing food products.
Nestlé established its first office in London in 1868 and merged
with Anglo-Swiss Condensed Milk, which expanded Nestlé’s
product line. Nestlé expanded its operations through mergers
and acquisitions. For example, it acquired a Swiss chocolate mak-
er and moved into the chocolate business in 1929. It introduced

S
Nescafe as the world’s first soluble coffee drink. In 1947, Nestlé
acquired Maggi, which is still considered to be the best move by
Nestlé. Nestlé entered 76 countries with 500 factories. The prod-
uct range of Nestlé expanded to include coffee, bottled water,
IM
chocolates, ice creams, confectionary, and refrigerated food. In
the 1990s, Nestlé realised that its growth rate is decreasing. The
reason was the stagnation of population growth, decline in food
consumption, and competition in the retail environment in some
countries. Nestlé looked for opportunities in Asia, Eastern Eu-
rope and Latin America as these regions were poor but had high
potential to develop. These countries were characterised by high
M

population and economic growth. Thus, Nestlé formed strategies

to enter the emerging markets. It used its same global brands in
various countries; however, it also focused on optimising ingredi-
ents and technology to local conditions.
N

Nestlé entered India in 1912 as an importer of finished food prod-

ucts. In 1961, it started its first factory in Punjab and developed
the milk industry by educating, advising, and helping farmers.
Nestlé has built a special relationship with India by collaborat-
ing in India’s growth. It focused on understanding the lifestyles
of people and anticipating their needs. It acquired customers by
providing a high product quality at affordable prices. The Indian
portfolio of Nestlé products includes Nescafe, Maggi, Milky Bar,
Kit Kat, Bar-One, Milkmaid, Nestea, Nestlé Natural Dahi, etc.
Nestlé is recognised as one of India’s most respected organisa-
tions and top wealth creators. The major strategies followed by
Nestlé India are as follows:
‰‰ Providing Nescafe through a vending machine network
‰‰ Selling confectionaries in railway platforms and college can-
teens
‰‰ Opening coffee corners at metros
‰‰ Adding value through innovation and continuous improvement
‰‰ Improving product availability and visibility

NMIMS Global Access - School for Continuing Education

 ENTERING INTERNATIONAL MARKETS  157

n o t e s

learning objectives

After completing this chapter, you will be able to:

> Discuss the concept of international market
> List the ways to enter into the international market
> Explain the reasons for entering into international markets
> Discuss the timing of international markets
> State the benefits of global involvement for associates and
managers

6.1 INTRODUCTION
The previous chapter discussed cultural issues faced by organisations

S
while entering into foreign markets. After understanding cultural is-
sues in the international market, organisations can make successful
strategies to enter into new arenas.
IM
Every organisation going global needs to decide how to enter into for-
eign markets. There are a number of options available to enter into
foreign markets, such as exporting, licensing, franchising, mergers
and acquisitions, joint ventures, strategic alliance, turnkey projects,
contract manufacturing and wholly owned subsidiary. An organisa-
tion should weigh all the benefits and limitations of every option care-
fully before selecting an option.
M

Apart from selecting the best option to enter into an international

market, an organisation needs to decide the right time to make the
entry. This is because making entry at the wrong time may cause fi-
nancial losses to the organisation, which in turn would affect its brand
N

image. Next time in this chapter, you will study about different ways in
which organisations can enter international markets.

6.2 CONCEPT OF INTERNATIONAL MARKET

A market can be defined as a system of institutions, instructions and
processes relating to the exchange of goods and services between per-
sons or organisations. Markets can be defined on the basis of vari-
ous factors, such as geographical dimensions, consumers, products or
even the behavioural aspects of consumers. They are mainly divided
into two types, namely international market and domestic market.
An international market is defined geographically as a market outside
the international boundaries of a company's country of citizenship. A
company is usually a citizen of the country where it was organised.
IBM, for example, was formed in the United States. Thus, IBM's inter-
national market would be any geographical area outside the territorial
boundary of the US, where it conducts business. On the other hand,
domestic market is conceptually opposite of international market. It
is the geographic region within the national boundaries of the compa-
ny's home country.

NMIMS Global Access - School for Continuing Education

158  International Business

n o t e s

6.2.1  CHOICE OF STRATEGY IN INTERNATIONAL MARKET

Every organisation going global has to adopt a strategy to enter into

the foreign market. The adoption of the strategy helps in designing a
set of actions that guide the organisation in the foreign market. The
international strategy adopted by the organisation addresses the fol-
lowing three important questions:
‰‰ What should be the market share of the organisation in the world’s
major markets?
‰‰ How to build the global presence in other countries?
‰‰ How to gain the competitive advantage?

The choice of the global entry by an organisation should be based on

the following aspects:

S
‰‰ Characteristics of the market, such as potential sales, philosophy,
policies, rules and limitations
‰‰ Characteristicsof organisations, such as degree of market knowl-
IM
edge and competition
‰‰ Organisation’s commitment towards global orientation

An organisation entering into the international market should assess

all the pros and cons of every option carefully before making any deci-
sion. Mostly, organisations follow the following strategies to enter into
M

international markets:
‰‰ International strategy: Under this strategy, organisations create
value by transferring valuable skills to foreign markets. For in-
stance, Microsoft develops core architecture and computer codes
N

of its products at its campus in Washington, US and allows nation-

al subsidiaries to develop marketing and distribution strategies on
their own as per the country’s culture.
‰‰ Multi-domestic strategy: Under this strategy, organisations cus-
tomise their product offerings and marketing strategies to adapt
to cultural differences of different countries. Multi-domestic or-
ganisations form a complete set of activities including production,
marketing, and research and development. Thus, multi-domestic
organisations have a high cost structure.
‰‰ Global strategy: Under this strategy, organisations follow a low
cost strategy. Organisations do not customise their product offer-
ings and marketing strategy to local conditions as it leads to in-
creased costs.
‰‰ Transnational strategy: As per this strategy, skills cannot only be
developed in home country. They can be developed in a foreign
country and transferred to the home country. This is called global
learning. However, transnational strategy is difficult for organisa-
tions to pursue.

NMIMS Global Access - School for Continuing Education

 ENTERING INTERNATIONAL MARKETS  159

n o t e s

self assessment Questions

1. __________ is defined geographically as a market outside the

international boundaries of a company’s country of citizenship.
2. Under which of the following strategy, organisations create
value by transferring the valuable skills to foreign markets.
a. International strategy
b. Multi-domestic strategy
c. Global strategy
d. Transnational strategy
3. Multi-domestic organisations have a high cost structure.
(True /False)

S
Activity

Using Internet search about and analyse the market characteristics

of country.
IM
WAYS TO ENTER INTERNATIONAL
6.3
MARKET
Before entering into foreign markets, every organisation needs to de-
M

cide a way of going global. There are a number of options available

to enter into foreign markets; however, every preference has its own
pros and cons. An organisation should weigh all the benefits and lim-
itations of every option carefully before making a selection to enter
into a foreign market. Figure 6.1 shows the ways of global entry:
N

Exporting
Choices for Entering International

Licensing

Franchising

Mergers and acquisitions

Markets

Joint ventures

Strategic alliance

Wholly owned subsidiary

Contract manufacturing

Turnkey project

Figure 6.1: Choices for Entering International Markets

Let us discuss these entry choices in the subsequent sections.

NMIMS Global Access - School for Continuing Education

160  International Business

n o t e s

6.3.1 EXPORTING

Exporting supports an organisation to increase its business in the

international market by selling its goods and services there. Export-
ing is of two types, namely, direct and indirect exporting. In direct
exporting, sellers and buyers from different countries comes in direct
contact with each other. On the other hand, in indirect exporting, a
distributer from the home country becomes a mediator for sellers and
customers from other countries. Exporting has two benefits. Firstly,
the cost of establishing operations in a foreign country is not involved.
Secondly, the economies of scale can easily be determined by organi-
sations as products are manufactured at the centralised location and
then sold globally.

However, exporting has some boundaries, which are as follows:

S
‰‰ Comprises high transportation costs and tariffs
‰‰ Lacks control over the marketing and distribution of products globally

‰‰ Finds it difficult to export a product whose substitute is already

IM
available in the foreign market
‰‰ Finds it difficult to modify the product

6.3.2 LICENSING

When one organisation permits another organisation to use its partic-

M

ular form of intellectual property, under clearly defined conditions, it

is called licensing. Generally, an organisation whose intellectual prop-
erty is protected by a patent, trademark, or copyright, can license it
to a third party. Licensing is a very effective way of profit earning for
intellectual property-rich organisations. For example, Siebel Systems
N

granted permission to other organisations for using its software that

tracks customer’s behaviour. Siebel has earned nearly 40% of its reve-
nue by licensing the software.

A licensing agreement is made between the licensee and the licensor

that contains all terms and conditions of a license. The organisation that
receives the permission to use intellectual property is called a licensee,
whereas a licensor is the one that grants permission. One of the effective
ways of earning income for the organisation is licensing as the licensee
pays a certain initial amount to get authorisation and constant royalty
to use the intellectual property. Licensing is a cost effective option for
the organisation to expand its geographical dimensions. Apart from this,
another added advantage of licensing is that the risk associated with the
intellectual property is shared by both the licensee and the licensor.

However, there are some limitations of licensing, which are:

‰‰ Lacks control over the product manufacturing by the licensor
‰‰ Gains fewer benefits of the economies of scale as the licensee man-
ufactures products.

NMIMS Global Access - School for Continuing Education

 ENTERING INTERNATIONAL MARKETS  161

n o t e s

‰‰ Generates less returns as profit sharing is between both the licen-

sor and licensee.
‰‰ Involves the risk of imitation of technology by the licensee.

6.3.3 FRANCHISING

Franchising is an approach that is generally employed by service or-

ganisations. The franchisee gets the right by the franchiser to sell his/
her products and services. The costs and risks involved are borne by
the franchisee for setting up the operations in the foreign market. The
benefits of franchising and licensing are similar. The major drawback
of franchising is a lack of quality control. This is because the large
number of franchisees and their geographic distance from the fran-
chisor make it difficult to maintain quality. McDonald’s and KFC are
the examples of franchising.

S
6.3.4  MERGERS AND ACQUISITIONS
IM
The strategies adopted to expand the scope of business for an organ-
isation come under mergers and acquisitions. A merger occurs when
two or more organisations combine by dissolving their assets and lia-
bilities to form a new business entity. It is also referred to as an agree-
ment in which one organisation attains the assets and liabilities of the
other in exchange for shares or cash. Thus, in merger, an organisa-
tion’s resources are pooled together to create a competitive advantage.
M

On the other hand, gaining partial or full control of one organisation

by another is considered as acquisition. Mostly, acquisitions are not
friendly in nature as one organisation tries to take over another organ-
N

isation by adopting unfriendly measures, which may not be in the in-

terest of the acquired organisation. Mainly, mergers and acquisitions
are done to increase market power and gain synergy of organisations.
There are various types of mergers that help in expanding the size of
organisations. These are briefly explained in the following points:
‰‰ Horizontal mergers: These mergers take place when two or more
organisations of the same trade merge actively. The merged organ-
isations results in a larger organisation and large-scale operations.
Resources and skills of organisations are shared by merging hori-
zontally. For example, organisation manufacturing computer hard-
ware may merge with an organisation doing the same business.
‰‰ Vertical mergers: These mergers take place between two or more
organisations having different phases of business in the same in-
dustry. For instance, organisation A, which is a manufacturing
concern, merges with organisation B, which serves as the sales
representative body for organisation A. The advantages of vertical
mergers include reduced communication cost, synchronised pro-
duction, better inventory planning, and so on.

NMIMS Global Access - School for Continuing Education

162  International Business

n o t e s

‰‰ Concentric mergers: These are mixtures of two or more related

organisations with similar production or distribution technologies.
For example, a merger between a motorcycle manufacturer and a
car manufacturer.
‰‰ Conglomerate mergers: These mergers denote a situation where
two or more discrete organisations merge horizontally or vertical-
ly. For example, the merger of a fast-food outlet with a cloth manu-
facturing organisation is a conglomerate merger.

Mergers and acquisitions happen to achieve the following results:

‰‰ Rise in the value of the organisation’s stock
‰‰ Increase in the growth rate by making strategic investments
‰‰ Expansion of product lines

S
‰‰ Reduction in competition
‰‰ Tax discounts and benefits
‰‰ Optimum utilisation of organisational capabilities
IM
‰‰ Exploration of new markets for increasing market share

6.3.5  JOINT VENTURES

Joint ventures refer to the formation of an entity by combining two or

more organisations that want to achieve similar objectives for a spe-
M

cific time period. In other words, two organisations enter into a coop-
erative business agreement to fulfil their mutual needs. The joint ven-
ture strategy allows organisations to share their technical skills and
explicit knowledge and represents a potential source for the growth
N

of organisations. In addition, it is very useful for organisations going

global.

An organisation can enter into a joint venture in the following situa-

tions:
‰‰ When performing an activity is uneconomical for an individual or-
ganisation.
‰‰ When the risks of business are collective and reduced for partici-
pating organisations.
‰‰ When the unique skills of organisations can be brought together.
‰‰ When setting an independent organisation requires overcoming
difficulties, such as tariffs and import quota.

A rich organisation may enter into an agreement with an organisa-

tion having technical know-how but lack in funds. According to Fried-
man, “50% of joint ventures take place for the purpose of knowledge
acquisition.” It is because every organisation would like to apply the
knowledge gained from one project in other projects. Thus, it can be

NMIMS Global Access - School for Continuing Education

 ENTERING INTERNATIONAL MARKETS  163

n o t e s

said that attaining knowledge is one of the reasons to enter into joint
ventures. The other reasons for the growth of joint ventures are as
follows:
‰‰ Sharing technical and management skills
‰‰ Spreading the business by investments sharing
‰‰ Spreading the risk involved in the project
‰‰ Attaining distribution channels or raw materials supply
‰‰ Simplifying tax-related matters
‰‰ Creating access to foreign technology

Although joint ventures have various benefits; there are various rea-
sons due to which they may not be able to realise the desired goals.
The reasons for the failure of joint ventures are as follows:

S
‰‰ Failure of organisations on control sharing or compromising on
difficult issues
‰‰ Inadequate
IM
planning for joint ventures
‰‰ Managers possessing expertise in one organisation refuses to
share knowledge with their counterparts in other organisation of
the joint venture
‰‰ Failureto achieve consensus to meet the basic objectives of joint
ventures
M

‰‰ Lack of obligation and time in implementing joint ventures.

Joint ventures can be a risky but gratifying strategy, if the concerned

organisations match their thought process to achieve common objec-
N

tives. Organisations entering into joint ventures should work together

for a successful partnership for both the organisations.

6.3.6 STRATEGIC ALLIANCE

Strategic alliance allows organisations to share risks and resources. It

is a partnership between the home country organisation and the in-
ternational organisation. Every partner possesses knowledge and re-
sources and tries to learn new skills. Strategic coalition develops core
proficiencies that contribute to the goals of an organisation. General-
ly, organisations form strategic coalition to gain technical skills and
knowledge. However, all coalitions cannot be successful and the fore-
most reason for their failure is the conflict among partners and difficul-
ty to manage the coalitions. The difficultly may also arise if the cultures
of organisations entering into a coalition do not match with each other.

In order to gain a competitive advantage, organisations enter into a

strategic alliance with their suppliers or competitors. These alliances
facilitate organisations to enter new markets, block competitors, and

NMIMS Global Access - School for Continuing Education

164  International Business

n o t e s

generate higher profits. The benefits of strategic alliances are as follows:

‰‰ Helping organisations to enter new markets by establishing part-
nership with other organisations
‰‰ Reducing manufacturing costs by pooling resources and efficient-
ly utilising them
‰‰ Developing technological proficiency by sharing technological
knowledge

There are four types of strategic alliance, which are discussed as

follows:
‰‰ Pro-competitive coalition: This involves a relationship within the
industry coalition, such as manufacturers, suppliers, or merchants.
These coalitions offer the benefits of vertical incorporation.

S
‰‰ Non-competitive coalition: This involves intra-industry partner-
ships between non-competitive organisations. In non-competitive
coalition, the areas of activities of organisations do not overlap
each other. Thus, there is no competition among them.
IM
‰‰ Competitive coalition: This involves a partnership between two
or more competing organisations. There can be intra-industry or
inter-industry competitive coalition. Many foreign organisations
enter into strategic coalition with local competitive organisations.
‰‰ Pre-competitive coalition: This implies partnerships between
M

two or more organisations from discrete industries. This alliance

is formed to work on different activities, such as new technology
development, new product, or new idea. Combined research and
development activities are examples of pre-competitive coalition.
N

According to Hamel and Prahalad, organisations form strategic alli-

ances because of the following purposes:
‰‰ Risk and cost sharing is associated with the development of new
products or processes. For example, the coalition between Boeing
and a number of Japanese organisations to build 767 aircraft was
the Boeing’s attempt to share the manufacturing cost of aircrafts.
‰‰ Skills that cannot be developed self-sufficiently are united. For
example, in 1990, AT&T collated with NEC Corporation of Japan
to trade technological skills. AT&T gave NEC a computer-aided
design technology, while in return NEC gave AT&T access to ad-
vanced computer chips.
‰‰ To gain an easy entry into foreign markets. For example, entering
the Japanese cellular phone market was a difficulty for Motorola
because of high trade barriers. Thus, it formed a coalition with
Toshiba of Japan to build microprocessors.

The demerit of the strategic coalition is that it gives competitors a

cost-effective route to enter new technology and markets.

NMIMS Global Access - School for Continuing Education

 ENTERING INTERNATIONAL MARKETS  165

n o t e s

6.3.7 TURNKEY PROJECTS

Turnkey projects are the projects undertaken by foreign organisations

based on the principle of build, control, and transfer. It is an alliance in
which one organisation is completely responsible on behalf of a client
organisation to set up a new organisation, starting from the infrastruc-
ture planning till the training of employees. After the completion of
a project, the newly set up organisation is handed over to the client
organisation for starting actual operations. For example, a contractor
hand overs a hospital installed with high technology medical equip-
ment to the owner after completion.

6.3.8  CONTRACT MANUFACTURING

Contract manufacturing implies a coalition in which the production of

S
goods is subcontracted to some other organisation. One organisation
chooses the design and specifications but another organisation pro-
duces. For example, Nike follows the strategy of contract manufactur-
ing where it decides the designs, but the manufacturing of the product
IM
is outsourced to another organisation.

6.3.9  WHOLLY OWNED SUBSIDIARY

Wholly owned subsidiary refers to the most expensive global entry

substitute. Under this, a parent company acquires a company which
M

becomes its subsidiary. It is also called Greenfield venture. The main

advantage of founding a wholly owned subsidiary in a foreign coun-
try is that it gives the restricted control to the organisation in han-
dling operations. However, this mode of entry involves high costs as
an organisation may have to attain particular skills, awareness, and
N

proficiency to set up operations aboard. It is suggested that strategic

alliances should be preferred in a country if the risk of establishing
a subsidiary is high. LG and Samsung are examples of organisations
that set wholly owned subsidiaries in India.

self assessment Questions

4. What are the types of exporting?

5. A licensing agreement is made between the __________ and the
_________that contains all terms and conditions of a license.
6. Franchising cannot be employed by service organisations.
(True/False)
7. _____________ mergers denote a situation where two or more
discrete organisations merge horizontally or vertically.
8. The joint venture strategy allows organisations to share their
technical skills and explicit knowledge. (True/False)
9. ___________allows organisations to share risks and resources.

NMIMS Global Access - School for Continuing Education

166  International Business

n o t e s

10. Which of the following projects are undertaken by foreign

organisations based on the principle of build, control, and
transfer?
a. Contract manufacturing
b. Turnkey projects
c. Non-competitive coalition
d. Joint ventures
11. Which of the following refers to the formation of an entity by
combining two or more organisations?
a. Turnkey projects
b. Non-competitive coalition

S
c. Joint ventures
d. Contract manufacturing
12. What is the other name for a wholly owned subsidiary?
IM
13. ____________ implies partnerships between two or more
organisations from discrete industries.
14. Organisation can enter into a joint venture when the risks of
business are collective and can be reduced by forming a joint
venture. (True/False)
M

Activity

Using the Internet, find information on the joint venture between

Bharti and Walmart. Based on the information, prepare a report on
N

the pros and cons of the joint venture.

REASONS FOR ENTERING

6.4
INTERNATIONAL MARKETS
The international market provides opportunities to organisations to
promote and sell their products in foreign countries. This in turn al-
lows organisations to earn huge profit margins. Such expansion of
business at an international level is attributed to globalisation. Apart
from this, there are many other reasons for which organisations enter
into international markets:
‰‰ Fast industrialisation: Industrialisation indicates a huge rise in
the production of goods that forces organisations to look beyond
the domestic market and sell their products. Therefore, organisa-
tions need international marketing to endorse their products in
foreign countries.

NMIMS Global Access - School for Continuing Education

 ENTERING INTERNATIONAL MARKETS  167

n o t e s

‰‰ Fulfillment of economic needs: Employment opportunities are

created for the people of the host country due to the establishment
of new organisations there. For example, when an MNC endorses
its product in a country, it recruits local people to approach and
influence customers. In this way, the economic needs of the local
people of the country get fulfilled.
‰‰ Rise in the standard of living: International marketing helps in
providing good quality products and superior technology, which
further enables a country in elevating its standard of living.
‰‰ Cost reduction: International marketing enriches internation-
al trade, which in turn, helps an organisation in recognising cost
benefits.
‰‰ Aid to less developed countries: Through global marketing, low
developed countries get assistance in terms of technology and oth-

S
er resources from developed nations. Therefore, it can be said that
a developed country supports low developed countries in their
struggle towards economic growth.
IM
self assessment Questions

15. Industrialisation indicates the huge fall in the production of

goods. (True/False)
16. Through global marketing, under developed countries get
M

assistance in terms of technology. (True/False)

Activity
N

Research on the Internet and find out how a domestic organisation

benefits from international trade.

TIMING OF ENTERING
6.5
INTERNATIONAL MARKETS
Apart from strategies used, one of the important factors that deter-
mine the success of organisations is the timing of their entry into in-
ternational markets. This is because entry at the wrong time may put
organisations into huge losses. There can be three timings for organi-
sations to enter into an international market:
‰‰ First mover: First mover implies being the first in any area. If an
organisation is the first mover in a specific market or industry, it
implies that it can easily acquire brand recognition and customer
loyalty. For instance, in World Wide Web, Yahoo is the first website
that offered directory and search engine. Also, Amazon.com (books)
and e-bay (online auctions) are the first movers in the online retail
industry. First movers are followed by competitors who try to gain

NMIMS Global Access - School for Continuing Education

168  International Business

n o t e s

success ahead from first movers. First movers are called market pi-
oneers and thus gain market dominance and profitability.
However, first movers also suffer a major disadvantage of pioneer-
ing costs that include business failure costs in case an organisa-
tion is unable to meet up the expectations of customers. Pioneer-
ing costs also include the costs of promotion of a product/ service.
Examples of market pioneers are Coca-Cola, Tide, Pitney-Bowes,
Lipton Tea, and Levi Strauss.
‰‰ Early mover: These are the followers of the first movers who come
in the market at the right time. Early movers enter into market at
the initial stage of a product/service. Like first movers, they also
receive brand recognition and customer loyalty. They have an op-
portunity of becoming market leaders and claim rewards in terms
of a high profit. Early movers also tend to indulge in competition at

S
their own level. Though they do not present any immediate threat
to the market leader but they may emerge as challengers with
their efforts over a period of time. For instance, the producer of
Smirnoff Vodka, enjoyed a dominant market share. Soon, it faced
IM
competition by a brand, Wolfschmidt, which was produced by The
Seagram Company Ltd. The price was set $1 less than Smirnoff
with the same quality.
‰‰ Late entrants: These are the entrants who enter very late in the
market. These entrants take a free ride on first movers and early
movers in number of areas such as research and development, ed-
M

ucation and infrastructure development. Late entrants need not

incur innovation costs that first movers and early entrants bear.
For instance, Philips is a late entrant in the mobile phone market
and face tough competition from Micromax, Lava and Motorola.
N

self assessment Questions

17. _________implies being the first in any area.

18. Early movers take a free ride on the first movers. (True/False)
19. Give a few examples of first movers.
20. ___________is the first website that offered a directory and
search engine.

Activity

Search the Internet and find out the disadvantages of being first
movers and late entrants.

NMIMS Global Access - School for Continuing Education

 ENTERING INTERNATIONAL MARKETS  169

n o t e s

BENEFITS OF GLOBAL INVOLVEMENT

6.6
FOR ASSOCIATES AND MANAGERS
Associates and managers get international exposure and experience
by dealing globally. They get a chance of personal grooming, growth,
and development up to a great extent. Organisations going global pro-
vide opportunities to associates and managers to directly work with
people from different cultures and backgrounds. This enables indi-
viduals to:
‰‰ Work as a team and handle international jobs effectively
‰‰ Harmonise with members of different cultures
‰‰ Initiatethe solution of issues, such as low faith, lack of support,

S
and lack of tuning among team members
‰‰ Develop an integrated vision of team members
‰‰ Value diversity, flexibility, and self-governance of team members
IM
‰‰ Work with individuals having different skill sets and knowledge

self assessment Questions

21. Associates and managers get international exposure and

M

experience by dealing globally. (True/False)

Activity

Meet a professional working with a multinational organisation and

N

learn about his/her growth opportunities.

6.7 SUMMARY
‰‰ International market is a place where international transactions
are conducted across national borders by organisations in order to
meet their objectives and expand business.
‰‰ The choice of strategy to be used in the international market de-
pends on the county’s culture, laws, competition, etc.
‰‰ Organisations follow four types of strategies to enter into the in-
ternational market, namely international strategy, multi-domestic
strategy, global strategy and transnational strategy.
‰‰ The different ways of entering into an international market are
exporting, licensing, franchising, mergers and acquisitions, strate-
gic alliance wholly owned subsidiary, contract manufacturing, and
turnkey projects.

NMIMS Global Access - School for Continuing Education

170  International Business

n o t e s

‰‰ Entering international markets help in fast industrialisation, rise

in standard of living, and fulfillment of economic needs.
‰‰ An organisation can be a first mover, early mover, or late entrant
in the market.
‰‰ An individual working with a global organisation gets the chance
of personal growth and development.

key words

‰‰ Customisation: Selling different products with different fea-

tures by matching them to the needs of customers.
‰‰ Franchising: It is a strategy of using another organisation’s
business model to sell products.
‰‰ Joint ventures: Joint ventures combine two or more organisa-

S
tions for a specified time period.
‰‰ Regional economic integration: It is a trade agreement be-
tween countries to remove trade barriers to allow easy trade
IM
transactions among nations.

6.8 DESCRIPTIVE QUESTIONS

1. Explain the concept of international market.
M

2. What strategies are followed by organisations to enter into

international markets?
3. Write short notes on exporting and licensing.
4. Explain various types of mergers.
N

5. What is a strategic alliance? Explain its four types.

6. What is a wholly owned subsidiary?
7. State the reasons for entering international markets.
8. How does the timing of entering a market affect organisational growth?
9. Explain the benefits of global involvement for associates and
managers.

6.9 ANSWERS and hints

answers for Self Assessment Questions

Topic Q. No. Answers

Concept of International 1. International market 
Market
2. a.  International strategy
3. True

NMIMS Global Access - School for Continuing Education

 ENTERING INTERNATIONAL MARKETS  171

n o t e s

Topic Q. No. Answers

Ways to Enter Internation- 4. Exporting is of two types, namely
al Market direct and indirect exporting.
5. Licensee and licensor
6. False
7. Conglomerate
8. True
9. Strategic alliance
10. b.  Turnkey projects
11. c. Joint Ventures
12. Greenfield venture

S
13. Pre-competitive coalition
14. True
Reasons for Entering 15. False
IM
International Markets
16. True
Timing of Entering 17. First mover
International Markets
18. False
M

19. Coca-Cola, Tide, Pitney-Bowes,

Lipton Tea, and Levi Strauss
20. Yahoo
Benefits of Global 21. True
N

Involvement for Associates

and Managers

hints for Descriptive Questions

1. International market is a place where international transactions

are conducted across national borders by organisations to meet
its objectives. Refer to Section 6.2 Concept of International
Market.
2. The choice of strategy to be used in the international market
depends on the country’s culture, laws, competition, etc. Refer
to Section 6.2 Concept of International Market.
3. Exporting means selling products and services in a foreign
country. On the other hand, licensing is all about when one
organisation permits another organisation to use its particular
form of intellectual property. Refer to Section 6.3 Ways to Enter
International Market.

NMIMS Global Access - School for Continuing Education

172  International Business

n o t e s

4. The different types of mergers horizontal mergers, vertical

mergers, concentric mergers, and conglomerate mergers. Refer
to Section 6.3 Ways to Enter International Market.
5. Strategic alliance allows organisations to share risks and resources.
Refer to Section 6.3 Ways to Enter International Market.
6. A wholly owned subsidiary is an organisation which is acquired
by a parent organisation. It gives constricted control to the
organisation in handling operations. Refer to Section 6.3 Ways
to Enter International Market.
7. Entering international markets help in fast industrialisation and
rise in the standard of living. Refer to Section 6.4 Reasons for
Entering International Markets.
8. Timing of entry of organisations into an international market

S
determines the success of organisations. Refer to Section
6.5 Timing of Entering International Markets.
9. Associates and managers get international exposure and
IM
experience by dealing globally. Refer to Section 6.6 Benefits of
Global Involvement for Associates and Managers.

6.10 SUGGESTED READING FOR REFERENCE

Suggested Readings
M

‰‰ Aswathappa, A. (2006). International business (1st ed.). New Delhi:

Tata McGraw-Hill.
‰‰ Endres, A., & Fleming, G. (2002). International organisations and
N

the analysis of economic policy, 1919-1950 (1st ed.). Cambridge:

Cambridge University Press.
‰‰ Gandolfo, G., & Gandolfo, G. (1998). International trade theory and
policy (1st ed.). Berlin: Springer.

E-References

‰‰ Market, D. (2014). Determinants for Entry Timing Decision by Ma-

laysian Construction Firms in International Market.  Academia.
edu. Retrieved 30 October 2014, from http://www.academia.
edu/3162533/Determinants_for_Entry_Timing_Decision_by_Ma-
laysian_Construction_Firms_in_International_Market
‰‰ nibusinessinfo.co.uk,.(2014). Retrieved 30 October 2014, from
https://www.nibusinessinfo.co.uk/content/different-ways-en-
ter-overseas-markets
‰‰ Small Business - Chron.com,. (2014). Ways for Companies to Enter
the Global Market. Retrieved 30 October 2014, from http://smallbusi-
ness.chron.com/ways-companies-enter-global-market-43849.html

NMIMS Global Access - School for Continuing Education

 C h a
7 p t e r

INTERNATIONAL MARKETING

CONTENTS

S
7.1 Introduction
7.2 Concept of International Marketing
IM
7.2.1 Process of International Marketing
7.2.2 Phases of International Marketing
7.2.3 Different Orientations of International Marketing
Self Assessment Questions
Activity
7.3 Multinational Corporations and Transnational Corporations
M

Self Assessment Questions

Activity
7.4 Problems in Managing International Marketing Channels
Self Assessment Questions
N

Activity
7.5 Types of Exporters, Export Houses and Marketing Organisations
Self Assessment Questions
Activity
7.6 International Market Research
7.6.1 Scope of Research in International Market
7.6.2 International Market Research Process
Self Assessment Questions
Activity
7.7 Summary
7.8 Descriptive Questions
7.9 Answers and Hints
7.10 Suggested Reading for Reference

NMIMS Global Access - School for Continuing Education

174  International Business

Introductory Caselet
n o t e s

INTERNATIONAL MARKETING OF THE

INDIAN FILM INDUSTRY

The Indian film industry has come a long way and gone beyond geo-
graphical boundaries. It has depicted a long story of nine decades,
starting from the early shaky screen images to multi-branched and
vast economic empire. This industry has created an easy pathway
for Indian cinema to enter into the international market. The re-
cent past has shown that the export sales of many Indian movies
were much more than the domestic sales. The industry has shown
the progress in all the four aspects of globalisation, which are goods
or services, capital, technology and people.

The Indian film industry has come out of its traditional boundar-
ies of making love and fantasy films and learnt to work on experi-

S
mental plots. The regional film industry is also touched by the im-
pact of globalisation. Not only are the Indian films making money
outside the country but are also attracting foreign producers and
IM
directors in the industry. Movie makers from Britain, America,
and France are greatly interested in investing in the entertain-
ment industry of India. Entertainment-based organisations such
as Eros, Adlabs, Indian Film Company, and UTV have raised hun-
dreds of millions of pounds from foreign investors.

Sony pictures enlisted Sanjay Leela Bhansali to co-produce

M

Saawariya that released with 1000 prints all over the world in
2007. It was the first time in the Indian cinema history when one
of the top Hollywood studios produced an Indian film.

It was the impact of globalisation that three Indian movies got

N

nominated for Oscar Awards in the foreign language catego-

ry. These were Mother India (1957), Salaam Bombay (1988), and
Lagaan (2001). The legendary filmmaker Satyajit Ray won the Os-
car Award in the Lifetime Achievement Awards category in 1992.
Pather Panchali, the first film of Satyajit Ray won 11 international
prizes at the Cannes Film Festival. In 1982, eight academy awards
had been won by a biographic film on Gandhi, with Ben Kingsley
as Gandhi and director Richard Attenborough. It was an interna-
tional co-production between India and the UK.

The late 20th century, is witnessed the beginning of globalisation

in the Indian film industry. Life of Christ at Mehta’s American-In-
dian cinema inspired Dada Saheb Phalke to make a legendry,
Raja Harishchandra. In the late 1920s, around 80 percent of mov-
ies shown in India were American but today around 80 percent
of Indian movies are released worldwide. Raj Kapoor’s Aawara
made Soviet Union and other countries of the communist bloc
crazy in 1950.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MARKETING  175

Introductory Caselet
n o t e s

There are many western actors, who have worked in Indian mov-
ies. For instance Rachel Shelley in Lagaan, Giselle Monteiro in
Love AajKal, Barbara Mori in Kites, and Chris Patten in Rang De
Basanti.

Not only the western actors but the Indian film industry’s talent is
also presenting a luring impact on Hollywood. For instance, Anil
Kapoor has an important role in one of the biggest Hollywood film
series, Mission Impossible. He also played an important role in Os-
car winning movie Slumdog Millionaire. The movie has won four
Golden Globes and eight academy Awards. A.R. Rahman wrote
the music for Andrew Lloyd Webber’s Bombay Dreams. In Lon-
don’s West End, the musical version of Hum Aapke Hain Kaun has
been played.

S
Globalisation has put a tremendous impact on the Indian film
industry in terms of using western production standards, usage
of English in the script, and incorporation of some western style
IM
plots. With `100 crores of investments, Shahrukh Khan has put
all his efforts in his home production Ra.One in making it not less
than any Hollywood scientific fiction-based movie. For giving it
an international touch, he hired a number of foreign technicians
for the film. The Oscar winner Hans Zimmer has worked on the
background score of the movie.
M

Bollywood movies are relying more on Hollywood special effects,

visual effects, and live sounds, which are used during production.
Filmmakers are using foreign talents for several of the acts such
as set design, cinematography, editing and music. For example,
Farhan Akhtar’s Don, and Karan Johar’s Kabhi Alvida Na Kehna
N

have used foreign technicians; Amir Khan’s Delhi Belly had Jason
West as the cinematographer and Rajnikant had used at least half
a dozen international technicians in his film Robot.

Bollywood had produced Dilwale Dulhaniya Le Jayenge, Kal Ho

Na Ho, and New York kind of hit movies which dealt with the over-
seas Indian culture. Indian festivals, traditions, and culture have
become famous all over the world through the Indian cinema.

Not only through movies but the Indian film industry has also
made its presence on the global platform by organising the pres-
tigious International Indian Film Academy (IIFA) awards. IIFA
has been known for its marvellous events hosted in some foreign
country. It glorifies the shimmering effect of the Indian film indus-
try in the whole world by promoting Indian cinema globally.

NMIMS Global Access - School for Continuing Education

176  International Business

n o t e s

learning objectives

After completing this chapter, you will be able to:

>> Define the concept of international marketing
>> Describe the process of international marketing
>> List different orientations of international marketing
>> Differentiate between multinational corporations and trans-
national corporations
>> Discuss the types of exporters, export houses and marketing
organisations
>> Identify problems in managing international marketing
channels
>> Explain the concept of international market research

S
7.1 Introduction
IM
The previous chapter discussed about the ways of entering into in-
ternational markets. After taking the decision to enter into the for-
eign market, organisations can make strategies for marketing their
products/ services into the foreign market. International marketing
comes into practice when an organisation markets its products in oth-
er countries of the world to gain profit by capturing the market share.
M

In the past, only big organisations with adequate resources used to

enter foreign markets. However, after liberalisation, the government
of various nations started providing assistance to small organisations
to market their products internationally. For example, after 1991, In-
N

dia provided financial support to small and medium handicraft organ-

isations to launch their products on a global platform. This happened
because the nations recognised that international marketing not only
benefits the organisation but also the parent nation.

International marketing leads to fulfilment of diverse consumer needs

and increases the standard of living of people by providing quality
products. It is significant for the economic development and prosper-
ity of a nation as it helps in developing trade relations and earning
foreign exchange. In addition, it helps organisations in lowering the
cost of production and expanding the market for a product. For exam-
ple, suppose an organisation is incurring losses because the demand
of its products is falling in the home country. This happens because
the market of that product has attained maturity. If the organisation
decides to enter the country in which the demand for its products is in
the growth stage, it can convert its losses into profits by using the right
strategies of international marketing.

International marketing research is conducted for identifying the type

and size of a foreign market, requirements of customers, and level of

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MARKETING  177

n o t e s

competition in the market is done. It assists an organisation in decid-

ing whether to enter a particular market or not by accessing the prof-
itability of a potential market. Next time in this chapter, you will study
about the concept of international marketing in detail.

CONCEPT OF INTERNATIONAL
7.2
MARKETING
Every country in the world offers independent market opportunities
to marketers to sell products and services and attract new customers.
These opportunities have influenced many organisations in the world
to make their global presence. This practice has given rise to a new
concept called international marketing, which is all about promoting
and selling products and services in more than one country. The fol-
lowing are the popular definitions of international marketing:

S
According to American Marketing Association,“International mar-
keting is the multinational process of planning and executing the concep-
tion, pricing, promotion and distribution of ideas, goods, and services to
IM
create exchanges that satisfy individual and organizational objectives.”

According to Cateora and Ghauri, “International marketing is the

performance of business activities that direct the flow of a company’s
goods and services to consumers or users in more than one nation for
a profit.”
M

Organisations practising international marketing are called Multina-

tional Corporations (MNCs). International marketing acts as a tool for
the growth and development of an organisation by providing oppor-
tunities for business expansion. It involves various marketing activi-
N

ties, such as buying, selling, pricing, advertising, sales promotion and

warehousing in foreign markets.

The evolution of the concept of international marketing is attributed

to the advancement in technology and transportation and communi-
cation systems. However, international marketing increases compe-
tition for domestic organisations by providing superior products to
customers. This may lead to protest from domestic organisations. For
instance, in 2011, the Government of India proposed that India would
be open to 51% FDI in retail.  This proposal was met with opposition
from politicians who favoured small kirana stores owners and busi-
nessmen as they fear that foreign organisations would attract all their
customers and their role will be diminished in the market.

7.2.1  PROCESS OF INTERNATIONAL MARKETING

Promoting products and services in the international market is a sys-

tematic process that involves a sequence of steps. Figure 7.1 shows the
steps involved in the international marketing process:

NMIMS Global Access - School for Continuing Education

178  International Business

n o t e s

Appraising the international marketing

environment

Deciding which market to enter

Deciding how to enter

Deciding the marketing mix

Deciding the marketing control

S
Figure 7.1: International Marketing Process
IM
These steps are discussed in detail as follows:
1. Appraising the international marketing environment: This
step involves understanding the characteristics of foreign
customers and markets. It requires extensive research and
collection and analysis of data in order to evaluate profitability
in the international market.
M

2. Deciding which market to enter: This step involves analysing

the threats and opportunities of every international market
considered in order to select the most appropriate market.
For instance, Indian and Chinese markets provide profitable
N

opportunities to marketers to conduct business as these markets

have a large population and are on the stage of development.
On the other hand, Greece is not a profitable opportunity for
marketers as its economy is suffering from financial crisis.
3. Deciding how to enter: This involves selecting the most
appropriate alternative to enter the market. Some of the
alternatives are exporting, joint ventures, mergers and
acquisitions, licensing and franchising.
4. Deciding the marketing mix: Marketing mix includes product,
price, place and promotion. The organisation should decide the
marketing mix of every product or service in accordance with
the host country depending on consumer preferences which
may vary from country to country.
5. Deciding the marketing control: This helps organisations
to upgrade their operations, if required. A proper evaluation
system helps organisation set its short and long-term goals. A
well-managed and controlled marketing system ensures better
survival for the organisation.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MARKETING  179

n o t e s

7.2.2  PHASES OF INTERNATIONAL MARKETING

Every organisation goes through four phases of international market-

ing. These phases are shown in Figure 7.2:

No direct Infrequent Regular

International
international international international
marketing
marketing marketing marketing

Figure 7.2: Phases of International Marketing

S
These phases are explained as follows:
‰‰ No direct international marketing phase: In this phase, an organ-
IM
isation is not indulged in a foreign market actively rather the sale
of products and services takes place in a foreign market through
trading organisations or foreign customers who come directly
to the organisation. Also, foreign customers may order products
through the website of the organisation.
‰‰ Infrequent international marketing phase: In this phase, an or-
M

ganisation does not market its products on a frequent basis. An

organisation can enter a foreign market if it has surplus produc-
tion. If domestic demand increases in this phase, the foreign sales
activity is withdrawn.
‰‰ Regular international marketing phase: Here, the main focus of
N

the organisation is the domestic market; however, it sells its prod-

ucts and services regularly in the foreign market as a source of
additional income.
‰‰ International marketing phase: In this phase, an organisation is
fully devoted towards production and sale in foreign markets. The
organisation establishes a production unit in the host country and
devises strategies to draw attention of foreign customers.

7.2.3 DIFFERENT ORIENTATIONS OF INTERNATIONAL

MARKETING

As the significance of international marketing has increased, or-

ganisations need to come up with strategies to adapt themselves to
any change in the foreign market. Various authors and management
thinkers have given theories and principles that depict how an or-
ganisation should carry its business in an international market. Per-
lmutter (1967) gave the Ethnocentric, Polycentric, Regiocentric and
Geocentric (EPRG) framework that acknowledged different outlook
of organisations that go global. These are called four orientations or

NMIMS Global Access - School for Continuing Education

180  International Business

n o t e s

attitudes of organisations associated with international exposure. Fig-

ure 7.3 shows four orientations of international marketing:

Ethnocentric

Polycentric Regiocentric

Geocentric

S
Figure 7.3: EPRG Framework

These orientations are discussed in detail as follows:

IM
‰‰ Ethnocentric: This organisation has an inclination towards the
home country. This may be referred to as extended domestic mar-
keting. In the ethnocentric approach, domestic operations are
more focused as compared to international operations. The re-
search is also done as per domestic consumers. For such organi-
sations, foreign income is additional to domestic earnings, so the
management believes in practicing native technology and resourc-
M

es for international operations. For instance, Walmart followed the

ethnocentric approach to reach different countries. However, it
failed to coincide with the cultures of countries. Thus, it switched
to the geocentric approach.
N

‰‰ Polycentric: This type of organisational attitude treats every mar-

ket distinctively. It is exactly the opposite of ethnocentric approach
and is known as multi-domestic marketing. Organisations that
adopt the polycentric approach conduct widespread research and
development programs to develop products and adapt to the tastes
and preferences of foreign customers. The best example is an au-
tomobile organisation, Ford Motors, which treats each market in
the world as a unique market and produces vehicles befitting the
demands of the country.
‰‰ Regiocentric: It involves the segmentation of the market accord-
ing to regions. The regions are formed on the basis of cultural, geo-
graphical, and political similarities. For instance, India, Pakistan,
Nepal, and Bhutan can be considered as one geographical region.
Every region has consistent marketing operations, thus, the mar-
keting strategy of a product remains uniform for a particular re-
gion. Pepsi follows the regiocentric approach.
‰‰ Geocentric: Geocentric orientation considers the whole world as
one market. It is an amalgamation of ethnocentric and polycen-

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MARKETING  181

n o t e s

tric approaches. In this orientation, products are localised while

the services associated with products are uniform. McDonald’s is a
successful example of geocentric orientation that serves products
according to the specific local needs in the whole world, such as
selling aloo tikki burger in India instead of beef burgers. However,
the services provided by McDonald’s, such as clean restrooms and
air conditioning are uniform throughout the world.

self assessment Questions

1. Organisations practicing international marketing are also

called _____________
2. International marketing increases competition for domestic
organisations. (True/False)

S
3. What are the components of marketing mix?
4. In which of the following phase, an organisation is fully
devoted to selling in foreign markets.
IM
a. No direct international marketing phase
b. Infrequent international marketing phase
c. Regular international marketing phase
d. International marketing phase
5. ___________ type of organisational attitude treats every market
M

distinctively.
6. Geocentric orientation considers the whole world as one
market. (True/False)
N

Activity

Take any two real life organisations following geocentric and eth-
nocentric approaches. Compare their promotional strategies.

MULTINATIONAL CORPORATIONS AND

7.3
TRANSNATIONAL CORPORATIONS
In simple terms, when an organisation operates in at least two coun-
tries, it is called a multinational organisation. According to Interna-
tional Labour Organisation (ILO), “MNC is a corporation that has its
management headquarters in one country, known as home country and
operates in several other countries, known as host countries.”

There is no single universally accepted definition of MNC. The defini-

tion of MNC has several dimensions, which are discussed as follows:
‰‰ Definition by size: It involves the size of an MNC in terms of mar-
ket worth, sales and profit.

NMIMS Global Access - School for Continuing Education

182  International Business

n o t e s

‰‰ Definition by structure: It includes the number of countries in

which an MNC operates.
‰‰ Definition by performance: It depends on the features, such as
sales and profit. These features show the range of investment by
organisations in foreign countries. For example, a profit-making
MNC can arrange more funds (by either using a part of profit or
borrowing) to invest in foreign markets.
‰‰ Definition by behaviour: It refers to the behavioural features of
the top management of an MNC. It is necessary that the mission,
vision, goals and objectives of an organisation should have a global
orientation.

According to Peter Drucker, the growth of international trade and

MNCsare the two sides of the same coin. This is because the develop-

S
ment of MNCs helps in the economic growth of the host countries. The
merits of MNCs are as follows:
‰‰ Increases income and employment opportunities for host countries
IM
‰‰ Facilitates technology upgradation in the developing countries
‰‰ Creates valuable human resource in host countries
‰‰ Enables host countries to increase exports and decrease imports
‰‰ Integrates the economies of the world
‰‰ Helps in increasing foreign direct investment in the host countries
M

‰‰ Increases competition and break monopolies

‰‰ Helps in conducting efficient research and development programs
and leads to new inventions
N

‰‰ Accentuate domestic organisations to widespread its global oper-

ations
‰‰ Leads to the economies of scale for an organisation and thus re-
duces the cost of production

MNCs also suffer from some demerits, which are as follows:

‰‰ An increase in competition for domestic organisations
‰‰ Loss of local cultures and traditions by changing the eating habits
and lifestyle of customers
‰‰ Exploitation of resources that are non-renewable in nature of host
countries
‰‰ Emergence of environmental problems, such as pollution

The reforms of 1991 opened several ways for Indian organisations

to expand their businesses in foreign countries. Various organisa-
tions, such as Asian Paints and HCL Group, entered in global mar-
kets through mergers and acquisitions, Greenfield investments, joint

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MARKETING  183

n o t e s

ventures, and organic expansions. Indian organisations are steadily

creating strategies to establish in foreign markets. Some instances of
Indian MNCs are as follows:
‰‰ Asian Paints, the world’s tenth largest decorative paint maker, has
manufacturing facilities across 24 countries.
‰‰ Ranbaxy, the world’s ninth largest generics organisation, gets
2/3rds of its revenues from overseas.
‰‰ Dr Reddy's Laboratories became the first Asia-Pacific pharma-
ceutical organisation outside Japan to be listed on the New York
Stock Exchange in 2001.
‰‰ Bharat Forge became the world’s second largest forging manu-
facturer after acquiring Carl Dan Peddinghaus, a German forging
organisation.

S
‰‰ Tata Consultancy Services generates about 80 percent of its reve-
nues from outside India.

On the other hand, Transnational Corporations (TNCs) are different

IM
from MNCs. According to United Nation Commission, “Transnation-
al corporations are those enterprises which own or control production or
service facilities outside the country in which they are based.” TNCs do
not identify themselves with one national home whereas MNCs iden-
tify with one national home and consider its other organisations as its
branches. MNCs invest in other countries but do not have the same
M

product offering in other countries. They customise the product and

services as per individual local market. Examples include McDonalds,
7-Eleven and Unilever. On the other hand, TNCs are complex firms
that invest in foreign operations and have a centrally corporate facili-
ty. However, TNCs give the power of decision making, R&D and other
N

sales and marketing functions to each individual foreign market. Ex-

amples include Shell, Accenture, Nestlé and Deloitte.

Table 7.1 differentiates between TNCs and MNCs:

Table 7.1: difference between TNCs and MNCs

TNCs MNCs
TNCs have subsidiaries in other MNCs have branches in other countries.
countries.
TNCs are borderless as they do MNCs belong to a particular country in
not have any base country. which they are headquartered.

self assessment Questions

7. TNCs stand for_______________________.

8. MNCs do not have branches in other countries. (True/ False)
9. _____are borderless as they do not have any base country.

NMIMS Global Access - School for Continuing Education

184  International Business

n o t e s

Activity

Using the Internet, search the benefits enjoyed by a country by hav-

ing MNCs in it.

PROBLEMS IN MANAGING
7.4 INTERNATIONAL MARKETING
CHANNELS
International marketing is an activity that consists of two aspects,
namely technical and social. The technical aspect is related to non-hu-
man factors that have universal applicability. These factors include
product, price, place and promotion. On the other hand, the social
aspect is related to human factors, such as behaviour, customs, atti-

S
tudes, tastes and status of customers. This aspect varies from mar-
ket to market, religion to religion and thus, from country to country.
These variations mostly lead to problems for global organisations to
IM
establish their marketing channels in foreign countries.

A marketing channel is used by an organisation to deliver its prod-

ucts or services to final consumers. It links manufacturers, suppli-
ers, distributors, wholesalers and retailers, who further play a key
role in linking manufacturers with consumers. An efficient marketing
channel is considered to be a major determinant of any organisation’s
M

profitability.

Some of the major problems faced in managing international market-

ing channels are as follows:
‰‰ Availability of intermediaries: Intermediaries are the middlemen
N

between a producer and consumers. They are also called agents,

distributors and retailers. An organisation uses intermediaries to
make products available to customers. An MNC can use either an
intermediary from its home country or from a foreign country to
sell its products. Organisations find it difficult to select intermedi-
aries for handling merchandise as different countries have differ-
ent types of intermediaries. Apart from this, it is hard to evaluate
intermediaries while selecting them.
‰‰ Difference in the channel structure of countries: Different coun-
tries have different channel structures for a particular product
category. For instance, in the US, distribution channels are domi-
nated by large retail chains, whereas in Finland, wholesalers form
the major part of distribution channels. Thus, organisations face
difficulties in forming proper distribution channels across coun-
tries. This also leads to high costs for some organisations.
‰‰ Differences in channel length: Channel length implies a number
of intermediaries between producers and consumers. If a produc-
er sells directly to consumers, the channel length is very short;

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MARKETING  185

n o t e s

whereas, if the producer sells first to agent, then to the wholesaler,

then to the retailer, the channel length is long. The choice of decid-
ing which type of channel length to be used depends on countries
and their market characteristics.
‰‰ Difference in market factors: Market factors play an important
role in influencing channel decisions. There are various types of
markets, such as industrial market and consumer market. The
customers or clients in markets vary from each other. Some cus-
tomers prefer low prices and some demand a good service deliv-
ery. Apart from this, the level of competition in the market affects
the distribution channel decisions. If the competitor of an organi-
sation has major control on distributors in the market, it is difficult
for an organisation to penetrate effectively in the market. It may
have to adopt direct selling practices without any use of middle-
men in between.

S
self assessment Questions
IM
10. _____________ implies a number of intermediaries between
producers and consumers.
11. Market factors do not play an important role in influencing
channel decisions. (True/False)
M

Activity

From the Internet, research the types of intermediaries involved in

Pepsi India.
N

TYPES OF EXPORTERS, EXPORT HOUSES

7.5
AND MARKETING ORGANISATIONS
Exporters, export houses, and marketing organisation play a signifi-
cant role in promoting international trade. Their main aim is to pro-
mote and develop the exports of the country. The different types of
exporters, export houses and marketing organisations are as follows:
‰‰ Manufacturer exporters: These exporters indulge in direct ex-
porting and do not involve any intermediaries. These exporters
book agents or depute representatives abroad to book orders.
‰‰ Merchant exporters: These exporters do not manufacture goods
themselves but buy them from local manufacturers and export
them to foreign countries. They can easily concentrate on market-
ing efforts and deal in a variety of export items.
‰‰ Export houses: Export houses are registered exporters who have
to obtain an export house certificate from the Director General of
Foreign Trade. These were developed in 1958 to help the small-

NMIMS Global Access - School for Continuing Education

186  International Business

n o t e s

scale sector to export their goods. The main objectives of export

houses are as follows:
 To ensure fair prices to farmers
 To minimise price fluctuations
 To arrange the supply of fertilisers
 To arrange the storage, transportation and packaging
‰‰ Trading houses: These houses were introduced in India in 1981
for developing new products and new markets for product exports
that are mainly produced by small-scale industries. These houses
serve as an intermediary. Star Trading House was introduced in
1990 for which a certificate needs to be obtained. They receive ad-
ditional benefits of the import of capital goods.

S
‰‰ Canalising agencies: These are organisations through which ex-
ports are routed. Canalising agencies are public-sector organisa-
tions, such as National agricultural Cooperative Marketing Fed-
IM
eration (NAFED) and Minerals and Metals Trading Corporation
(MMTC).
‰‰ Service export houses: These export houses are specifically de-
signed for service providers. They are eligible for recognition as
international service export house, international star service ex-
port house. These houses are entitled to all benefits available to
M

export houses.

self assessment Questions

12. __________exporters indulge in direct exporting and do not

N

involve any intermediaries.

13. Export houses are registered exporters who have to obtain
export house certificate from the _________________________
14. NAFED stands for ____________________

15. Canalising agencies are public-sector organisations.
(True/False)

Activity

List down some major Indian export houses.

7.6 INTERNATIONAL MARKET RESEARCH

International market research can be defined as a systematic design,
collection, recording and analysis of data related to a market decision

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MARKETING  187

n o t e s

made by an organisation operating internationally. In other words, it

can also be described as an extensive study of values, belief and pref-
erences of consumers in a foreign market.

International market research plays an important role in the inter-

national trade decisions of organisations. This is because if organisa-
tions skip researching before entering into foreign markets, they may
face huge losses. For instance, when Walmart entered the Argentinian
market, its jewellery counters were filled with diamonds and emer-
alds, which failed to attract the women of Argentina because they pre-
fer gold and silver.

International market research identifies new business opportunities

and provides new ideas, comparisons and control information. It is the
foundation of strategic decisions. It plays an important role in identi-
fying and developing the organisation’s strategies for internationalisa-

S
tion. It identifies, evaluates and compares potential foreign markets.

However, conducting market research is not a cake walk for organisa-

IM
tions due to various factors, such as linguistic barriers and differences
in culture, religions and business practices. For example, a male mar-
ket researcher from the US may face great difficulties in conducting
research on hair care beauty salons in Islamic countries. This is be-
cause in these countries unisex saloons are not available. In addition,
women’s beauty salons are established far away from men’s beauty
salons. Also, the presence of men in women beauty salons is treated as
M

a breach of the Islamic law.

7.6.1 SCOPE OF RESEARCH IN INTERNATIONAL MARKET

N

International market research involves a sound valuation of a foreign

market. While evaluating a foreign market, a marketer takes into con-
sideration political stability, cultural traits, and geographical features
of a country. There are many areas that can be focused while research-
ing a foreign market. For example, while researching the economy,
researchers may focus on growth of the economy, price rise, business
cycle trends, and cost-effectiveness. The knowledge of market condi-
tion of the country and the market division is crucial for deciding an
organisation’s entry or exit from the market and country.

7.6.2  INTERNATIONAL MARKET RESEARCH PROCESS

An organisation must follow a series of steps for effective research in

an international market. The process of international market research
is shown in Figure 7.4:

NMIMS Global Access - School for Continuing Education

188  International Business

n o t e s

Collecting, analysing and interpreting information

Deciding the sampling plan

Selecting the method of data collection

Deciding the type of data

S
IM Developing a research plan

Defining a research problem and objective

Figure 7.4: International Market Research Process

These steps are explained as follows:

M

1. Collecting, analysing and interpreting information: It

involves processing data to extract meaningful information
and recommending actions. Using statistical tools, the data is
converted into information. The information is circulated to the
concerned authorities for its verification.
N

2. Deciding the sampling plan: It includes the following:

a. Sample unit: It refers to a part of a population selected to
represent the whole population.
b. Sample size: It refers to a number of interpretations made in
the research.
c. Sampling procedure: It involves probability and non-
probability sampling procedures. Probability sampling is a
process used to confirm that every element in a sample is
equitably included. Non-probability sampling is a process
in which elements would not have an equal chance of being
united in a sample.
3. Selecting the method of data collection: This step involves
determining a suitable method of data collection out of all the
methods available. Some of the commonly used methods are
opinions, interviews, surveys, etc.
4. Deciding the type of data: This step involves deciding whether
primary data or secondary data should be used for market

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MARKETING  189

n o t e s

research. Primary data implies the original data collected for

some purpose; whereas, secondary data is the used data which is
collected for another purpose. Some of the sources of secondary
data for international marketing research are as follows:
a International business resources directory is maintained by
the centre for international business education and research.
b. Other government agencies, such as World Bank and
International Monetary Fund gather a huge amount of data
to conduct international business.
c. The collection of primary data is tedious as compared to
secondary data. This is because collection of primary data
involves huge cost and time.
5. Developing a research plan: Research plan involves articulating
objectives, hypotheses and questions for research. This plan also

S
involves developing the research design that includes the analysis
of data, qualitative and quantitative research, management
discussions, and experts’ opinions. Research design is a layout
to conduct market research. It provides the detailed technique
IM
required to obtain necessary information of the market.
6. Defining the research problem and objective: It involves
identifying the problems faced by an organisation. The problem
should be defined clearly and the reason for research should also
be spelt out.
M

self assessment Questions

16. _________________is an extensive study of values, belief and

preferences of consumers in a foreign market.
N

17. International market research identifies new business
opportunities. (True/False)
18. What is the first step in the process of international market
research?
19. ____________refers to a part of a population selected to
represent the whole population.
20. Secondary data is the previous data that is collected for some
research but used for a different research. (True/False)
21. ____________involves articulating objectives, hypotheses and
questions for research.

Activity

Suppose you want to open a pizza restaurant in a foreign market.

On what aspects, will you research the market?

NMIMS Global Access - School for Continuing Education

190  International Business

n o t e s

7.7 SUMMARY
‰‰ International marketing involves promoting and selling products
in foreign countries. It is significant for the economic development
and prosperity of a nation as it helps in developing trade relations
and earning foreign exchange.
‰‰ Various opportunities in global markets have helped many organi-
sations in the world to make their global presence.
‰‰ The orientations of international marketing include the ethnocen-
tric, polycentric, regiocentric and geocentric.
‰‰ Multinational corporations and transnational corporations form
an important part of the global world. They differ in a sense that
MNCs identify with one national home and consider other organ-

S
isations as its branches; whereas, TNCs do not identify itself with
one national home.
‰‰ Problems faced by international marketers related to marketing
channels include unavailability of intermediaries, differences in
IM
channel structure of countries, differences in channel length, and
differences in market factors.
‰‰ Different types of exporters, export houses include manufacturer
exporters, merchant exporters, export houses, trading houses, ca-
nalising agencies and service export houses.
M

‰‰ A systematic design, collection, recording and analysis of data re-

lated to a market decision made by an organisation operating in-
ternationally is called international market research.
N

key words

‰‰ Ethnocentrism: It implies judging another culture by compar-

ing it with one’s own culture.
‰‰ Export house: It means an organisation that specialises in the
export of goods that are manufactured by other organisations.
‰‰ Marketing mix: It refers to the mix of all controllable elements,
such as product, price, place and promotion.
‰‰ Marketing research: It is a process of gathering information from
the market about products, customers or any relevant aspect.
‰‰ Quantitative research: This involves research related to math-
ematical or numerical data.

7.8 DESCRIPTIVE QUESTIONS

1. Explain the concept of international marketing.
2. Elaborate on the phases of international marketing.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MARKETING  191

n o t e s

3. Explain the orientations of international marketing.

4. How do MNCs differ from TNCs?
5. Explain the merits and demerits of MNCs.
6. Discuss the problems in managing international marketing
channels.
7. Explain the types of exporters, export houses and marketing
organisations present in the global world.
8. Explain the concept of international market research.
9. Discuss the process of international market research.

7.9 ANSWERS AND HINTS

S
answers for Self Assessment Questions

Topic Q. No. Answers

IM
Concept of International 1. Multinational Corporations
Marketing (MNCs)
2. True
3. Marketing mix includes prod-
uct, price, place and promotion.
4. d. International marketing
M

phase
5. Polycentric
6. True
Multinational Corpora- 7. Transnational Corporations
N

tions and Transnational

Corporations
8 False
9 TNCs
Problems in Managing 10 Channel length
International Marketing
Channels
11 False
Types of Exporters, Ex- 12 Manufacturer
port Houses and Mar-
keting Organisations
13 Director General of Foreign
Trade
14 National Agricultural Coopera-
tive Marketing Federation
15 True

NMIMS Global Access - School for Continuing Education

192  International Business

n o t e s

Topic Q. No. Answers

International Market 16 International market research
Research
17 True
18 Defining a research problem
and objective
19 Sample unit
20 True
21 Research plan

hints for Descriptive Questions

1. International marketing means promoting and selling products

S
and services in foreign markets. Refer to Section 7.2 Concept of
International Marketing.
2.  The four phases of international marketing are no direct
IM
international marketing phase, infrequent international
marketing phase, regular international marketing phase, and
international marketing phase. Refer to Section 7.2 Concept of
International Marketing.
3. The orientations of international marketing include the
ethnocentric, polycentric, regiocentric and geocentric
M

orientations. Refer to Section 7.2 Concept of International

Marketing.
4. MNCs are characterised by one national home and consider
its other organisations as its branches whereas TNCs are
N

not identified with one national home. Refer to Section

7.3 Multinational Corporations and Transnational Corporations.
5.
A multinational organisation increases income and
employment opportunities for host countries. Refer to Section
7.3 Multinational Corporations and Transnational
Corporations.
6. Problems faced while managing international marketing
channels are the unavailability of intermediaries, differences in
channel length, and difference in market factors. Refer to Section
7.4 Problems in Managing International Marketing Channels.
7. Types of exporters include manufacturer exporters, merchant
exporters, export houses, trading houses, and canalising agencies.
Refer to Section 7.5 Types of Exporters, Export Houses and
Marketing Organisations.
8. International market research is a process of collecting,
recording, and analysing data related to a market decision faced
by an organisation operating internationally. Refer to Section
7.6 International Marketing Research.

NMIMS Global Access - School for Continuing Education

 INTERNATIONAL MARKETING  193

n o t e s

9. The process of international market research involves various

steps, such as defining the research problem and objective,
developing research plan, deciding the type of data, determining
the research approach, selecting the method of data collection,
deciding the sampling plan and collecting, analysing, and
interpreting the information. Refer to Section 7.6 International
Marketing Research.

7.10 SUGGESTED READING FOR REFERENCE

SUGGESTED READINGS

‰‰ Aswathappa,A. (2006). International business (1st ed.). New Delhi:

Tata McGraw-Hill.

S
‰‰ Endres, A., & Fleming, G. (2002). International organisations and
the analysis of economic policy, 1919-1950  (1st ed.). Cambridge:
Cambridge University Press.
‰‰ Gandolfo, G., & Gandolfo, G. (1998). International trade theory and
IM
policy (1st ed.). Berlin: Springer.

E-REFERENCES

‰‰ Ebsglobal.net,.(2014). International marketing is one of the EBS

online business courses that build towards a distance learning
M

MBA. Retrieved 30 October 2014, from http://www.ebsglobal.net/

programmes/international-marketing
‰‰ International Market Research,. (2014). International Market Re-
search - Definition and Explanation. Retrieved 30 October 2014,
N

from http://www.international-market-research.com/
‰‰ Pib.nic.in,. (2014). Chap-12. Retrieved 30 October 2014, from http://
pib.nic.in/archieve/eximpol/eximpol00-01/Chap-12.htm

NMIMS Global Access - School for Continuing Education

N
M
IM
S
 C h a
8 p t e r

MARKETING MIX IN INTERNATIONAL BUSINESS

CONTENTS

S
8.1 Introduction
8.2 Concept of Global Product
IM
Self Assessment Questions
Activity
8.3 International Product Management
Self Assessment Questions
Activity
8.4 International Product Strategies
M

Self Assessment Questions

Activity
8.5 Product Standardisation and Product Adaptation
Self Assessment Questions
N

Activity
8.6 International Product Life Cycle
Self Assessment Questions
Activity
8.7 New Product Development in International Market
Self Assessment Questions
Activity
8.8 Concept of International Pricing
8.8.1 International Pricing Methods
8.8.2 Keegan’s Four Steps to Global Pricing Strategy
8.8.3 Pricing Incoterms
8.8.4 Factors Affecting International Pricing
Self Assessment Questions
Activity
8.9 International Pricing Strategies
Self Assessment Questions
Activity

NMIMS Global Access - School for Continuing Education

196  International Business

CONTENTS

8.10 Concept of International Distribution Channels

8.10.1 Types of International Distribution Channels
Self Assessment Questions
Activity
8.11 Concept of International Promotion
8.11.1 International Promotional Tools
Self Assessment Questions
Activity
8.12 Summary
8.13 Descriptive Questions
8.14 Answers
8.15 Suggested Reading for Reference

S
IM
M
N

NMIMS Global Access - School for Continuing Education

 MARKETING MIX IN INTERNATIONAL BUSINESS  197

Introductory Caselet
n o t e s

MARKETING STRATEGIES OF KELLOGG’S

IN INTERNATIONAL MARKET

Kellogg’s, a US-based company, is one of the world’s leading pro-

ducers of cereal and convenience foods, such as vegetarian foods,
toaster pastries, cookies, crackers, cereal bars and fruit-flavoured
snacks. Formed in 1906 by Kellogg brothers, the company ma-
tured with the philosophy of “improved diet leads to improved
health”. The company was focused and particular about its objec-
tives. The main objectives of the company were to grow as a cereal
and snacks business across the world by exploring new markets.
In the early 1920s, the company launched ‘Kellogg’s Corn Flakes’
in the UK to expand its business but initially it turned out to be
disastrous for the company. It was due to the unconvinced nature

S
of the inhabitants of the country and thus, it was difficult to per-
suade them. Also, people were used to traditional porridge, ba-
con, and eggs. In the 20th century, the company made a massive
team of skilled and committed salesmen in order to establish its
IM
products in the UK market to cover the entire country. The team
was then sent to households to knock the doors and distribute
millions of free samples. It encouraged a lot of consumers to buy
Kellogg’s products. This eventually brought a big change in the
tastes and eating habits of a nation. The marketing of Kellogg’s
is considered among one of the most inspiring success stories. A
brand is identified and recognised by distinguished characteris-
M

tics of its product and its unique marketing strategies.

In addition, the company also considered other elements of its
marketing mix while expanding its business internationally. To-
day, Kellogg’s uses all means of advertising to promote its prod-
N

ucts, such as press, posters, cinema, radio, direct e-mails and

Internet. Nevertheless, the main channel for its advertising is
television through which a specific and large audience is targeted.
Kellogg’s also focused on research and development of new tech-
niques of reducing risks. It spent a significant amount in market
research. A series of research and surveys are carried out by the
company to understand consumers’ tastes. Further, the company
also drove its activities towards quality packaging and exciting
promotional campaigns. With the launch of every new product,
the company flagged its image in order to make consumers aware
of the new products.
Eventually, Kellogg’s made its global presence by offering a unique
product range and using effective marketing strategies. The com-
pany has also been successful in differentiating its product range
from the others offering the same in the market. Everything done
by Kellogg’s proved to be right for its products, brand image and
global presence.

NMIMS Global Access - School for Continuing Education

198  International Business

n o t e s

learning objectives

After completing this chapter, you will be able to:

>> Explain the concept of global product
>> Discuss international product management
>> Discuss international product strategies
>> Differentiate between product standardisation and product
adaption
>> Describe international product life cycle
>> Discuss new product development in an international
market
>> Describe the concept of international pricing
>> Explain the concept of international distribution channel

S
>> State the concept of international promotion
IM
8.1 Introduction
In the previous chapter, you studied about the concept process, and
phases of international marketing. In order to market their products
in global markets, organisations need to have a clear understanding
of marketing mix in international trade. Marketing mix can be defined
M

as a set of actions or tactics that organisations use to promote their

products in a national or international market.

There are four elements of a marketing mix called 4 Ps, namely prod-
uct, place, promotion and price. The product aspect of a marketing mix
N

aims at satisfying the needs and wants of customers. In the context of

international marketing, product decisions mainly include three types
of decisions, such as market segment, product specifications, and po-
sitioning and communication decisions. The price element is another
important aspect of a marketing mix that refers to the point of sale. In
order to attract customers’ attention, organisations need to select an
appropriate location for their businesses.

An organisation launching itself on the global platform needs to gen-

erate a market for its goods and services. It needs to make customers
of foreign countries aware about its products and their features, ben-
efits and usage.  The organisation can accomplish this task by making
correct international promotional decisions. These decisions are re-
lated to selecting the best method for conveying product information
to customers. International pricing is a crucial element of a marketing
mix as it directly influences the revenue and profit of organisations
in the international market. Next time in this chapter, you will study
about marketing mix in international markets.

NMIMS Global Access - School for Continuing Education

 MARKETING MIX IN INTERNATIONAL BUSINESS  199

n o t e s

8.2 CONCEPT OF GLOBAL PRODUCT

A product refers to any tangible or intangible object that can be of-
fered to customers in a market for the purpose of acquisition, usage
or consumption. In other words, it can be defined as a means of meet-
ing the expectations of customers. A product flourishes in the mar-
ket when it fulfils customers’ needs and meets their expectations. In
order to achieve the success of a product, an organisation needs to
make certain product-related decisions, such as which product to be
launched and in which market, and what to add and what to upgrade
in the existing product. However, this concept of product is limited to
domestic markets. The concept of product is much broader in inter-
national markets.

Organisations going global always face challenges related to differ-

S
ences in culture, customs, tastes and preferences of customers in for-
eign countries. In such a case, it is difficult for organisations to attract
customers towards their products. For instance, customers from dif-
ferent cultures may not accept the products of other countries like a
IM
McDonald’s had to replace its beef and pork burgers with Aloo tikki
burgers in India. Therefore, in an international market, an organisa-
tion should not only focus on attracting customers towards its prod-
ucts but also pay attention on adapting to the culture of host countries
before introducing any product.
M

In order to capture large market share in foreign markets, organi-

sations need to convert its national product into a universal brand.
Figure 8.1shows how a domestic product is converted into a global
brand:
N

Local National Global

product product product

Figure 8.1: Growth of a Product

Let us discuss the journey of a local product towards a global product:

‰‰ Local product:  It refers to a product that is accessible in a certain
region or state of a country. For example, MTR spices were first
launched as the local brand in South India only. In 1976, Sakthi
Masala, which is a famous brand in northern India, was launched.
Likewise, in South India, Fairever was launched in 1998 by Cav-
inKare. Later these products were introduced across India.

NMIMS Global Access - School for Continuing Education

200  International Business

n o t e s

‰‰ National product: It refers to the product being endorsed and sold

within the country itself and has no global presence. For example,
Campa Cola was introduced in India in the 1970s, and there was no
other foreign product to compete with it at that time.
‰‰ Global product: It refers to the product being sold and traded in-
ternationally. A global product has international presence and cor-
porations. For example, McDonald’s is catering to 58 million of its
customers every day in 119 countries.

self assessment Questions

1. A _______________ refers to any tangible or intangible object

that can be offered to customers in a market for the purpose
of acquisition, usage or consumption.

S
Activity
IM
Using the Internet, find out any two Indian brands that intro-
duced their products nationally and later made successful global
presence.

INTERNATIONAL PRODUCT
8.3
MANAGEMENT
M

When an organisation introduces its products in a global market, it

needs to manage its products in order to keep on building its image in
the minds of customers. International product management is a pro-
N

cess of planning and forecasting the production and marketing of a

product sold internationally at all stages of the product lifecycle. Inter-
national product management mainly involves two functions, which
are shown in Figure 8.2:

Product
Management

Product Product
planning marketing

Planning Positioning
Defining new Promoting the
product products
products product
differentiation in the market

Figure 8.2: International Product Management

NMIMS Global Access - School for Continuing Education

 MARKETING MIX IN INTERNATIONAL BUSINESS  201

n o t e s

International product management involves product planning and

product marketing. Product planning involves deciding about various
product features, such as length, size, width, product line and quality
of products. It involves deciding on various topics, such as:
‰‰ Which product should be launched in which country?
‰‰ What changes should be brought about in the product?
‰‰ What should be the new additions in the products, if being re-
launched?
‰‰ What should be the name of the brand?
‰‰ What assurances should be given along with the product?
‰‰ What kind of after sales services should be given?
‰‰ When is the right time to get into the global market?

S
On the other hand, product marketing takes care of all the tactics that
can increase the sale of a product. It also ensures the image of a prod-
uct in the market or customers’ mind. In addition, product marketing
IM
involves formulating and implementing various marketing strategies
that enable an organisation in increasing sales volume, such as promo-
tion, exhibitions, advertisements and packaging. For instance, Amul
has established itself in the market by using its famous slogan of “The
Taste of India”. Also, a world’s famous retail giant, Walmart entered
the Indian market a few years back by collaborating with one of the
M

top Indian brands, Bharti, to give itself an established retail platform.

However, they parted later and run separate operations.

self assessment Questions

N

2. Two main functions of international product management

include product planning and product marketing. (True/False)

Activity

Visit any organisation that has a global presence of your choice and
discuss how they manage their products.

INTERNATIONAL PRODUCT
8.4
STRATEGIES
International product strategies are formed to promote a product
globally. They involve all the important tactics that contribute in the
growth and success of a product at a global level. These strategies are
about the new product development, promotional activities, pricing
decisions, distribution channels, etc. Therefore, in order to get into
the global market, meticulous attention to product strategies is re-

NMIMS Global Access - School for Continuing Education

202  International Business

n o t e s

quired. The following are some common product strategies adopted

by organisations while marketing their products globally:
‰‰ Extension strategy: This strategy focuses on ensuring the usage
of a product internationally by using product tactics of the domes-
tic market in the global market.
‰‰ Adaptation strategy: This involves change in the interaction strat-
egy to match the needs of global markets. Therefore, it focuses on
adopting the changes in strategies as per the requirements of the
global market.
‰‰ Invention strategy: It refers to the formation of unique market
strategies by introducing new products for global markets. It also
focuses on being the first in the market to lead and take the advan-
tage of the untapped market.

S
These three strategies are divided into five alternatives, which are ex-
plained as follows:
‰‰ Dual extension-Product and communication extension: This in-
IM
volves a strategy chosen by the latest competitors and by small or-
ganisations that do not have ample funds. This strategy is good for
those products where awareness among customers is the same in-
ternationally. The negative side of this strategy is that, if the inter-
national customers find that other brands comply with their needs
better, they tend to move to those brands. Great achievement has
M

been made by Pepsi, Coca Cola, since they followed the similar
strategy. Nevertheless, Pizza Hut could not be as successful in In-
dia at the beginning and had to revise their menu in accordance
with the Indian taste.
‰‰ Product extension-Communication adaptation: This relates to a
N

strategy which includes advertising similar products with a modi-

fied promotional drive. Thus, the culture, tastes, and preferences
of a country are kept in mind through this strategy.
‰‰ Product adaptation-Communication extension: This refers to a
strategy that aims at adapting a product through consistent inter-
action strategy. The adaptation of the product is done in relation
to the culture, requirements and climatic conditions of a country.
In many cases, the product is taken up according to the situation
of the country with the expansion strategy, including mergers and
acquisitions and cooperative schemes. There is no change in the
communication strategy since the purchasing behaviour of cus-
tomers is the same. For instance, Indian automobile companies
have to keep in mind the left-hand drive system, engine, and the
pollution control devices according to the international automo-
bile system.
‰‰ Dual adaptation- Product and communication adaptation: This
relates to a product strategy that focuses on conveying a strong
message to customers about the product through effective promo-

NMIMS Global Access - School for Continuing Education

 MARKETING MIX IN INTERNATIONAL BUSINESS  203

n o t e s

tions. This is found in those countries where cultural and corpo-

ral environment varies. In such cases, organisations modify their
products and promote them according to the type of market avail-
able. One such example is McDonald’s. Mc Aloo Tikki Burger has
been offered in accordance with the Indian taste.
‰‰ Product invention: This refers to a strategy that focuses on mak-
ing a new product according to the requirements of customers of
a particular country. This implies that the product is made accord-
ing to the tastes of customers.

self assessment Questions

3. Which alternative relates to a strategy that includes advertising

similar products with a modified promotional drive?

S
Activity
IM
Discuss with your friends about a product strategy that is appropri-
ate for the Indian market.

PRODUCT STANDARDISATION
8.5
AND PRODUCT ADAPTATION
M

Organisations that market their products or services in global mar-

kets always face difficulties in deciding whether to standardise or
adapt their product offerings. Product standardisation is a strategy of
setting common and identical characteristics for a product across the
N

world, wherever it is being sold. However, small changes can be made

according to requirements. The main aim of organisations to use the
product standardisation strategy is to bring production costs down by
making bulk production internationally. Apart from this, the following
are the forces of product standardisation:
‰‰ Common customer needs: The standardisation strategy can be
used when the requirements of customers for certain products are
similar to others around the world. For example, Nike, a sports
products manufacturer, makes similar footwear for everyone in-
ternationally.
‰‰ Economies of scale: This enables to bring the cost down and tak-
ing the profits up for those organisations working globally. It also
brings the cost of research and development (R&D) down interna-
tionally. Therefore, low cost of production helps the organisations
lowering the cost for the customers to benefit them.
‰‰ Regional market agreements: This involves business contracts
(like the European Union) that assist in making local markets.

NMIMS Global Access - School for Continuing Education

204  International Business

n o t e s

By making these agreements, moving of technology among coun-

tries helps in eroding business obstructions and letting the stan-
dardised products sell internationally.

The main benefits of the product standardisation strategy is that it

helps in sharing expertise and information all over the world and en-
hancing harmonisation of organisations globally. However, it focuses
more on product orientation instead of market orientation. Some-
times, product orientation fails in some countries.

On the other hand, product adaptation is a strategy of changing prod-

ucts in accordance with the environment of a particular country.
Through adaptation, product is being altered by keeping in mind the
requirements of customers of a particular country. Organisations that
target global markets must alter their products as per the social, cul-
tural, and biological conditions of countries. Changes in products can

S
be brought in their total appearance, cost, packaging, etc.

Adaptation can be of two types, namely mandatory adaptation and

IM
non-mandatory adaptation. Mandatory adaptation aims at only meet-
ing the needs of a country by adapting toauthorised principles, teach-
ings, financial and political environment, etc. One of the examples of
mandatory adaptation is the voltage intensity of electrical devices that
vary from one country to another. On the other hand, in non-manda-
tory adaptation, a product can be modified or a new product can be
made, even though there is no need for adaptation. This is adapted
M

due to various customs and requirements. For example, McDonald’s

adapted its products according to Indian customs and tastes.

self assessment Questions

N

4. In mandatory adaptation, a product can be modified or a new

product can be made. (True/False)

Activity

Using various sources, find information on the strategy (prod-

uct standardisation or product adaptation) used by Walmart and
7-Eleven in different countries.

8.6 INTERNATIONAL PRODUCT LIFE CYCLE

As an organisation goes through different levels of development,
products made by them also go through the same. The levels or stag-
es a product undergoes during its lifetime form a product life cycle.
Organisations are required to shape and devise various promotional
strategies at every life stage of a product. When a product is intro-
duced globally, there are four phases it has to go through, which are
shown in Figure 8.3:

NMIMS Global Access - School for Continuing Education

 MARKETING MIX IN INTERNATIONAL BUSINESS  205

n o t e s
Sales

Introduction Growth Maturity Decline

Time

S
Figure 8.3: International Product Life Cycle

These phases of international product life cycle are discussed as fol-

lows:
IM
1. Introduction stage: It refers to the phase in which a product
is produced and introduced in its own country as per the
requirements of customers and traded abroad later. For example,
in 1981, IBM computers were made in the US and were also
introduced in other developed countries later.
M

2. Growth stage: It refers to the phase when the organisation aims

at bringing the production cost down. Here, the growth of the
product starts if it does well in the market and customers are
gradually getting used to it. At this phase, different substitutes
N

are accessible in the market, which leads to competition. The

product is sent abroad for expanding the economic range and
business.
3. Maturity stage: It refers to the longest phase in the product
life cycle. Therefore, organisations move their manufacturing
services to countries where labour cost is less in order to bring
the cost of production down. Here, product sales and growth is at
its peak and it makes an impression in the mind of the customers.
In this phase, campaigning has a big role in boosting the sales of
the product. In such cases, organisations must look for new ways
of using the product.
4. Decline stage: It refers to the phase where the development of the
product goes down at a faster rate. At this phase, a product that
an organisation produces tends to produce different outcomes in
various countries. For instance, the growth phase of the product
may be more in one country while in another it may be less. In
such a case, the loss incurred in one country can be shielded by
another country that has profited well.

NMIMS Global Access - School for Continuing Education

206  International Business

n o t e s

self assessment Questions

5. Is the largest phase in the life cycle of a product.

Activity

Find information on the product life cycle of the following products

in the Indian market:
‰‰ Apple iPhone 5S
‰‰ Domino’s pizza
‰‰ Nike’s sports items
‰‰ HUL consumer goods

S
NEW PRODUCT DEVELOPMENT IN
8.7
INTERNATIONAL MARKET
IM
The development of a product is important for an organisation in or-
der to sustain in a global market. However, the process of developing
a product in both local and global market remains the same except
the consideration of environmental, geographical, political, economic,
and such other factors. Developing a new product is important for the
product policy of an organisation.
M

New products are always brought about in the market to catch the
attention of customers. In the era of information technology, there is
a frequent change in customers’ tastes and preferences. Thus, it is
N

important for organisations to develop innovative products from time

to time. Developing new products requires a lot of planning and re-
search about the tastes, preferences, demographics, market condi-
tions, etc. of countries where products are to be introduced. Without
proper planning and research, a product may lead to a complete fail-
ure. The following are some forms of new product development:
‰‰ New products: It refers to creating a brand new market.
‰‰ New product lines: It refers to making a debut in the market.
‰‰ Additions to existing product lines: It refers to complementing
existing product lines with various flavours and volumes.
‰‰ Improvement in existing products: It refers to raising the worth
of an existing product by adopting a new technology.

Product development is a systematic process that involves a number

of steps, which are explained as follows:
1. Generating new product ideas: This relates to developing
new products by recognising the requirements, desires and
preferences of consumers in various countries. This is done by

NMIMS Global Access - School for Continuing Education

 MARKETING MIX IN INTERNATIONAL BUSINESS  207

n o t e s

interacting with people, such as scientists, engineers, customers,

competitors and the general public. Apart from this, some
other techniques like attribute listing, forced relationship,
morphological analysis, and mind mapping are also used to
generate ideas.
2. Screening new product ideas: It involves examining the
collected ideas in order to select the best one. In addition, in
this step, organisations also evaluate schemes or ideas that were
generated in the past by other organisations for attaining their
objectives.
3. Developing and evaluating concepts: This step involves
determining how the product would be perceived by customers.
For this, information regarding the product is collected by
interacting and interviewing customers. Organisations that offer

S
products in international markets have to look for any technical
modification.
4. Performing feasibility analysis: This involves evaluating the
IM
viability of selecting a particular idea regarding the product. The
viability can be evaluated in terms of production and equipment
cost, sales volume, and profit margins. Feasibility analysis further
helps organisations in deciding the price of the product.
5. Designing and developing the product: After the selection of the
most feasible idea, an organisation first makes a trial product. It
M

is important that the trial product must co-relate with product

details. The product gets a name at this level and creates a
business merge too.
6. Test marketing: Test marketing is done to check whether the
N

product is appropriate for business or not. It is done by providing

free samples to customers and later receiving feedback from
them. Some organisations do not follow this and directly bring
the product for sale as this phase takes up time and is highly
expensive and existing competitors may come to know about
the product and may try to imitate it. Nevertheless, the nature,
expressions and responses of customers are evaluated before
marketing the product.
7. Actual test marketing: This relates to the test marketing which
is performed widely. On the basis of the stores available, few
cities or countries are picked to check upon the product. To bring
down the budget, those providing services may be contacted
directly by using the actual test marketing system. For example,
organisations in Germany and Netherlands contact customers
directly through e-mails in order to check the new product. Test
marketing can be a dependable way of producing the strategy of
the product and assessing its share, expenditure and business
gain. Nevertheless, there are some restrictions like wrong
predictions and choosing an incorrect test marketing system.

NMIMS Global Access - School for Continuing Education

208  International Business

n o t e s

self assessment Questions

6. In the era of information technology, customers’ tastes and

preferences are stable. (True/False)
7. Which of the following is the third step of the new product
development process?
a. Generating new product ideas
b. Developing and evaluating concepts
c. Test marketing
d. Actual test marketing

Activity

S
As an entrepreneur, what steps would you take to develop a new
product to be introduced in an international market?
IM
8.8 CONCEPT OF INTERNATIONAL PRICING
Price is one of the most important aspects of the marketing mix. It
determines the value of a product in a market. An organisation has to
make a critical decision on the price of the product as it influences the
M

demand of the product to a large extent. An organisation makes use of

this strategic instrument during the lifecycle of the product in order
to continue with the requirement of the product and productivity. For
example, when a product is initially launched, it is priced low in order
to catch the attention of customers; but once the need and demand for
N

the product goes up, its price also rises to receive profits.

As markets are different in different countries, price strategies are

also different according to distinctiveness. Thus, internal and external
environmental factors are taken into consideration when price strat-
egies are developed by organisations. The stock rates, manufacturing
and business expenses, and shipping charges come under the inter-
nal system, while level of competition, revenues, foreign exchange
rates, and price rise rates come under the external system. Let us dis-
cuss some effective pricing methods used by organisations operating
globally.

8.8.1  INTERNATIONAL PRICING METHODS

Different organisations use different methods of pricing depending

on their requirements. Figure 8.4 shows some main pricing methods
adopted by organisations in international markets:

NMIMS Global Access - School for Continuing Education

 MARKETING MIX IN INTERNATIONAL BUSINESS  209

n o t e s

Cost-based pricing

Demand-based pricing

Competition-based pricing

Other pricing methods

S
Figure 8.4: Different Pricing Methods

These pricing methods are explained as follows:

‰‰ Cost-based
IM
pricing: It is a method in which a certain part of profit
is included in the price of the product in order to get the final
price. The cost must be inclusive of the production done for global
organisations. The two kinds of cost-based pricing are cost-plus
pricing (in which certain amount is included along with the price
of the product to get the final price) and mark-up pricing (in which
set price or proportion of the price is included in the cost of the
M

product to attain the selling price).

‰‰ Demand-based pricing: In this method, the cost of a product is
decided on the basis of its demand. If there is more demand, the
organisation would increase the rate for its profits, while, if the
N

demand is low, then the rates are brought down to lure custom-
ers. The demand-based pricing is achieved when the demand is
evaluated depending on the capacity of competitors. This pricing
method is generally adopted in the hospitality and transportation
industries.
‰‰ Competition-based pricing: In this method, the organisation de-
cides its own price depending on the competitor’s prices. One of
the best examples of competition-based pricing is that of the avi-
ation industry, as their rates go up and down for the same route
compared to their opponents. Also, publishing houses accordingly
price their rates related to the prices charged by their competitors.
‰‰ Other pricing methods: Apart from the aforementioned methods,
there are other pricing methods, such as value pricing (less prices
for good quality products); target return pricing (price is deter-
mined to receive the needed rate of return); and going rate pricing
(the price of the product is related to the present market rate).

NMIMS Global Access - School for Continuing Education

210  International Business

n o t e s

8.8.2 KEEGAN’S FOUR STEPS TO GLOBAL

PRICING STRATEGY

Four ways for international pricing strategy have been given by War-
ren J Keegan, who is a strategic marketing consultant, an author and
also a professor of global management and marketing. Figure 8.5
shows the four steps to global pricing strategy by Keegan:

Determining the price elasticity

of demand

Estimating fixed and variable

manufacturing costs

S
Identifying all costs associated with
the marketing program
IM
Selecting the price that offers the highest
contribution margin

Figure 8.5: Steps for Selecting Global Pricing

M

These steps have been discussed as follows:

1. Determining the price elasticity of demand: This step involves
measuring the price elasticity of demand in order to determine
N

customer’s awareness with the product’s price change. If

customers are not conscious about the price of a product and are
willing to buy the product at any given price, the product can be
charged at a higher rate by an organisation.
2. Estimating fixed and variable manufacturing costs: This step
involves assessing set prices and differing prices of the product.
Set prices are unchangeable in spite of variations in sales. Lease
of machinery and factory, and payment of interest on loans are
examples of set prices. Variations in sales cause variation in
prices as well. The rate of raw material and salary of the labour
are the examples of cost variation.
3. Identifying all costs associated with the marketing program:
This step involves evaluating the value of market activities. The
cost of research and development, manufacturing, marketing,
promotion, advertisement, and distribution are all included in
this step.
4. Selecting the price that offers the highest profit margin: This
involves determining the cost of all prices and profits that the

NMIMS Global Access - School for Continuing Education

 MARKETING MIX IN INTERNATIONAL BUSINESS  211

n o t e s

organisation wishes to earn. In addition, the organisation should

ensure that a fixed price gives the product worth to the customer.

8.8.3  PRICING INCOTERMS

The language of international trade is very complex. Due to the di-

versities of policies, cultures, languages and different ways of trade,
it becomes very difficult for buyers, sellers and traders to trade their
products in international markets. International Commercial Terms
(INCOTERMS) are a set of trade term definitions developed by the In-
ternational Chamber of Commerce (ICC). These terms are recognised
through the world and have been developed for the ease of businesses
in global markets. Incoterms 2010 is being used as the current set of
terms. These terms are used in business contracts to help buyers and
sellers to know:

S
‰‰ Which party (seller or buyer) holds the responsibility for the cost
of transporting goods, insurance, taxes and duties?
‰‰ Where the goods have to be picked up from and delivered to?
IM
‰‰ Who will be responsible for the follow-up of the goods during each
stage of transportation?
‰‰ What are the essential terms and conditions of sales and purchase?

Exhibit
M

Incoterms For The Mode Of Transport

Following are the rules of incoterms for the mode of transport given
by the International Chamber of Commerce (ICC):
N

‰‰ EXW (Ex Works): “Ex Works” means that the seller delivers
when it places the goods at the disposal of the buyer at the sell-
er’s premises or at another named place (i.e., works factory,
warehouse, etc.). The seller does not need to load the goods on
any collecting vehicle, nor does it need to clear the goods for
export, where such clearance is applicable.
‰‰ FCA (Free Carrier): “Free Carrier” means that the seller de-
livers the goods to the carrier or another person nominated
by the buyer at the seller’s premises or another named place.
The parties are well advised to specify as clearly as possible the
point within the named place of delivery, as the risk passes to
the buyer at that point.
‰‰ CPT (Carriage Paid To): “Carriage Paid To” means that the
seller delivers the goods to the carrier or another person nomi-
nated by the seller at an agreed place (if any such place is agreed
between parties) and that the seller must contract for and pay
the costs of carriage necessary to bring the goods to the named
place of destination.

NMIMS Global Access - School for Continuing Education

212  International Business

n o t e s

‰‰ CIP (Carriage and Insurance Paid To): “Carriage and Insur-

ance Paid to” means that the seller delivers the goods to the car-
rier or another person nominated by the seller at an agreed place
(if any such place is agreed between parties) and that the seller
must contract for an pay the costs of carriage necessary to bring
the goods to the named place of destination. “The seller also con-
tracts for insurance cover against the buyer’s risk of loss of or
damage to the goods during the carriage. The buyer should note
that under CIP the seller is required to obtain insurance only on
minimum cover. Should the buyer wish to have more insurance
protection, it will need either to agree as much expressly with
the seller or to make its own extra insurance arrangements.”
‰‰ DAT (Delivered at Terminal): “Delivered at Terminal” means
that the seller delivers when the goods, once unloaded from the

S
arriving means of transport, are placed at the disposal of the
buyer at a named terminal at the named port or place of des-
tination. “Terminal” includes a place, whether covered or not,
such as a quay, warehouse, container yard or road, rail or air
IM
cargo terminal. The seller bears all risks involved in bringing
the goods to and unloading them at the terminal at the named
port or place of destination.
‰‰ DAP (Delivered at Place): “Delivered at Place” means that the
seller delivers when the goods are placed at the disposal of the
buyer on the arriving means of transport ready for unloading
M

at the named place of destination. The seller bears all risks in-
volved in bringing the goods to the named place.
‰‰ DDP (Delivered Duty Paid): “Delivered Duty Paid” means that
the seller delivers the goods when the goods are placed at the
N

disposal of the buyer, cleared for import on the arriving means

of transport ready for unloading at the named place of destina-
tion. The seller bears all the costs and risks involved in bringing
the goods to the place of destination and has an obligation to
clear the goods not only for export but also for import, to pay
any duty for both export and import and to carry out all customs
formalities.
(Source: http://www.iccwbo.org/products-and-services/trade-facilitation/incoterms-2010/
the-incoterms-rules/)

8.8.4  FACTORS AFFECTING INTERNATIONAL PRICING

Pricing is an important aspect of an organisation’s business as it is

directly proportional to the organisation’s sales and profits. However,
it gets affected due to various internal and external factors called 4Cs,
which are explained as follows:
‰‰ Company: It involves internal factors that have an effect on the
organisation’s pricing strategy. These factors include organisa-

NMIMS Global Access - School for Continuing Education

 MARKETING MIX IN INTERNATIONAL BUSINESS  213

n o t e s

tional aims and costs. For instance, if an organisation aims to lure

customers, it may have to reduce prices. On the other hand, in a
region, if labour costs are high, organisations need to adjust the
cost through the pricing of products; otherwise it may need to bear
losses.
‰‰ Customers: The requirement of a product in a market depends
on customer’s tastes, traditions, lifestyle, thinking, and purchasing
power. Therefore, countries that are economically weak are more
price conscious as compared to those that are strong.
‰‰ Competition: The level of competition differs in different coun-
tries. Some countries have fewer competitors, while others may
have more. Organisations cannot fix the prices of its products on
its own in countries where the level of competition is high.
‰‰ Channels: Prices are decided according to the distance. If in a dis-

S
tribution channel, mediators are given a payment for selling prod-
ucts, the cost of distribution is added in the price of the product.
IM
self assessment Questions

8. In _______________ method, a certain part of profit is included

in the price of the product in order to get the final price.
9. Which of the following is NOT one of the 4Cs of international
pricing?
M

a. Company
b. Customers
c. Competition
N

d. Commercials

Activity

Using the Internet, find out some important incoterms used in the
international retail industry.

8.9 INTERNATIONAL PRICING STRATEGIES

As discussed in the previous section, pricing is one of the most cru-
cial elements of the marketing mix. Thus, to manage the pricing of
its products and achieve success, organisations need to formulate an
effective pricing strategy. A pricing strategy helps organisations to de-
termine the prices of products under different market situations with
an aim to maximise sales and profits. In an international market, or-
ganisations use various types of pricing strategies depending on their
marketing goals and objectives. The following are some of the com-
monly used international pricing strategies:

NMIMS Global Access - School for Continuing Education

214  International Business

n o t e s

‰‰ Price skimming: In such type of strategy, organisations use the

highest rate of products by fixing rates according to their require-
ments. This strategy enables organisations to make profits season-
ally. The main benefit of this strategy is that it draws customers
who know the significance of high rated products.
‰‰ Penetration pricing: As per this strategy, organisations sell prod-
ucts at a lesser price in order to obtain a huge market share. This
strategy helps in attracting customers due to lesser prices. Pen-
etration pricing is the most lucrative one for organisations as it
demotivates competitors (as lower rates do not fit them) and leads
to quick acceptance of products. However, if products staying low
for a long time, the expectations of customers go up. With such low
rates, it becomes difficult for organisations to meet high custom-
ers’ expectations.

S
‰‰ Predatory pricing: This relates to pricing where huge global or-
ganisations eradicate the smaller local organisations from com-
peting by fixing lesser rates of products. These global organisa-
tions are called predators. They fix lesser rates for their products;
IM
hence, small local organisations are not able to endure the market.
‰‰ Multi-point pricing: This relates to a pricing strategy where or-
ganisation X brings the rates down in market A, which inspires
organisation Y to lessen their rates in market B. The organisation
Y chooses market B since it would be not easy to compete in mar-
ket A with organisation X. An organisation which sells its products
M

globally, follow this strategy, as markets in various countries vary.

Thus, the market pricing strategy has its effects on every kind of
market.
N

self assessment Questions

10. Which of the following strategy has effects on every kind of

market?
a. Price skimming
b. Multi-point pricing
c. Penetration pricing
d. Predatory pricing

Activity

Suppose your friends want to open an Italian restaurant in London.

Which pricing strategy would you suggest to them? Base your anal-
ysis on the conditions of the food industry in London.

NMIMS Global Access - School for Continuing Education

 MARKETING MIX IN INTERNATIONAL BUSINESS  215

n o t e s

CONCEPT OF INTERNATIONAL
8.10
DISTRIBUTION CHANNELS
A distribution or marketing channel is a mode that connects produc-
ers of a product to consumers. In other words, it is a medium through
which consumers receive products in their absolute form. A distri-
bution channel involves traders, dealers and mediators who assist in
reaching products to consumers. It is of paramount importance for
every organisation to have an efficient distribution channels. This is
because if products are not delivered to customers at the right time,
it may lead to their dissatisfaction. An efficient distribution channel
strives to:
‰‰ Make products available at the right time to the right customers at
the right place

S
‰‰ Transfer ownership and possession of products from manufactur-
ers by supplying them to customers
‰‰ Provide easy options to customers to buy products, such as paying
IM
in installments
‰‰ Manage and take risks involved in storing products till the time
they are with the channel
‰‰ Negotiate with customers about the price and place where prod-
ucts have to be delivered on the manufacturer’s behalf
M

‰‰ Add additional features to bring changes in products, such as as-

sistance, repair and free home delivery

As different manufacturers have different requirements, they select

different types of distribution channels. For instance, Dell, a comput-
N

er manufacturer uses direct marketing channels to get in touch with

customers. In the next section, let us study about different types of
distribution channels used by organisations operating globally.

8.10.1 TYPES OF INTERNATIONAL
DISTRIBUTION CHANNELS

Organisations make use of different distribution channels for deliver-

ing their products to customers. Manufacturers, traders, distributors,
sellers and dealers are some of the examples of long-established dis-
tributional channels. Organisations select a particular type of distri-
bution channel based on their requirements. The following are the
three main types of distribution channels:
‰‰ Direct distribution channel: It is called a zero-level channel as
there are no mediators in this channel and customers receive prod-
ucts directly. Eureka Forbes, Tupperware and Asian Sky Shop are
some of the examples of organisations that use direct distribution
channels. A direct distribution channel is used by organisations
when they deal in local markets for daily need products (bread and

NMIMS Global Access - School for Continuing Education

216  International Business

n o t e s

biscuits) or when products are produced in large quantities and

sold in small sizes through departmental stores and supermarkets.
The following are the features of a direct distribution channel:
 It maintains the privacy of customer information related to
their purchases or any other personal information; thereby,
building a rapport with customers.
 Customers get in touch with manufacturers directly, which
makes it easier for manufacturers to locate the target audience.
 It leads to reduction of wastage as production is started only
when customers place orders.
 It enables manufacturers to get direct feedback from custom-
ers as there is direct interaction between manufacturers and
customers. This helps manufacturers to make changes in their

S
products as per the feedback of customers.
‰‰ Indirect distribution channel: This channel includes a mediator
for distributing products to customers. The large-scale producers
IM
use this channel as they cannot distribute their products directly.
An indirect distribution channel can be a single-party selling sys-
tem (having one mediator) or multiple-party selling system (hav-
ing two or more mediators). This channel is used in the textile,
machinery, equipment and agricultural products industries.
‰‰ Hybrid distribution channel: It is a combination of direct and in-
M

direct distribution channels. Under this channel, manufacturers

sell directly to customers at one hand and through mediators on
the other hand. An example of hybrid distribution is franchising
wherein franchisors provide a license to franchisees to operate
N

their units at the same time owning and operating some units
themselves. However, using two or more channels to target the
same market can sometimes lead to channel conflicts.

self assessment Questions

11. Name some industries that use indirect marketing channels.

12. In which channel manufacturers sell directly to customers at
one hand and through mediators on the other hand?

Activity

Find out a few real-life organisations using direct, indirect, and hy-
brid distribution channels. Also, prepare a report on the pros and
cons of each channel in those organisations.

NMIMS Global Access - School for Continuing Education

 MARKETING MIX IN INTERNATIONAL BUSINESS  217

n o t e s

CONCEPT OF INTERNATIONAL
8.11
PROMOTION
Promotion is a process that encompasses all activities involved in
communicating to customers about the availability of products and
their features and benefits. After working upon product and price
elements, organisations need to conduct conversation with custom-
ers about products in order to raise awareness; thereby increasing
sales and fostering brand loyalty. Through promotion, the main aim
of organisations is to achieve customer attention and provide them
product-related information to create their interest. As there exist to
be cultural differences in different countries, substantial information
provided to customers helps them in making buying decisions. Differ-
ent organisations have different objectives behind selecting a partic-
ular promotional activity. Some common objectives of promotion for

S
any organisation may include the following:
‰‰ To raise awareness and build brand identity for new products in
the market
IM
‰‰ To determine customers’ needs and fulfil those needs
‰‰ To differentiate products from these of competitors by providing
information on the unique features of products to customers
‰‰ To stimulate demand by retaining old customers and attracting
new ones
M

Each country follows its own ethics and principles regarding product
promotion. Thus, an organisation may not achieve its promotional ob-
jectives if these ethics and principles are side-lined. For example, in
1972, an American organisation Procter & Gamble (P&G), which sells
N

personal care and medicinal products, entered Japan. Initially, P&G

was not able to make any profits in the market as it ensued American
ways of promotion like offering discounts. This led to the inability of
the organisation to connect with efficient distributors in Japan. This is
because distributors in Japan did not sell products having less profit
limits on discounted rates. However, P&G succeeded after some years
in Japan when it eliminated discounted rates.

Organisations operating globally use different promotional tools to

communicate with customers depending on the organisations’ re-
quirements and trends followed in host countries. Let us now discuss
some important promotional tools used for international trade.

8.11.1  INTERNATIONAL PROMOTIONAL TOOLS

Every organisation has two main aims to be fulfilled through promo-

tional activities. One is to make customers aware of the availability
of a product and the other is to convince them to prefer and buy the

NMIMS Global Access - School for Continuing Education

218  International Business

n o t e s

product over all other brands. Organisations use a number of ways to

approach the target audience. Some common promotional tools are
shown in Figure 8.6:

Advertising

Sales Public
promotions relations (PR)

Promotional
Tools

S
IM
Direct Personal
marketing selling

Figure 8.6: Types of International Promotion Tools

M

Let us discuss these promotional tools in detail as follows:

‰‰ Advertising: It is a traditional promotional method yet effective in
gaining customers’ attention. In this method, information is con-
veyed to customers through mass media including television, ra-
N

dio, newspapers, magazines, etc. Besides this, billboards, posters,

web pages, brochures and direct mail can also be used to advertise
products. The Internet has emerged as one of the fastest mode that
not only helps in promoting products but also allowing real-time
feedback from customers. Advertising can be done by organisa-
tions directly or through advertising agencies depending on the
scale of promotion. It is an effective way of building the impression
of a product in the minds of customers. However, it may be expen-
sive for organisations if done at a large scale.
‰‰ Public relations (PR): It involves building a positive image of a
product in influential media sources like newspapers, magazines,
talk shows, social networking sites, blogs, etc. Apart from this, PR
can also involve allowing product users or influencers to test the
product and canvass positively about it to their families and close
acquaintances. This type of promotion can be paid or free of cost
for organisations. For instance, promoting a product in a major
event is a paid activity, while sending free samples to the public
at social networking sites involves a certain cost to organisations.

NMIMS Global Access - School for Continuing Education

 MARKETING MIX IN INTERNATIONAL BUSINESS  219

n o t e s

‰‰ Personal selling: Personal selling relates to direct selling where

a salesman makes an effort to convince customers to buy a prod-
uct by meeting in person, conducting product demos, talking over
the phone, e-mails, and live chats. Contacting customers directly
creates personal relationships between customers and the organ-
isation. Moreover, personal selling can be less expensive as there
is absence of third parties. However, it may face problems in con-
veying regular messages to customers because of variations in the
selling methods used by salesmen.
‰‰ Direct marketing: This method involves the use of telemarketing,
customised letters, e-mails, text messages, etc. to come in touch of
customers. Although it is an effective way of promoting products,
it may annoy customers if a large number of e-mails or text mes-
sages are sent to them.

S
‰‰ Sales promotions: It is the most successful ways of increasing
product sales by giving offers to customers. These offers can be
like buy one get one free schemes, seasonal discounts, free sam-
ples, special coupons with expiration dates, and so on.
IM
self assessment Questions

13. Promotion is a process that encompasses all activities involved

in communicating to customers about the availability of
products and their features and benefits. (True/False)
M

14. The _________ has emerged as one of the fastest mode that not
only helps in promoting products but also allowing real-time
feedback from customers.
N

Activity

Find out the names of organisations that use a combination of ad-

vertising and sales promotions methods. Also, prepare a report on
the objectives of these organisations behind using these methods.

8.12 SUMMARY
‰‰ A product refers to any tangible or intangible object that can be
offered to customers in a market for the purpose of acquisition,
usage or consumption.
‰‰ International product management is a process of planning and
forecasting the production and marketing of a product sold inter-
nationally at all stages of the product life cycle.
‰‰ International product strategies are formed to promote a product
globally. The three main types of product strategies are extension
strategy, adaptation strategy and invention strategy.

NMIMS Global Access - School for Continuing Education

220  International Business

n o t e s

‰‰ Organisations that market their products or services in global mar-

kets always face difficulties in deciding whether to standardise or
adapt their product offerings.
‰‰ The levels or stages a product undergoes during its lifetime form
a product life cycle. These stages are introduction stage, growth
stage, maturity stage and decline stage.
‰‰ New products are developed to catch the attention of customers
and sustain in a global market.
‰‰ Price is one of the most important aspects of the marketing mix
which determines the value of a product in a market. Some of
the important pricing methods include cost-based pricing, de-
mand-based pricing and competition-based pricing.
‰‰ A distribution or marketing channel is a mode that connects pro-

S
ducers of a product to consumers. The three types of distribution
channels are direct distribution channel, indirect distribution
channel and hybrid distribution channel.
IM
‰‰ Promotion is a process that encompasses all activities involved
in communicating to customers about the availability of products
and their features and benefits. Some important promotion tools
include advertising, public relations, personal selling, direct mar-
keting and sales promotions.
M

key words

‰‰ Attribute listing: It is a technique of generating new ideas

wherein every characteristic and features of a product are listed.
‰‰ Forced relationship: It helps in creating a rapport with every
N

idea. For instance, sofa and bed can be converted into a sofa bed.
‰‰ Morphological analysis: This relates to creating ideas by bring-
ing together various means of carrying out a task.
‰‰ Mind mapping: It involves listing of ideas on paper and eventu-
ally connecting with the next idea.
‰‰ Price elasticity of demand: It is a measure of a proportion-
ate change in the demand for a product with a proportionate
change in its price keeping other factors like customers’ tastes,
income, etc. constant.

8.13 DESCRIPTIVE QUESTIONS

1. What do you understand by a global product?
2. Write a short note on product extension-communication adaptation.
3. What are the different stages of a product life cycle?

NMIMS Global Access - School for Continuing Education

 MARKETING MIX IN INTERNATIONAL BUSINESS  221

n o t e s

4. Discuss the concept of international pricing.

5. List various types of international distribution channels.
6. ‘Advertising is an effective promotional tool.’ Discuss.

8.14 ANSWERS and hints

answers for Self Assessment Questions

Topic Q. No. Answers

Concept of Global Product 1. Product
International Product 2. True
Management

S
International Product 3. Product extension-Communica-
Strategies tion adaptation
Product Standardisation 4. False
and Product Adaptation
IM
International Product Life 5. Maturity stage
Cycle
New Product Development 6. False
in International Market
7. b.  Developing and evaluating
M

concepts
Concept of International 8. Cost-based pricing
Pricing
9. d. Commercials
N

International Pricing 10. b.  Multi-point pricing

Strategies
Concept of International 11. Textile, machinery, equipment and
Distribution Channels agricultural products industries
12. Hybrid distribution channel
Concept of International 13. True
Promotion
14. Internet

hints for Descriptive Questions

1. A global product is sold and traded internationally; thus has a

global international presence and corporations. Refer to Section
8.2 Concept of Global Product.
2. The product extension-communication adaptation strategy
involves advertising similar products through modified
promotional strategies. Refer to Section 8.4 International
Product Strategies.

NMIMS Global Access - School for Continuing Education

222  International Business

n o t e s

3. There are four stages of the product life cycle, namely introduction
stage, growth stage, maturity stage and decline stage. Refer to
Section 8.6 International Product Life Cycle.
4. Price determines the value of a product in an international
market and gains customers’ attention. Refer to Section
8.8 Concept of International Pricing.
5. There are mainly three types of distribution channels, namely
direct distribution channel, indirect distribution channel and
hybrid distribution channel. Refer to Section 8.10 Concept of
International Distribution Channels.
6. Advertising is an effective method of promotion wherein
information is conveyed to customers through mass media
including television, radio, newspapers, magazines, etc. Refer to
Section 8.11 Concept of International Promotion.

S
8.15 SUGGESTED READING FOR REFERENCE
IM
SUGGESTED READINGS

‰‰ Cherunilam, F. (2010). International marketing. Mumbai [India]:

Himalaya Pub. House.
‰‰ Keegan, W., & Keegan, W. (1989). Global marketing management.
Englewood Cliffs, N.J.: Prentice Hall.
M

‰‰ Kotler, P. (2003). Marketing management. Upper Saddle River, N.J.:

Prentice Hall.
‰‰ Richter, T. (2012). International marketing mix management. Ber-
lin: Logos-Verl.
N

E-REFERENCES

‰‰ (2014).Retrieved 1 November 2014, from http://hh.diva-portal.org/

smash/get/diva2:326017/FULLTEXT01.pdf
‰‰ (2014). Retrieved 1 November 2014, from http://www.sagepub.com/
upm-data/60045_Masterson_ch11.pdf
‰‰ Netmba.com,. (2014). Product Life Cycle. Retrieved 1 November
2014, from http://www.netmba.com/marketing/product/lifecycle/

NMIMS Global Access - School for Continuing Education

 C h a
9 p t e r

Issues in International trade

CONTENTS

S
9.1 Introduction
9.2 Export Restrictions
IM
9.2.1 Prohibited or Restricted Goods
Self Assessment Questions
Activity
9.3 Determining Export Requirements
9.3.1 Common Export Documents
9.3.2 Transportation Documents
M

Self Assessment Questions

Activity
9.4 Ways To Obtain Export Licence
Self Assessment Questions
N

Activity
9.5 Import Restrictions
9.5.1 Tariffs
9.5.2 Exchange Permits
9.5.3 Quotas
9.5.4 Import Licences
9.5.5 Boycotts
Self Assessment Questions
Activity
9.6 International Logistics
9.6.1 Terrorism and Logistics
Self Assessment Questions
Activity
9.7 Summary
9.8 Descriptive Questions
9.9 Answers and Hints
9.10 Suggested Reading for Reference

NMIMS Global Access - School for Continuing Education

224  International Business

Introductory Caselet
n o t e s

CHALLENGES FACED BY STARBUCKS CORPORATION

STARBUCKS CORPORATION, opened on March 30, 1971 is a

popular American coffee house chain with its head office in Se-
attle, Washington. The core business of Starbucks is to provide
freshly brewed coffee to its customers. In a short span of time, the
outlets of Starbucks increased from 17 coffee shops to more than
20,000 outlets in around 62 countries.

The growth was steadfast, but during World Trade Organisation

(WTO) discussions, Starbucks faced some major protests relating
to free market capitalism. Since then, its sales dropped steadily
causing it to shut down over 400 stores in US only. It faced cul-
tural challenges from its future customers who belonged to Gen-

S
eration X (born during 1960-1980). In addition, it encountered
heavy competition from McDonald’s, Dunkin’ Donuts, and Nestle.
Employee dissatisfaction was also one of the challenges faced by
Starbucks, as employees had odd work hours and felt that they
IM
were overworked, underpaid and unappreciated.

Starbucks decided to identify all the factors that affected their en-
try and growth in the global market. Market research was conduct-
ed to understand the global market properly. Starbucks encoun-
tered factors such as market volatility, declining consumption and
increasing dairy costs. These factors were uncontrollable. The
M

controllable factors were strong competition and labour issues.

For dealing with the changing economic environment, Starbucks

made its strategy as per the country polices.
N

Despite all these factors, Starbucks still has an excellent company

vision that builds their brand image.

NMIMS Global Access - School for Continuing Education

 Issues in International trade  225

n o t e s

learning objectives

After completing this chapter, you will be able to:

>> Explain the export restrictions
>> Explain the export requirements
>> Discuss the ways to obtain export licence
>> Explain the import restrictions
>> Discuss international logistics

9.1 Introduction
In the previous chapter, we studied about marketing mix in interna-

S
tional business. This chapter focuses on various issues that emerge in
international business.

Globalisation has provided a platform for the world to integrate, inter-

IM
act and exchange its views, ideas, culture and products. It has opened
new opportunities for trade at the international level. International
trade forms a substantial part of Gross Domestic Product (GDP) of
many countries.

International trade helps in the advancement in technology, informa-

tion accessibility and capital internationalisation. It is significant for
M

the economic development and prosperity of a nation, as it helps in

developing trade relations and earning foreign exchange (FOREX).
However, international trade faces various controllable and non-con-
trollable factors that directly or indirectly influence the organisation’s
N

decisions. These may relate to export and import restrictions, licens-

ing requirements, international terrorism etc. Organisations entering
into international trade should examine the external and internal en-
vironment constantly and adapt accordingly. By analysing marketing
environments, organisations can predict the changes that might take
place in future. These changes may create threats and opportunities
for the organisations.

In this chapter, you will learn about various issues in international

trade.

9.2 EXport restrictions

Export restrictions mean when a country or an individual is banned
or restricted from exporting certain products or services by the gov-
ernment. The country or individual might also be asked to limit the
quantity of that item which is being exported. Government authorities
of a particular country prepare and regulate these export restrictions.
These restrictions are imposed on those individuals or countries that
are exporting their products or services in the home country.

NMIMS Global Access - School for Continuing Education

226  International Business

n o t e s

The reasons of export restrictions are as follows:

‰‰ It helps in preventing the lack of certain goods or services as it is
more valuable for the local market.
‰‰ It facilitates in managing the impact of particular goods imported
in the home country, which are else levied under the antidumping
duties.
‰‰ It constrains the import of items, such as arms or narcotics, in the
home country that might be used for terrorism or illegal drug re-
lated activities.

Exhibit

United States Expands Export Restrictions On Russia

S
Here is a news article that shows how export restrictions are imple-
mented by countries.

In response to Russia’s continued actions in southern and eastern

IM
Ukraine, the United States is implementing additional restrictive
measures on defence exports to Russia. Accordingly, the Depart-
ment of State is expanding its export restrictions on technologies
and services regulated under the U.S. Munitions List (USML).

Effective immediately, the Department’s Directorate of Defense

M

Trade Controls (DDTC) will deny pending applications for export

or re-export of any high technology defence articles or services reg-
ulated under the U.S. Munitions List to Russia or occupied Crimea
that contributes to Russia’s military capabilities. In addition, the
Department is taking actions to revoke any existing export licences
N

which meet these conditions. All other pending applications and

existing licences will receive a case-by-case evaluation to deter-
mine their contribution to Russia’s military capability.

The United States will continue to adjust its export licensing poli-
cies toward Russia, as warranted by Russia’s actions in Ukraine. We
urge Russia to honour the commitments it made in Geneva on April
17 to deescalate the situation in Ukraine.
Source: http://www.state.gov/r/pa/prs/ps/2014/04/225241.htm

9.2.1  PROHIBITED OR RESTRICTED GOODS

Prohibited or restricted goods are those goods that are not allowed
to be exported in other countries from the home country. However,
there is a slight difference between prohibited goods and restricted
goods. Prohibited goods are completely banned in the home country;

NMIMS Global Access - School for Continuing Education

 Issues in International trade  227

n o t e s

whereas, restricted goods have restrictions imposed on them due to

certain terms and conditions and if these conditions are fulfilled, the
ban is lifted.

Let us look at the list of prohibited and restricted goods:

‰‰ Prohibited goods
 Narcotic drugs
 Obscene items
 Wildlife such as exotic birds, specified sea shells and human
skeleton.
 Chemicals as mentioned in the Schedule 1 of the Chemical
Weapons Convention of UN, 1993.

S
 Pirated goods
‰‰ Restricted goods
 Ammunition
IM
 Goods for commercial use
 Medicines and drugs
 Endangered species of certain animals and plants
M

self assessment Questions

1. ________________________of a particular country prepares

and regulates export restrictions.
N

2. Which of the following comes under the category of prohibited

goods?
a. Medicines and drugs
b. Chemicals
c. Ammunition
d. Endangered species

Activity

Using the Internet, find out major export restrictions imposed by

different countries. Analyse its importance in your home country.
Present your findings in a short note.

NMIMS Global Access - School for Continuing Education

228  International Business

n o t e s

9.3 Determining EXport requirements

There are certain common requirements that every country or indi-
vidual has to follow for carrying out export procedure. An organisa-
tion dealing in exports should be aware of the standards, rules and
regulations of the foreign country. For instance, if goods are exported-
through ships, it is necessary that the documents should outline the
sale, shipment and responsibilities of each party.

9.3.1  Common export documents

The export documents are very essential for international trade. The
documents should ensure compliance with the country`s rules and
regulations.

S
Common export documents include the following:
‰‰ Commercial Invoice: It is a bill that the sellers give to the buyer
for making purchases. This bill or invoice helps in deciding the
IM
actual value when custom duties need to be assessed.
‰‰ Export Packing List: It is a packing list with information and de-
scription regarding the product price and other shipping details.
Generally an export packing list includes information regarding:
 Seller
M

 Buyer

 Invoice number
 Shipper

 Mode of transport
N

 Carrier

 Date of shipment
 Quantity

 Type of package
 Net and gross weight
 Dimension

‰‰ Pro Forma Invoice: This type of invoice is prepared by an exporter,

which is addressed to the buyer. It includes information regarding
the goods that would be sent as well as their value and other vital
descriptions.
‰‰ Export Licences: It is a document issued by the government of a
country that declares the export of a particular good or service in
a given quantity at a specified destination. This document has to
be provided for certain specific products, such as defence articles,
dual use articles or nuclear materials.

NMIMS Global Access - School for Continuing Education

 Issues in International trade  229

n o t e s

9.3.2 Transportation Documents

Transportation documents are issued by the airlines, shipping lines,

freight forwarder and logistics companies. These documents serve as
an evidence of acceptance, receipt of goods for carriage and document
of ownership.
‰‰ Airway Bill: When any shipment is done through air transport
then this bill is required. These airway bills depend upon the ship-
per’s requirements. For acquiring this bill the owner of the good
and carrier undergoes a contract which is known as Bill of Lading.

self assessment Questions

3. ________________________includes information regarding

the goods that would be sent as well as their value and vital

S
descriptions.
4. Export Licence is provided for which of the following:
a. Airway bill
IM
b. Pro Forma invoice
c. Nuclear material
d. Endangered species
M

Activity

Using the Internet, find out different ways to export food grains.

Present your findings in a short note.

N

9.4 Ways to OBTAIN export Licence

If you want to export your goods and services in other countries then
it is imperative for you to obtain an export licence. An export licence
depends on certain factors that are the destination of the product be-
ing exported, user of the product, and its usage. If any of the given
factor changes then licence requirements also changes accordingly.

Let us consider some of the ways to obtain an export licence in the

following section.

Export licence Application and Information

Network (ELAIN)

ELAIN is a system which allows private vendors to submit a licence

application electronically. It is an online service through which ex-
porters can submit their applications 24 hours a day.

NMIMS Global Access - School for Continuing Education

230  International Business

n o t e s

Electronic Request for Item Classification (ERIC)

ERIC assists in submitting all the requests related to commodity clas-

sification to Bureau of Industry and Security (BIS). ERIC is an addi-
tional service to ELAIN provided to the exporters.

Simplified Network Application Process (SNAP)

In SNAP, vendors or exporters can submit online applications by log-

ging in the Web browser. It is a free of charge online program that is
run by BIS.

System for Tracking Export Licence Application (STELA)

STELA is used by applicants for tracking their application status of li-

cence as well as product classification. It is an automatic system which

S
provides voice responses to the applicants. If the application gets ac-
cepted without any terms and conditions then exporters are allowed
to export their products and services by STELA. However, if the appli-
IM
cation gets accepted under certain conditions then the exporter has to
wait for a formal approval from BIS.

self assessment Questions

5. Which of the following is used for tracking the application

M

status of licence as well as product classification?

a. ELAIN
b. ERIC
c. SNAP
N

d. STELA

Activity

Using the Internet, study the instances where a change in factor

led to changing the requirement of an export license. Present your
findings in a short note.

9.5 IMPort restrictions

Import restrictions can be defined as tariffs or taxes imposed on goods
imported by the home country. It is levied to make the goods costly
and to restrict the quantity of goods imported. These are generally
imposed to regulate a country’s exchange rate. Import restrictions are
also referred as import controls.

NMIMS Global Access - School for Continuing Education

 Issues in International trade  231

n o t e s

Import restrictions are generally levied on the following:

‰‰ Imported goods to make it more expensive
‰‰ Licensing goods for limiting the quantity of import
‰‰ Restricting currency exchange during payment of imported goods

‰‰ Prohibiting access to illegal products

‰‰ Increasing domestic employment
‰‰ Restricting unfair trade practices
‰‰ Supporting infant industries

Now let us consider different types of import restrictions.

9.5.1 Tariffs

S
Tariffs can be defined as the fees imposed by government on the ex-
porters to export goods in a particular country. Tariffs are also referred
as import taxes. These fees or taxes are charged as some percentage of
IM
the total value of goods shipped. However, the exact amount is calcu-
lated depending upon the type of goods being shipped.

It is important to note that there are certain countries which levy

no tariff on import while there are some which impose a minimum
amount of the tariff on any product or service being imported in the
M

country. Collecting a minimum amount of tariff helps in generating

revenues for those countries.

Tariffs are also charged to avoid competition posed by the foreign

countries on the vulnerable local market. When foreign countries pro-
N

vide goods at cheap prices then to protect the interest of domestic

market tariff is charged. The consequence of this would be increase in
prices by the exporter to cover its own profit margin.

For instance, China has intimated a new coal tariff to Australians im-
ports. The main aim of imposing these tariffs is to aid the Chinese coal
producers.

9.5.2 Exchange Permits

Exchange permits or foreign exchange controls are basically a restric-

tion which is imposed on currency exchange to prevent any fluctua-
tions in the exchange rate of a country. Exchange permits are basically
imposed to control foreign purchases made by an individual or organ-
isation. This may include the following:
‰‰ Prohibiting use of FOREX within home country
‰‰ Restricting possession of FOREX by locals

NMIMS Global Access - School for Continuing Education

232  International Business

n o t e s

‰‰ Maintaining fixed exchange rates

‰‰ Restricting or controlling the import or export of forex

9.5.3 Quotas

Quotas can be defined as import restriction imposed on the exporter

relating to the quantity of goods being exported. It is usually a phys-
ical limit levied on the items that are imported in the home country.

It creates competition among the exporters for negotiating as well

as offering the best deal in the domestic market. In addition, it helps
in protecting the interests of the local seller by setting a limit on the
quantities of goods.

9.5.4  Import Licences

S
Import licence is an authorisation given to the exporter for shipping
goods or services in the importing country. It is a document prepared
IM
by the importing country which allows the exporter to ship a particu-
lar quantity of goods or services. It is a non–tariff barrier that aids in
protecting the interest of domestic country from foreign competition.

Import licence helps in clearly defining the quantity of product that the
exporter is allowed and it should.
M

9.5.5 Boycotts

A boycott also referred as import bans or embargoes is a ban which

strictly restricts the import of certain goods or any kind of transaction
with some countries. It is an extreme ban that can be used in an array
N

of situations. For instance, Russia has banned the import of meat, fish,
dairy products and some other agricultural goods from countries such
as US, Canada and Australia.

self assessment Questions

6. Which of the following is a strict ban on the import of certain

goods or any kind of transaction with some countries?
a. Boycott
b. Tariff
c. Import Licence
d. Quota

NMIMS Global Access - School for Continuing Education

 Issues in International trade  233

n o t e s

Activity

Using the Internet, find and list the goods on which import restric-
tions are levied by India.

9.6 International logistics

According to the Council of Logistics Management, “Logistics is the
management process of planning, implementing and controlling the
physical and informational flows concerned with materials and final
goods from the point of origin to the point of usage.”

Logistics is a process of designing, managing and improving the move-

ment of products through supply chain management. Supply chain

S
management engages in the activities that are necessary to turn raw
materials into products and make the products available for customers.
A supply chain consists of the organisations that supply necessary raw
materials and move final products from manufacturers to customers.
IM
Logistics is based upon the requirements of customers. In addition, lo-
gistics also manages the flow of raw materials, products and informa-
tion from the manufacturer to customers. Logistics includes various
functions, such as inventory management, transportation, warehous-
ing, material handling, packaging and security of products. Logistics
M

has an objective of reaching the right customers, at the right place, at

the right time, with the right quantity and quality of products.

Some of the other objectives of logistics are as follows:

‰‰ Reducing the cost of product: It refers to the minimisation of cost
N

by involving the least number of distribution channel members.

‰‰ Offering best services: It refers to providing the best services to
customers. For example, best services can be timely delivery, good
relationship with customers, warranty and guarantee.
‰‰ Maintaining transparency in operational activities: It refers to
the openness in sharing the information of operational activities
with customers and employees. For example, FedEx shares infor-
mation about the delivery of products. Customers can track the
delivery status of the product in transition at any time.

International logistics can be defined as proper management and con-

trol of the given resources in the supply chain of a global organisation.
Logistics is an important element of the international distribution pol-
icy. It poses a challenge for the international organisations, as there is
a large geographical area that needs to be covered. Freight forwarders

NMIMS Global Access - School for Continuing Education

234  International Business

n o t e s

play an important role in international logistics. With their help, the

organisation can focus on the main activities, such as production and
marketing. Freight forwarders have extensive knowledge and exper-
tise in the export distribution. Their role in shipping the goods is dis-
cussed as follows:
‰‰ Estimating the costs, developing the economic methods of shipment
to port, and arranging the export licences and import permits
‰‰ Instructing the shipping department regarding when to ship goods
from the plant
‰‰ Preparing the bill of lading and checking compliance with the
terms of sale
‰‰ Presenting the export declaration to the custom house for approval

‰‰ Securing the consular forms and documents

S
‰‰ Presenting documents to the bank, if payment is made through
letter of credit
IM
In simpler terms, it can be defined as a process which involves negoti-
ation, planning and execution of logistic operations between nations.
It involves proper utilisation of logistic policies and procedures by do-
ing proper planning and taking the appropriate actions. This further
helps in fulfilling the requirements of the foreign governments as well
as international organisations.
M

9.6.1 Terrorism and Logistics

Terrorism harms international trade to a large extent. We all know

that the attacks of 9/11 are a shock to humankind which had major
N

effects directly on personal and professional aspects of a human life.

Before the attacks, the international organisations only had internal
systems to manage the documentation, shipping, customs, etc.

However, after these attacks, a crucial step in logistics management

is added that is strict vigilance at each point of the export/ import
process. Cargo and container security initiative (CSI) was the major
step taken by US government for enhancing the security. Apart from
this, for further strengthening the CSI, Customs and Board Protection
announced electronic container tracking. This tracking includes pro-
cesses such as Global Positioning System, Radio Frequency Identifi-
cation, Satellite, Bluetooth, etc.

The primary importance of international logistics is to combine all the

processes that are vital to the movement of products or services from
the exporter to the customer. This is the reason behind the increasing
importance of logistics security. Terrorism as well as social and eco-
nomic effects break the logistic chain which further affects a country’s
economy and its competitiveness.

NMIMS Global Access - School for Continuing Education

 Issues in International trade  235

n o t e s

Exhibit

Container Security Initiative (Csi)

The Container Security Initiative (CSI) was established by the US

after September 11, 2001 terrorist attacks. This initiative addresses
the threat to border security and global trade posed by the potential
terrorist. Under CSI, all containers are identified and inspected at
foreign ports before they are placed on vessels destined for the US.

The core elements of CSI are:

‰‰ Identify high-risk containers by using automated targeting
tools are used. This technology includes large-scale X-ray and
gamma ray machines and radiation detection devices.
‰‰ Prescreen and evaluate containers before they are shipped.

S
‰‰ State-of-the-art detection technology to scan containers
IM
self assessment Questions

7. Logistics manages the flow of raw materials, products and

information from the manufacturer to customers. (True/False)
M

Activity

Using the Internet, find out the measures taken by Indian Govern-
ment to counter terrorism with respect to international logistics.
N

9.7 Summary
‰‰ Export restriction means barring a country or an individual from
doing trade in any other nation.
‰‰ An exporter has to fulfil certain requirements for doing trade,
which includes attaining common export document, transporta-
tion documents and export compliance documents.
‰‰ Forgetting an export licence, an exporter has to follow a process
which includes ELAIN, ERIC, SNAP and STELA.
‰‰ Import restrictions are basically imposed to protect the vested in-
terests of the domestic market.
‰‰ Import restrictions include tariffs, exchange permits, quotas, im-
port licence and boycotts.
‰‰ Internationallogistics help in carrying out the cross-border trans-
actions through supply chain management.

NMIMS Global Access - School for Continuing Education

236  International Business

n o t e s

key words

‰‰ Boycott: It refers to the strict and extreme restrictions imposed

by the importing country on the exporter.
‰‰ Forex: It refers to the foreign exchange or the currencies ex-
changed in the market.
‰‰ Prohibited Goods: It refers to those goods that are strictly
banned in a country and includes items, such as narcotics.
‰‰ Tariff: It refers to the tax or charge levied on the exporter for
shipping goods or services.

9.8 Descriptive questions

S
1. What do you understand by export requirements? Discuss.
2. Explain the ways to get export licence.
3. What are import restrictions? Explain.
IM
9.9 Answers and hints

answers for Self Assessment Questions

M

Topic Q. No. Answers

Export Restrictions 1. Government authorities
2. b. Chemicals
N

Determining Export 3. Pro Forma Invoice

Requirements
4. a.  Airway Bill
Way to Obtain Export 5. d. STELLA
Licence
Import Restrictions 6. a. Boycott
International Logistics 7. True

hints for Descriptive Questions

1. Export requirements include the documents and procedures

for carrying out the exports by a country. Refer to Section
9.3 Determining Export Requirements.

NMIMS Global Access - School for Continuing Education

 Issues in International trade  237

n o t e s

2. For getting an export licence an exporter has to follow different

ways which are ELAIN, ERIC, SNAP and STELA. Refer to
Section 9.4 Ways to Obtain Export Licence.
3. Import restrictions include tariffs, quotas, exchange permits and
boycotts. Refer to Section 9.5 Import Restrictions

9.10 SUGGESTED READING FOR REFERENCE

Suggested Readings

‰‰ Aswathappa,A. (2006). International business (1st ed.). New Delhi:

Tata McGraw-Hill.
‰‰ Endres, A., & Fleming, G. (2002). International organistaions and
the analysis of economic policy, 1919-1950 (1st ed.). Cambridge:

S
Cambridge University Press.
‰‰ Gandolfo, G., & Gandolfo, G. (1998). International trade theory and
policy (1st ed.). Berlin: Springer.
IM
e-references

‰‰ Export.gov,.
(2014). Export.gov - Export Licences. Retrieved 28
October 2014, from http://www.export.gov/regulation/eg_main_
018219.asp
M

‰‰ Singfield, C. (2014). U.S. Commerce Department Expands Export

Restrictions on Russia - 7/29/2014.Bis.doc.gov. Retrieved 28 Octo-
ber 2014, from http://www.bis.doc.gov/index.php/about-bis/news-
room/press-releases/107-about-bis/newsroom/press-releases/
N

press-release-2014/710-u-s-commerce-department-expands-ex-
port-restrictions-on-russia

NMIMS Global Access - School for Continuing Education

N
M
IM
S
 C h
10 a p t e r

ETHICS IN INTERNATIONAL BUSINESS

CONTENTS

S
10.1 Introduction
10.2 International Business Ethics
IM
Self Assessment Questions
Activity
10.3 Corporate Guidelines & Policies for Global Business Ethics
Self Assessment Questions
Activity
10.4 Global Bribery and Corruption
M

Self Assessment Questions

Activity
10.5 Corporate Social Responsibility
10.5.1 Importance of CSR
N

10.5.2 Increasing Role of CSR in Organisations

10.5.3 Benefits of CSR
10.5.4 Values in Corporate Responsibility
Self Assessment Questions
Activity
10.6 CSR in Multinational Companies
Activity
10.7 Summary
10.8 Descriptive Questions
10.9 Answers and Hints
10.10 Suggested Reading for Reference

NMIMS Global Access - School for Continuing Education

240  International Business

Introductory Caselet
n o t e s

capgemini & its global ethics

Capgemini, a French company, was established in the late 1960s.

The company is renowned for its technology, outsourcing, profes-
sional and consulting services. It has its operations in more than
40 countries across the world. The company has been recently
recognised for the second time by Ethisphere Institute. The rea-
son behind this is its efforts in the promotion of corporate busi-
ness ethics and governance.

The company’s primary focus is on instilling Corporate Social Re-

sponsibility (CSR) and sustainability into all processes and corpo-
rate strategies. In 2003, the company formulated its CSR and Sus-
tainability Strategy based on a top-to-down leadership approach.

S
The company has an unfailing commitment towards its business
ethics, which means building and maintaining trust of clients,
stakeholders, employees and suppliers. It is one of those compa-
IM
nies that comply with all the laws and does not believe in bribery
or corruption of any form.

Capgemini has designed its business objectives and standards in

such a way that its benefits are not limited just to clients or stake-
holders but to all those parties that are actively participating in
the value chain. The company has established a body for ethics
M

and compliance, which consists of one chief officer for ethics and
compliance followed by local officers for ethics and compliance at
the group level. These officers promote the proper implementa-
tion of the ethics program wherein employees have to undergo a
training related to business ethics.
N

NMIMS Global Access - School for Continuing Education

 ETHICS IN INTERNATIONAL BUSINESS  241

n o t e s

learning objectives

After studying this chapter, you will be able to:

>> Discuss the concept of international business ethics
>> Explain corporate guidelines and policies for global
business ethics
>> Describe global bribery and corruption
>> Define corporate social responsibility
>> State corporate social responsibilities followed by multina-
tional companies

10.1 Introduction

S
The previous chapter discussed about various issues that crop up
while trading between countries. To deal with such issues, organisa-
tions that go global have formed business ethics and taken corporate
IM
social responsibility initiatives.

When an organisation goes global to expand its business operations, it

comes across an array of issues related to legal and ethical structures
of the host country. For overcoming these issues, many multination-
al companies have started paying attention to international business
ethics. Most ethical issues arise because of difference in the laws, reg-
M

ulations, political and economic systems, and culture of countries.

However, the most common ethical issues in international business
are related to human rights, fair wages, corruption, and adherence to
environment regulations.
N

Today, many multinational companies are debating that how they

should adopt the culture of the host country. However, many of them
are in favour of adopting socially accepted behaviour of the given
country, while some think that it might affect their own ethical and
moral norms. Next time in this chapter, you will study the concept of
international business ethics and CSR in detail.

10.2 International business ethics

An organisation can neither exist in seclusion nor run its business only
for profit maximisation. The business activities of an organisation di-
rectly affect the environment and its stakeholders, such as custom-
ers, suppliers, employees, shareholders and the society. For example,
a mining project may be financially beneficial for an enterprise, but
it can cause deforestation, displacement of inhabitants and environ-
mental pollution. Thus, we can say that there are some moral princi-
ples that guide how a business should behave. These moral principles
are called business ethics. Ethics is a moral philosophy that guides in-

NMIMS Global Access - School for Continuing Education

242  International Business

n o t e s

dividuals to decide what is wrong or right, good or bad, and what com-
prises desirable behaviour in a particular set of social circumstances.

Globalisation has resulted in integrating organisations with the rest

of the world through cross-border communication and trade. This
can only be possible if every organisation entering into foreign trade
adapts to the culture of other countries. Here, comes the role of inter-
national business ethics into the picture.

International business ethics implies the global code of conduct to be

followed by each organisation entering the foreign trade. In today’s
world, the importance of international business ethics is increasing
rapidly. International business ethics address complex issues related
to cultural differences that exist in the host country. These issues can
be related to employment opportunities, child labour, poor working
conditions, and corruption.

S
International business ethics help organisations going global in vari-
ous areas. These areas are explained as follows:
IM
‰‰ Finance: It is the most important discipline in any business, which
is concerned with accounting and investing decisions. An example
of ethical violation is data fudging in which organisations present
a fabricated statement of accounts and other records, which are
open to investigation. The following are ethics in finance:
 Following truthfulness and authenticity in business transac-
M

tions
 Seeking fulfilment of mutual interests
 Getting economies and financial units freed from greed-based
N

methodologies
‰‰ Human resource management: This discipline basically deals
with issues related to the employees of the organisation. It handles
all the ethical problems related to discrimination, whistle blowing,
workplace safety and trade unions.
‰‰ Sales and marketing: It is very important to infuse business ethics
in sales and marketing as it helps in increasing profitability and
avoiding conflicts. Business ethics in this area deals with a num-
ber of issues, which are as follows:
 Misinforming customers about products or services
 Deciding high prices for products and services
 Creating a false impression on customers about the features of
products
 Promoting sexual attitudes through advertising; thus, affecting
the young generation and children

NMIMS Global Access - School for Continuing Education

 ETHICS IN INTERNATIONAL BUSINESS  243

n o t e s

‰‰ Ethics in production: Business ethics deals with the responsibil-

ity of an organisation to ensure that production processes are not
causing harm to the environment. It throws light on the following
issues:
 Avoidingrendering services or producing products that are
hazardous to health. For example, tobacco and alcohol.
 Maintaining ethical relations with the environment and avoid-
ing environmental pollution.

Exhibit

Human Rights Violation in International Business

There are various organisations that are involved in human rights

S
violations in other countries. They claim that they develop coun-
tries by improving their economic growth. Instead the situation is
worsened in many countries. Child labour is the most prevalent vi-
olation in developing countries.
IM
Organisations employ child labour because children are made to
work for long hours at low wages. An ethical organisation should
condemn this act and refrain from those suppliers who produce
raw materials using child labour.
M

The extended work hours also reduce quality and performance of

employees. World Health Organisation recommends the rationali-
sation of employment hours except in case of doctors, lawyers, po-
lice offices, and engineers. Organisations should also provide recre-
ational activities to their employees.
N

Sometimes organisations fail to provide good safety standards to

their employees. This is one of the main reasons for industrial acci-
dents. There are various standards and guidelines issued by Envi-
ronment Health and Safety, which put pressure on organisations to
follow health and safety norms. A European Consortium (IAPC-Eu-
rope) is established, which comprises 13 organisations that share
the cost of conducting environmental and health audits in different
countries.

self assessment Questions

1. Business ethics is also known as ____________.

2. Ethics is a moral philosophy. (True/False)
3. What are the common issues that affect international business
ethics?

NMIMS Global Access - School for Continuing Education

244  International Business

n o t e s

Activity

Visit an organisation of your choice and note down the business

ethics principles followed by it.

Corporate guidelines & policies

10.3
for Global business ETHICS
Every organisation in the world has to be ethical in nature as it has
to deal in the society. Most organisations have implemented in-house
codes of conduct to be strictly followed by all their employees.

Global organisations have acknowledged the significance of incorpo-

rating ethical values, such as integrity, transparency, and mutual and

S
healthy communication in their corporate governance system. The
organisations believe that the goodwill generated by implementing
business ethics helps to gain monetary and non-monetary benefits in
IM
the long run.

The increasing awareness among stakeholders and consumers leads

to the identification of the existence of unethical practices in the or-
ganisation. Such practices include financial frauds, tax evasion, bad
quality products and services, indifference towards environmental
concerns, and hazardous working conditions.
M

Nowadays investors make sure that organisations in which they in-

vest are managed properly and possess a proper corporate gover-
nance structure. The organisations regard corporate governance as
an important control mechanism that makes the optimum use of the
N

human, financial, and physical resources of an organisation. Thus, the

organisations focus to ingrain ethics into their culture and concen-
trate on implementing appropriate corporate governance practices.

Some of the important corporate guidelines and policies for global

business ethics are as follows:
‰‰ Act with honesty and integrity avoiding actual or apparent conflict
of interest
‰‰ Provide accurate, complete, and relevant information
‰‰ Comply with rules and regulations set down by the government
‰‰ Protect the confidentiality of information
‰‰ Share knowledge and maintain skills
‰‰ Use the assets and resources optimally

NMIMS Global Access - School for Continuing Education

 ETHICS IN INTERNATIONAL BUSINESS  245

n o t e s

self assessment Questions

4. Organisations regard ____________ as an important control

mechanism that makes the optimum use of the human,
financial and physical resources of an organisation.

Activity

Research the Internet and find out corporate guidelines related to

business ethics followed by multinational organisations.

10.4 global bribery and corruption

Global bribery and corruption law come into action when decision or

S
policy makers are influenced by people for solving their own purpose.
In such cases these people are considered to be criminal under the
bribery law. It can be given in the form of cash or anything of value
and offered directly or indirectly with the help of a third party. Bribery
IM
and corruption influence the performance of countries and organisa-
tions. This results in lower growth and low level of per capita income.

The motive for bribery is to secure government contracts that might

not be forthcoming by giving cash or anything in value. To prevent
such practices, bribery law is formulated which has a provision for
M

the punishment of both the giver and receiver of bribery. It also helps
in putting an end to corruption in both the private and public sectors.
Now let us discuss anti-bribery and anti-corruptions conventions for-
mulated in international business.
N

Organisation for Economic Co-Operation and Development

Anti-bribery Convention

For fighting against bribery, formulation of anti-bribery convention

took place, which is formally known as Convention on Combating
Bribery of Foreign Public Officials in International Business Trans-
actions. The main aim of this convention is to stimulate sanctions to
respond against bribery in the developing countries such that it helps
in decreasing corruption.

Organisation for Economic Co-operation and Development (OECD)

Anti-Bribery Convention consists of 34 member countries and there are
also seven non-member countries, which have implemented the prac-
tices of this convention. Those seven non-member countries are Argen-
tina, Brazil, Bulgaria, Colombia, Latvia, Russia, and South Africa.

OECD ensures the proper implementation and working of all inter-

national commitments that a country has adopted under the conven-
tion. It monitors the implementation process by carrying out an open
mechanism by a working group that includes state members of the
convention.

NMIMS Global Access - School for Continuing Education

246  International Business

n o t e s

United Nations Convention against Corruption

United Nations Convention against Corruption (UNCAC) came into

existence in 2005 by UN member nations and is a multifaceted con-
vention. It is one of the legal instruments that help in fighting against
corruption effectively. UNCAC enforces all the member states to im-
plement the anti-corruption measure that further affects law and
practices followed by them. This convention is established with some
common aims that are enlisted below:
‰‰ Preventing and fighting corruption
‰‰ Giving a criminal status to certain behaviours
‰‰ Improving cooperation in judicial laws
‰‰ Helping in proper enforcement of international law

S
‰‰ Taking effective legal actions for recovering assets
‰‰ Facilitating a proper exchange of information
‰‰ Ensuring proper and effective implementation of the convention
IM
UNCAC helps in fighting corruption in both local and global markets
by implementing its effective measures. It deals in various forms of
corruption that are explained below:
‰‰ Trading in influence: It is also known as influence peddling, which
means influencing others with authority and power for obtaining
M

favour and privileges. It is illegal under OECD and is generally

called undue influence peddling.
‰‰ Abuse of function: It refers to illegal activities carried by public
officials for gaining some personal benefits for which they are not
N

given any legal authority.

‰‰ Recovery of stolen assets: It is also known as international asset
recovery, which focusses on restoring the earnings of corruption.
It may include real estate, precious metals, black money safely de-
posited in the bank, antique pieces and vehicles.

self assessment Questions

5. Select the common aim that is established by UNCAC from

the following:
a. Recovery of stolen assets
b. UNCTC
c. Improving cooperation in judicial laws
d. Abuse of function
6. ___________ is also known as international asset recovery and
aims at restoration of earnings of corruption.

NMIMS Global Access - School for Continuing Education

 ETHICS IN INTERNATIONAL BUSINESS  247

n o t e s

Activity

Using the Internet, find how global bribery can affect the interna-
tional trade.

10.5 Corporate social responsibility

According to Lord Holme and Richard Watts in a publication
Making Good Business Sense, “Corporate Social Responsibility is the
continuing commitment by business to behave ethically and contribute
to economic development while improving the quality of life of the work-
force and their families as well as of the local community and society at
large.”

S
Corporate Social Responsibility (CSR) is an evolving concept that has
been widely accepted and practiced in most organisations throughout
the world. Precisely, it can be defined as the responsibility of an organ-
isation towards the society. Nowadays there is an increase in educated
IM
customers so they prefer organisations that understand as well as take
effective steps towards the society and people. CSR is also known as
corporate social performance, sustainable responsible business, or
corporate citizenship.

CSR was followed by a thought that a business operating in a partic-

M

ular environment using resources of the society has to pay back to

its people on the grounds of moral and ethical responsibility. Thus,
it becomes necessary for organisations to give first preference to the
interest of the society and its people.
N

Adopting CSR practice in an organisation not only fulfils its respon-

sibilities towards the society but also for its employees, environment,
stakeholders, communities, and end customers. It promotes economic
development and growth of an organisation as well as helps ineradicat-
ing unfair trade practices. Today, the importance of CSR has increased
undisputedly and thus it forms an important part of the decision-mak-
ing process, which further helps in ensuring the society’s interests.

Organisations that have adopted and implemented CSR practices en-

joy a good reputation in the market and hence are able to sustain in
the market and reap the profits even in unpleasant situations.

10.5.1  IMPORTANCE OF CSR

A society plays an important role in the growth of an organisation as

it is the primary provider of raw materials. It allows the organisation
to reap its benefits through the buying process. For maintaining the
success of a business in the long run, it is very important to keep its
employees happy and motivated at the same time. Now let us discuss
the importance of CSR in a business:

NMIMS Global Access - School for Continuing Education

248  International Business

n o t e s

‰‰ Public expectations from business: These are hopes and expec-

tations that people have from a business directly or indirectly. For
surviving and sustaining in the market, the organisation needs to
understand and respond to the needs and wants of the people of
the society. However, if it fails to fulfill the expectations, it becomes
really difficult to survive and revive its policies.
‰‰ Better environment for business: When a society is content with
the ways a business functions, a favourable and positive envi-
ronment is created for itself as well as business. For instance, en
eco-friendly organisation is a boon for a society.
‰‰ Good public image: It helps in gaining more customers and bet-
ter employees for a business. For continuously improving and
promoting the performance of a business, it is really necessary to
maintain good public image in front of a society.

S
‰‰ Responsibility with power: Social power comes inclusive for a
business, which means that any decision taken will certainly have
an influence on a society as a whole. Therefore, it is very important
IM
to maintain a proper balance in the society to reduce or avoid any
negative effects.

10.5.2  INCREASING ROLE OF CSR IN ORGANISATIONS

CSR plays a substantial role in maintaining good relationships with

shareholders and society. Today society gives more preference to
M

those organisations that do not neglect its moral and ethical obliga-
tions. The following points explain the reasons behind increasing im-
portance of CSR:
‰‰ Erosion of trust: This arises when financial scandals are done by
N

a business organisation. Scandals shake the trusts of stakeholders

and society in such a way that they start looking for other options.
For regaining the trust again, it becomes really important for or-
ganisations to adopt CSR practices.
‰‰ Globalisation: This affects the global trade so much that today
many conventions are established to secure the interest of the
home as well as the host country. Many anti-globalisation groups
have come into the picture demanding transparency and responsi-
bility from business organisations. Thus, for fulfilling the demands
of these groups, it becomes relevant for organisations to follow
CSR practices.
‰‰ Competitive pressure: Steep rise in competition among organi-
sations has made the role of CSR significant for the existence of a
business. CSR boosts the morale of employees, maintains brand
image and loyalty, and gains the confidence of shareholders.

NMIMS Global Access - School for Continuing Education

 ETHICS IN INTERNATIONAL BUSINESS  249

n o t e s

10.5.3  BENEFITS OF CSR

For surviving in an ever-changing business environment, it has be-

come really important for organisations to follow and adopt CSR prac-
tices. Some of the benefits of CSR to organisations are enlisted below:
‰‰ Improved relationship with stakeholders: This helps in build-
ing the trust of stakeholders and society in the organisation. Only
those organisations can understand the views and issues of their
stakeholders that adopt and follow transparency as their ethical
and moral responsibility.
‰‰ Investment opportunities: It is believed that potential investors
look for non-financial performance to understand the type of activ-
ities an organisation undertakes. If an organisation is concerned
about environmental and social issues, it is believed to invite more

S
investors.
‰‰ Improved financial performance: Following good CSR standards
helps the organisation in improving its financial performance. This
IM
also increases trust among shareholders, investors, and customers
that the organisation is going to sustain in the long run.
‰‰ Increased public credibility: When an organisation becomes
transparent and accountable for all its actions, it helps in building
trust and credibility among the society. Moreover, organisations
should dedicatedly work towards the implementation of CSR for
M

maintaining its brand image.

‰‰ Resource utilisation: Optimum utilisation of resources helps in
minimising the cost and increasing the benefits by following best
CSR practices. For example, a few years back, Nokia came up with
a plan “donate mobile phones and grow trees”. This plan asked
N

customers to donate their old cell phones that can be recycled for
new phones.
‰‰ Decrease in negative publicity: If an organisation adopts CSR, it
negates or eliminates the chances of receiving any negative pub-
licity. Following CSR also helps in understanding concerns and is-
sues faced by shareholders and the society.

10.5.4  VALUES IN CORPORATE RESPONSIBILITY

From the discussion so far, it can be said that CSR plays a pivotal role
in any business organisation. However, there are certain CSR values
that should be included for maintaining the welfare of a society. These
values are shown in Figure 10.1:

NMIMS Global Access - School for Continuing Education

250  International Business

n o t e s

Societal value

Shareholder
Environmental value
value

Values in CSR

Corporate
Credence value
value

S
Economic
value
IM
Figure 10.1: Values in CSR

Let us discuss these values in detail:

M

‰‰ Credence value: This value cannot be measured and is intangible

in nature. Credence value of an organisation is influenced by any
negative verdict, such as bad word of mouth, and typically based
on trust. Media is a powerful business hub that can make or break
the image of an organisation by showing a false picture of its CSR
N

practices.
‰‰ Shareholder value: This value improves when CSR activities be-
come transparent in the organisation. CSR activities help in ob-
taining a long-term shareholder value. For instance, CSR is an
important part of the Nestlé’s business model. The organisation
participates in various CSR activities, such as reducing poverty
and promoting healthcare. Transparent CSR procedures also help
shareholders to make a decision about their investments.
‰‰ Societal value: This value facilitates a society’s welfare by show-
ing responsibility towards various social issues, such as education,
child marriage, dowry, poverty and unemployment.
‰‰ Corporate value: This value builds and promotes the brand image
and goodwill of an organisation. Corporate value is important to
ensure the sustainability of the organisation in the long run.
‰‰ Environmental value: This value helps in resolving issues related
to environment. These issues may include deforestation, resource
wastage, and pollution.

NMIMS Global Access - School for Continuing Education

 ETHICS IN INTERNATIONAL BUSINESS  251

n o t e s

‰‰ Economic value: This value promotes the production of those

goods and services that create value for the society and allows the
organisation to pay back to its stakeholders.

self assessment Questions

7. Credence value of an organisation cannot be influenced by

the word of mouth. (True/False)

Activity

Using the Internet, find about the CSR activities of Wipro Technol-
ogies.

S
10.6 Csr IN Multinational companies
According to World Bank, “Companies are realising that it is in their
IM
business interest to ‘do the right thing’ everywhere they operate. Global
firms are keenly aware that their long-term investment goals can only
be achieved within a stable, healthy and free of social and financial en-
vironment. But companies alone cannot solve the challenges associated
with social responsibility. They must work in cooperation with govern-
ments, civil society groups, development institutions, and citizens.”
M

Today with the emergence of globalisation, there are many controver-

sies encircling the motives of Multinational Companies (MNCs). It is
being widely discussed that the primary aim of MNCs are to maximise
their profits may be at the expense of workforce and environment.
N

Keeping all those issues in mind, MNCs decided to demonstrate their

moral responsibility towards the society. This led to the formulation of
CSR activities that is now widely accepted by MNCs.

In different countries, the societal norms and policies get changed,

thus making CSR multifaceted activity. Hence, we can say that CSR
does not have any universally accepted definition. In the last decade,
CSR has come in focus increasingly, which has pressurised various
organisations to contribute their resources in this field. The groups or
stakeholders which led to CSR are NGOs, labour unions, media, cus-
tomers, employees, suppliers, communities, and government. These
groups are recognising the power of CSR and therefore, making ef-
forts to create a global change to make earth a better place to live.

According to a renowned author Archie Carroll, “The company must

fulfil economic and legal responsibilities for survival of the business
and should start fulfilling the social responsibilities when it starts
earning profits.” He proposed a pyramid for CSR which is shown in
Figure 10.2:

NMIMS Global Access - School for Continuing Education

252  International Business

n o t e s

Philanthropic
Responsibilities

Be a good corporate
citizen

Ethical
Responsibilities

Be ethical

Legal
Responsibilities

Obey the law

S
Economic
Responsibilities

Be profitable
IM
Figure 10.2: CSR Practices
(Source: Carroll(1996))

Figure 10.2 states that it is imperative for a business to practice and

adopt CSR to become a corporate, ethical, obedient and responsible
M

part of the society.

Activity

Take any two organisations in the same industry and compare CSR
N

initiatives taken by them.

10.7 summary
‰‰ International business ethics aim at identifying unjust business
practices and their impact on an organisation.
‰‰ International business ethics is important in all the areas of a busi-
ness, be it finance, human resource management, sales and mar-
keting and production.
‰‰ OECD Anti-Bribery Convention helps in the proper implementa-
tion of international commitments related to anti-bribery.
‰‰ UNCAC helps in fighting different types of corruption, such as trad-
ing in influence, abuse of function and recovery of stolen assets.
‰‰ With an increase in environmental and social awareness and strict
government regulations, CSR has become increasingly important
for an enterprise nationally and internationally.

NMIMS Global Access - School for Continuing Education

 ETHICS IN INTERNATIONAL BUSINESS  253

n o t e s

‰‰ CSR helps in meeting expectations of public, maintaining good

public image, providing better environment, and maintaining bal-
ance with power.
‰‰ CSR values include credence value, shareholder value, corporate
value, environmental value and economic value.
‰‰ CSR is a voluntary approach that monitors and ensures that an
organisation adheres to ethical standards and norms.

key words

‰‰ Business ethics: It refers to the desirable code of conduct to be

followed within an organisation.
‰‰ Discrimination: It refers to unfair treatment given to people
on the basis of race, religion, sexual or gender harassment and

S
disability.
‰‰ Whistleblowing: It refers to exposing any misconduct, dishon-
esty, or illegal activity in the workplace.
‰‰ Trading
IM
in influence: It can be defined as misusing power and
authority for personal benefits.

10.8 DescrIptive questions

1. Discuss the importance of maintaining international business
M

ethics.
2. Write a note on global bribery and corruption.
3. Explain CSR and its importance.
N

10.9 ANSWERS AND HINTS

answers for Self Assessment Questions

Topic Q. No. Answers

International Business 1. Corporate ethics
Ethics
2. True
3. The common issues that af-
fect international business
ethics are employment op-
portunities, child labour,
poor working conditions,
and corruption.
Corporate Guidelines & 4. Corporate governance
Policies for Global
Business Effects

NMIMS Global Access - School for Continuing Education

254  International Business

n o t e s

Topic Q. No. Answers

Global Bribery and Cor- 5. c. Improving cooperation in
ruption judicial laws
6. Recovery of stolen assets
Corporate Social Respon- 7. False
sibility

hints for Descriptive Questions

1. Business ethics refers to moral and behavioural codes of conduct

that every individual working with an organisation must follow.
Refer to Section 10.2 International Business Ethics.
2. Bribery and corruption risks increase when businesses continue

S
to expand globally. Refer to Section 10.4 Global Bribery and
Corruption.
3. CSR is the responsibility of an organisation towards the society.
IM
Refer to Section 10.5 Corporate Social Responsibility.

SUGGESTED READING
10.10
FOR REFERENCE

SUGGESTED READINGS
M

‰‰ Aswathappa, A. (2006). International business (1st ed.). New Delhi:

Tata McGraw-Hill.
‰‰ Endres, A., & Fleming, G. (2002). International organisations and
N

the analysis of economic policy, 1919-1950 (1st ed.). Cambridge:

Cambridge University Press.
‰‰ Gandolfo, G., & Gandolfo, G. (1998). International trade theory and
policy (1st ed.). Berlin: Springer.

E-REFERENCES

‰‰ Glennie, J. (2010). Corruption index: global bribery and corruption

worldwide ranked by Transparency International. the Guardian. Re-
trieved 28 October 2014, from http://www.theguardian.com/news/
datablog/2010/dec/09/global-corruption-index-worlwide-transpar-
ency-international
‰‰ Hg.org,. (2014). The Role of Ethics in International Business -
HG.org. Retrieved 28 October 2014, from http://www.hg.org/article.
asp?id=7796
‰‰ Unido.org,. (2014). Corporate social responsibility for market inte-
gration. Retrieved 28 October 2014, from http://www.unido.org/csr.
html

NMIMS Global Access - School for Continuing Education

 C h
11 a p t e r

CASE STUDIES

CONTENTS

S
Case Study 1 International Business Operations of Zara
Case Study 2 Application of Adam Smith’s Absolute Advantage Theory
Case Study 3 Foreign Direct Investment in The Indian Retail Sector
Case Study 4
IM
Classic Coke Vs New Coke: Wrong Environmental Analysis by Coca-Cola
Case Study 5 Adaptation of Marketing Strategy for International Business
Case Study 6 Starbucks Entering Indian Markets
Case Study 7 Success of KFC in India
Case Study 8 International Marketing Research by Apple INC.
Case Study 9 Two Dogs International’s Penetration in The Japanese Market
M

Case Study 10 Distribution Channel Strategy of Pepsico in India

Case Study 11 Import Restrictions on Gold in India
Case Study 12 Unethical Labour Practices of Nike
N

NMIMS Global Access - School for Continuing Education

256  International Business

Case study 1
n o t e s

INTERNATIONAL BUSINESS OPERATIONS OF ZARA

This Case Study discusses how organisations operate globally. It is

with respect to Chapter 1 of the book.  

S
IM
Zara, a Spanish clothing and accessories retailer, was founded in
1975 by Amancio Ortega (CEO) and Rosalia Mera. It is a chain of
stores operated by world’s largest fashion giants, Inditex Group.
Zara is known for developing a new product and getting it into
M

stores within just two weeks. It launches around 10,000 designs

every year.

Zara targets young, style seeking individuals around the world for
its global business success. The research team of Zara identifies
N

the latest fashion trends to fulfil the requirements of the young

generation. Before developing any design, the organisation con-
ducts surveys at universities, clubs, discos, etc. According to Busi-
ness World magazine, “Zara focuses its attention on understanding
the fashion items that its customers want and then delivering them,
rather than on promoting predicted season’s trends via fashion
shows and similar channels of influence, which the fashion industry
traditionally used.”

Zara operates internationally and has stores in several countries

such as Spain, UK, Portugal, Germany, Italy, France, Austria, Ire-
land, Belgium, Luxemburg, and India. As an integrated retailer,
Zara controls most of the operations, including those of supply
chain, design and manufacturing on its own. It has its own factory
in A Coruña where around 80% of its production is carried out.

NMIMS Global Access - School for Continuing Education

 CASE STUDY 1: International Business Operations of Zara  257

Case study 1
n o t e s

As Zara operates globally, information and communication tech-

nology plays a vital role in Zara’s business. It collects informa-
tion on a daily basis to know the demands of consumers and cre-
ates new designs accordingly. Accurate product information and
inventory management system around the world helps Zara to
manage and design thousands of garments in a very short period
of time. Zara’s distribution system functions with minimum hu-
man intervention to minimise the level of confusion.

Today, Zara is known for having a strong international expansion

strategy. The major steps in the internationalisation process of
Zara from its establishment are:
‰‰ 1975:Zara began its activities by opening its first store in A
Coruña in Spain.

S
‰‰ 1976:The owners of Zara opened GOASAM, a holding com-
pany to manage the expansion of the Zara retail chain.
‰‰ 1985: Inditex was founded as the holding company of Zara.
IM
‰‰ 1988: Zara opened its first overseas store at Porto in Portugal.
‰‰ 1989-1990: Zara opened its stores in New York in United States
and Paris in France.
‰‰ 1991: Retail chain of Pull & Bear started in this year and Zara
purchased 65 per cent of the Massimo Dutti group.
M

‰‰ 1992-1994: More new stores were opened in Mexico (1992),

Greece in 1993 and in Belgium and Sweden (1994).
‰‰ 1995-1996: Inditex acquired the whole share capital of Mas-
simo Dutti and opened its stores in Matta (1995) and Cyprus
N

(1996).
‰‰ 1997: New stores were opened in Norway and Israel.
‰‰ 1998-2000: New stores were opened in Argentina, Japan,
United Kingdom, Venezuela, Lebanon, Kuwait, Germany, Po-
land, Netherland, Saudi Arabia, Canada, Brazil, Chile, Tur-
key, Austria, Denmark, Qatar and Andorra.
‰‰ 2001: Inditex was listed on Spanish Stock Market and new
stores were opened in Puerto Rico, Jordan, Ireland, Iceland,
Luxemburg, Czech Republic and Italy.

NMIMS Global Access - School for Continuing Education

258  International Business

Case study 1
n o t e s

questions

1. What makes Zara a perfect example of an international

business organisation?
(Hint: Zara targets the young, style-seeking individuals
around the world for its global business success. It operates
internationally and has stores in several countries such
as Spain, UK, Portugal, Germany, Italy, France, Austria,
Ireland, Belgium, Luxemburg, and India. As an integrated
retailer, Zara controls most of the operations, including
those of supply chain, design and manufacturing on
its own.)
2. How Zara manages its operations in the global context?

S
(Hint: Information and communication technology plays
a vital role in Zara’s business. It collects information on
a daily basis to know the demands of consumers and
IM
creates new designs accordingly.)
M
N

NMIMS Global Access - School for Continuing Education

 Case study 2
n o t e s

Application of Adam Smith’s Absolute

Advantage Theory

This Case Study discusses the importance of trade theories in

organisations. It is with respect to Chapter 2 of the book.  

International trade between two countries takes place when there

is an absolute advantage of one country over the other country in
the cost of production of a product. Absolute Advantage Theory
put forward by Adam Smith (1723–90) applies where, for exam-
ple, both the countries can produce two commodities they need,
but country A is more efficient in producing commodity X, and
country B is more efficient in producing commodity Y in terms
of unit cost. Both countries can evaluate the cost of one unit of a
particular product in terms of dollar/forex rate.

S
Suppose there are two countries X and Y, which produce wheat
and wool with 400 units of resources. Both countries produce 1
IM
ton of wheat and wool with the following resources:

Table: Resources used to produce 1 ton of

Wheat and Wool without trading
Country X Country Y
(Resources required to pro- (Resources required to
duce 1 ton) produce 1 ton)
M

Wheat 20 50
Wool 40 10

It can be seen from the preceding table that country X has abso-
N

lute advantage in producing wheat as it uses less amount of re-

sources (20 units) to produce 1 ton of wheat as compared to coun-
try Y. Country Y has absolute advantage in producing wool as it
uses less amount of resources (10 units) to produce 1 ton of wool
as compared to country X.
Both the countries decided that they would equally use the re-
sources for producing wheat and wool. Thus, country X produced
20 tons of wheat and 10 tons of wool; whereas, country Y pro-
duced 8 tons of wheat and 40 tons of wool.
The following table shows the production of the country X and Y
without trade:

Table: Production without Trade (in tons)

Country X Country Y
Wheat 20 8
Wool 10 40

NMIMS Global Access - School for Continuing Education

260  International Business

Case study 2
n o t e s

Both the countries are in a dilemma whether to trade with each

other or not.

questions

1. What shows that country X has absolute advantage in

producing wheat? Explain.
(Hint: Country X has absolute advantage in producing
wheat as it uses less amount of resources that is 20 units
to produce 1 ton of wheat)
2. Would the total production increase after trade?
(Hint: Yes )

S
IM
M
N

NMIMS Global Access - School for Continuing Education

 Case study 3
n o t e s

Foreign Direct Investment In The

Indian Retail Sector

This Case Study discusses the FDI policy in Indian retail sector. It
is with respect to Chapter 3 of the book.

S
The retail sector is one of the fastest growing sectors in India.
IM
It not only generates high annual sales but also acts as a major
source of employment. According to Kearney, a well-known in-
ternational management consultancy, India is the fifth most at-
tractive retail destination among thirty emergent markets. The
Indian retail sector employs about 40 million people. Pricewater-
houseCoopers (PwC), a global consultancy organisation, has men-
M

tioned in its report ‘Strong and Steady 2011’ that the Indian retail
sector would be worth US$ 900 billion by 2014.

In India, the major part of the retail sector is unorganised, which rep-
resents a traditional format of low-cost retailing. Some examples of
N

unorganised retailers are local kirana stores, paan and beedi shops,
chemists, footwear shops, apparel shops, and hand-cart hawkers.
These unorganised retail shops entail a major portion of the Indian
retail sector; whereas, organised retail is still at a nascent stage.

In a bid to modernize the retail industry, the Indian retail sector

was opened in 2006 to single brand foreign players with a cap of
51%. Considering the growth of the organised retail sector, the
government increased the cap for foreign players in single brand
retailing from 51% to 100% in 2011.

Earlier, the Indian government was not in favour of allowing for-

eign groups to invest in the retail sector. However, on 24 Novem-
ber 2011, the Indian government gave the following statements
regarding Foreign Direct Investment (FDI):
‰‰ Single brand retailers, such as Apple and IKEA, which pre-
viously owned only 51 per cent of their Indian store, can now
own 100 per cent of it.

NMIMS Global Access - School for Continuing Education

262  International Business

Case study 3
n o t e s

‰‰ India will allow FDI up to 51 per cent to multi-brand retailers

or supermarkets.
‰‰ All the multi-brand and single brand stores in India will be
required to source around one-third of their products from
Indian suppliers.
‰‰ All multi-brand and single brand stores in India must run their
operations to 53-odd cities with a population of over one million.
‰‰ A minimum investment of US$100 million is compulsory for
multi-brand retailers with at least half of the amount invested
in back-end infrastructure, such as refrigeration, transporta-
tion, packing and processing.
‰‰ The retail policy will perform under the legal framework of the
Indian government. The state governments have the freedom

S
to decide whether or not to accept and implement the policy.
Thus, the actual implementation of policy will be within the
constraints of state laws and regulations.
IM
‰‰ However, on 3 December 2011, the Chief Minister of West Ben-
gal, Mamata Banerjee, demanded that the Indian government
should put the FDI retail reforms on hold until it reaches an
agreement within the ruling coalition.

Nevertheless, the Indian government approved FDI in multi-

brand retail in September 2012. The main intention of govern-
M

ment behind allowing FDI was to boost the economic growth of

the country. This decision faced a lot of criticism from Indian re-
tailers. These retailers were of the view that kirana stores in India
would be forced to shut down if global retail organisations were
allowed to enter in the Indian retail sector.
N

questions

1. Discuss the major reforms made by the Indian government

in 2011 regarding FDI policies.
(Hint: The Indian government stated that single brand
retailers, which previously owned only 51 per cent of their
Indian store, can now own 100 per cent of it. In addition,
India will allow FDI up to 51 per cent to multi-brand
retailers or supermarkets.)
2. Why the approval of FDI in multi-brand retailing was
widely criticised by Indian unorganised retailers?
(Hint: The approval of FDI in multi-brand retailing was
widely criticised by Indian unorganised retailers as these
retailers were of the view that kirana stores in India would
be forced to shut down if the global retail organisations
were allowed to enter in the Indian retail sector.)

NMIMS Global Access - School for Continuing Education

 Case study 4
n o t e s

CLASSIC COKE VS NEW COKE: WRONG ENVIRONMENTAL

ANALYSIS BY COCA-COLA

This Case Study discusses how an incorrect environmental analy-

sis may lead to product failure. It is with respect to Chapter 4 of
the book.

S
Coca-Cola is one of the world’s most recognised brands. However,
IM
in 1985, the company decided to replace its most popular soft
drink brand with a new one and this decision proved to be a big
mistake. To understand why this disastrous decision was taken, it
is essential to comprehend the market environment of that time.

In the 1950s and 1960s, the soft drink industry of the United States
of America witnessed a stringent competition. By the 1980s, the
M

biggest and fiercest competitors left were the Coca-Cola Com-

pany and the PepsiCo, who controlled the largest market share
(70 percent).

As a part of its promotion campaign, Pepsi forced Coke to un-

N

dertake a blind test, where consumers were given two unlabelled

drinks to drink and compare. In these blind tests, most of the con-
sumers preferred Pepsi due to its comparatively sweeter taste.

Coca-Cola Company’s management became increasingly con-

cerned about their brand and their slipping position in the
market. The market share of Coca-Cola had also started to fall
gradually. However, in all this, Diet Coke was still appearing as a
double-edged sword, as it helped to shrink the sugar cola market.
In 1983, Diet Coke moved to number three position behind origi-
nal Coke and Pepsi. By this time, Coke’s market share had slipped
to 24 percent, an all-time low.

Roy Stout of Coca-Cola Company questioned his management,

“If we have twice as many vending machines, dominate fountain,
have more shelf space, spend more on advertising, and are competi-
tively priced, why we are losing share?”

NMIMS Global Access - School for Continuing Education

264  International Business

Case study 4
n o t e s

The R&D department of the Coca-Cola Company tried to find out

the reasons for the falling market share of the drink. A research
was carried out secretly and it was discovered that people pre-
ferred Pepsi because it was sweeter.

Subsequently, the new sweeter Coke formula was made and

200,000 taste tests were conducted. The results were positive. The
tasters preferred the newer Coke to the traditional one.

On 23rd April 1985, Coca-Cola Company launched a press confer-

ence in New York City and introduced the new Coke with a slo-
gan, The Best Just Got Better, amidst other expensive advertising.

However, if Coca-Cola wanted to stay ahead of Pepsi-Cola, it

could not have two of its products on the shelves at the same time.

S
Therefore, it decided to terminate the original Coca-Cola and in-
troduced New Coke in its place. On 23 April 1985, New Coke was
introduced and a few days later, the original Coke’s production
was stopped.
IM
PepsiCo responded to Coca-Cola Company through aggressive
advertising using public media. According to Roger Enrico, Pres-
ident and CEO of PepsiCo, “The withdrawal of original coke from
the market and launch of new Coke is indication of victory of Pepsi
over Coca-Cola.”
M

Despite the enormous research and advertising, new Coke was

still a failure. The Coca-Cola Company had severely underesti-
mated the power of its original Coke’s brand. As soon as the with-
drawal decision of original Coke was announced, a large percent-
N

age of the US population instantly boycotted the new product.

The decision of terminating the original Coke was referred to as ‘the

biggest marketing blunder of all time’. Public anger was at its peak.
Consumers’ set up protest groups to get back the original Coke. An-
noyed and deeply disappointed customers would call Coca-Cola’s
number to lodge complaints. In all this taste-test, Coca-Cola forgot
that consumers were emotionally attached to the old Coke.

Coca-Cola soon understood that they had little choice but to

bring back its original brand and formula. The CEO of Coca-Cola,
Donald Keough announced the return of the product. Accord-
ing to Keough, “The simple fact is that all the time and money and
skill poured into consumer research on the new Coca-Cola could not
measure or reveal the deep and abiding emotional attachment to
original Coca-Cola felt by so many people. The passion for original
Coca-Cola – and that is the word for it, passion – was something that
caught us by surprise. It is a wonderful American mystery, a lovely
American enigma, and you cannot measure it any more than you
can measure love, pride or patriotism.”

NMIMS Global Access - School for Continuing Education

Case study 4: Classic Coke Vs New Coke: Wrong Environmental Analysis By Coca-Cola  265

Case study 4
n o t e s

The company reintroduced the original Coke and it was renamed

as Classic Coke. The new Coca-Cola was withdrawn from the
market and the drink was returned to its original taste.

Coca-Cola learned that marketing is much more about the prod-

uct itself. The taste-tests had been blind, and therefore taste was
the only factor that was considered in those tests. The company
forgot that its key brand asset is its originality. Coke’s taste was
never the problem. It had failed to understand the importance of
marketing soft drinks, and instead was focused on winning taste-
tests. The researchers had misunderstood the customers. The
new Coke was a result of an obsession with competition gener-
ated from misreading consumer’s behaviour.

Since its launch in the 1880s, the company focused on presenting

S
Coke as ‘The Real Thing’. Now, it could not come up with a ‘new
real thing’. However, when Coca-Cola reintroduced its original
coke, the public and media’s interest swung back in the brand’s
favour. Within months, Coke gained its number one position and
IM
the story of New Coke faded away.

According to Enrico, “The error of New Coke proved to be a valu-

able lesson for Coca-Cola. I think, by the end of their nightmare, they
figured out who they really are. Caretakers. They can’t change the
taste of their flagship brand. They can’t change its imagery. All they
can do is defend the heritage they nearly abandoned in 1985.”
M

questions

1. The launch of New Coke turned out to be a nightmare for

N

Coca-Cola. Discuss what went wrong while introducing

New Coke.
(Hint: Coca-Cola underestimated the brand loyalty of
customers for the original Coke. It focused on taste as the
only factor while introducing New Coke and forgot that
its key brand asset is its originality.)
2. Where did market research fail in this case?
(Hint: The researchers had misunderstood the customers.
The new Coke was a result of an obsession with competition
generated from misreading consumer’s behaviour.)

NMIMS Global Access - School for Continuing Education

N
M
IM
S
 Case study 5
n o t e s

ADAPTATION OF MARKETING STRATEGY FOR

INTERNATIONAL BUSINESS

This Case Study discusses the role of cultural environment in inter-

national business. It is with respect to Chapter 5 of the book.   

S
Disneyland Park, owned by Walt Disney Company of US, is a
theme park located in Anaheim, California. In 1992, the company
decided to open a Disneyland in Europe with the name Euro Dis-
IM
ney. It was a project that involved more attention to marketing
strategies. Though, the company believed that locating a theme
park in Europe would be a lucrative growth opportunity, Europe-
ans did not want the American dreamland to affect the European
culture.

On April 15, 1983, when Walt Disney Company started its first
M

theme park in Tokyo, Japan; the project became an instantaneous

hit. This made the company to look for another site to open a new
theme park and expand its business in international arena. To
find a site for their next theme park, Walt Disney Company se-
N

lected Europe, where they hoped of doing better even than the
United States. The reason behind this was the familiarity of Euro-
pean audience with Disney entertainment and merchandise. The
company decided to open its new venture in Spain and France.
The reasons for selecting these sites were:
‰‰ The moderate climate of Spain was able to attract a lot of visi-
tors to the park throughout the year.
‰‰ The big population base and a convenient transportation net-
work system of France.

In spite of doing a lot of market research, the company failed to

notice the following:
‰‰ The company could not identify the different tastes and pref-
erences of the people of France and Spain that included vis-
itors from dissimilar countries, such as Denmark, Norway,
Germany, and Italy.
‰‰ The company did not modify the ticket pricing in European
market and kept it same as in the US market.

NMIMS Global Access - School for Continuing Education

268  International Business

Case study 5
n o t e s

‰‰ The company did not work on identifying the lifestyle and de-
mographic pattern of Europeans.
‰‰ The company designed classic American style restaurants
that did not appeal to European visitors.
‰‰ The company failed to schedule meals as per the European
culture.
‰‰ The company followed alcohol-free policy that did not fit with
the local culture, as in Europe, wine is an important part of
daily life.

The failed marketing strategy of Disney led it to the edge of bank-

ruptcy with a loss of more than a billion dollars. This alarmed
the management and the company started rectifying its mistakes.

S
The company changed the name of the park to Disneyland Resort
Paris to give a homely feeling to local people and attract more
customers. However, it was not an end and the many names came
during the following years:
IM
‰‰ Euro Disney Resort-1992
‰‰ Euro Disneyland-1993
‰‰ Festival Disney-1993
‰‰ Euro Disneyland Paris-1994
M

‰‰ Disneyland Paris-1995
‰‰ Disney Village-1997
‰‰ Disneyland Resort Paris-2002
N

‰‰ Disneyland Park-2003
‰‰ Disneyland Paris-2009

To attract more customers, the company made deals with vari-

ous trains and airlines to reduce ticket prices. It also focused on
adapting strategies that could match with different segments of
European customers. It started offering discounts in winter sea-
sons as it is basically the holiday season and could attract lots of
crowd to the park. Disney also revised its non-alcohol policy and
allowed beer and wine to be served at restaurants. The room
rates of resorts were lowered and food menus at restaurants
were modified.

Many rides were renamed to attract French visitors and famous

characters like Mickey Mouse and Donald Duck of Disney were
told to communicate in French accents to appeal to the local cus-
tomers. The focus was on revitalising the brand entirely. These
steps proved to be a great success for Disney and the company
capitalised its European success by offering another grand theme

NMIMS Global Access - School for Continuing Education

Case study 5: ADAPTATION OF MARKETING STRATEGY FOR INTERNATIONAL BUSINESS  269

Case study 5
n o t e s

park adjacent to Disneyland, namely ‘The Walt Disney Studios’.

This park is dedicated to the art of cinema, animation and tele-
vision and focuses on entertaining the Europeans in all possible
ways to bring fantasy to reality.

questions

1. What made Disney to expand its business to Europe?

(Hint: After successful operation in Tokyo, Japan; the
company thought, it could operate in all other markets
of the world without any hindrance. Apart from this,
the familiarity of European audience with Disney
entertainment and merchandise made Disney to expand
its business to Europe.)

S
2. Why did Disney fail to perform in the European market?
(Hint: The company failed to perform effectively in
European market as it could not assess the demographic
IM
and cultural factors of France and Spain. The new venture
could not attract sufficient numbers of customers as they
could not relate themselves with an American theme park.)
M
N

NMIMS Global Access - School for Continuing Education

N
M
IM
S
 Case study 6
n o t e s

STARBUCKS ENTERING INDIAN MARKETS

This Case Study discusses the ways to enter international market. It

is with respect to Chapter 6 of the book.

S
Starbucks is an American coffee company and coffee shop chain
founded in Seattle, Washington. It is the world’s largest coffee
house organisation with more than 20,366 stores, operating in 61
IM
countries. There are more than 13,123 Starbucks coffee shops in
the United States, 1,299 in Canada, 793 in the United Kingdom,
977 in Japan, 363 in Mexico, 732 in China and 473 in South Korea.

India was one of the big untapped markets for Starbucks. In Jan-
uary 2011, chairman and CEO of Starbucks Howard Schultz vis-
ited India to sign the 50:50 joint ventures with Tata Global Bev-
M

erages that owns 8,258 sq. feet roasting facility at Kushalnagar

near Coorg. Schultz said in an interview that India is “as large an
opportunity as there exists in the world, coupled with China.”
N

The outlets are branded as, “Starbucks, A Tata Alliance”. Star-

bucks ensured that the coffee at the roasting facility match the
global espresso blend of Starbucks. On 19 October 2012, Starbucks
opened its first store in India in Mumbai. Starbucks expanded its
branch to Delhi by opening two new stores in Delhi at Terminal
III of the Indira Gandhi International Airport and in Connaught
Place. Next, the company moved to Pune, Bangalore and Chen-
nai. Tata Starbucks Ltd. opened its 50th store in India on Tues-
day, July 8th 2014 at Phoenix Market City, Velachery, Chennai.

The company is planning to open more stores and grow in the

market with an assurance to offer the unique Starbucks experi-
ence, unequalled service and extensive food and beverages offer-
ings to coffee lovers across the nation.

According to John Culver, group president, Starbucks China and

Asia Pacific, Channel Development and Emerging Brands, “The
opening of the 50th Starbucks store in India strongly reiterates our
commitment to the Indian market for the long-term and our focus

NMIMS Global Access - School for Continuing Education

272  International Business

Case study 6
n o t e s

on expanding thoughtfully to ensure we are consistently delivering

the highest quality Starbucks Experience to each customer in every
store. Providing an elevated coffeehouse experience that embraces
uncompromising quality, diverse offerings, unique store ambience to
offer our customers an unmatched Third Place and passionate part-
ners who deliver this to every customer with every cup is a promise
that we have consistently endeavoured to deliver. We remain deeply
excited about our journey in India, and we will continue to deliver
on our promise of offering an unparalleled coffeehouse experience
to every customer, every time they visit our stores, as well as nurtur-
ing our biggest assets – our partners.”
Apart from the usual products offered internationally, Starbucks
in India has modified its menu to certain extent to match Indian
taste. For example, one can find Tandoori Paneer Roll, Elaichi

S
Mawa Croissant and Murg Tikka Panini in the menu offered in
Indian outlets of Starbucks.
Starbucks is aggressively targeting India’s cafe chains market
IM
that’s growing annually by 20 percent and is currently ruled over
by Cafe Coffee Day (CCD). India has over 1,400 cafes, and accord-
ing to a report by Technopak advisors, there is space for around
2,700 more cafes in the country in the upcoming five years.
According to Santhosh Unni, CEO of Costa Coffee India, “The cafe
market is small, and needs to grow faster. The entry of chains like
M

Starbucks and Dunkin’ Donuts will help generate more demand.”

According to Saloni Nangia, President, Technopak, “Starbucks
understands how to create the Starbucks experience. For the supply
chain, which is the difficult part in India, the Tatas bring in com-
plete understanding.”
N

As Schultz said in a news conference, “With Tata’s help and the

size and scale of this (Indian) market, we believe that this is a mar-
ket that we will grow significantly in over the near future.”

questions

1. What made Starbucks to enter the Indian market?

(Hint: Large opportunity for business growth and
untapped market were the major reasons for the entry of
Starbucks in India.)
2. What type of entry mode was adopted by Starbucks to
enter into the Indian market?
(Hint: For entering into the Indian market, Starbucks
adopted the market strategy of 50:50 joint ventures with
Tata Global Beverages.)

NMIMS Global Access - School for Continuing Education

 Case study 7
n o t e s

SUCCESS OF KFC IN INDIA

This case study discusses the success of KFC in India. It is with re-
spect to chapter 7 of the book.

KFC is a fast-food restaurant chain headquartered in Louisville,

Kentucky, United States and specialises in fried chicken. It is
world’s second largest restaurant chain (as measured by sales)
after McDonald’s with around 18,875 outlets in 118 countries. The
reason behind the huge success of KFC in international markets
is its effective international marketing strategies.

However, when KFC decided to begin its operations in India in

1995, it faced various issues. This resulted in a dim start of the

S
company in the country. The main problem that the company
faced while serving Indian consumers was their changing pref-
erences. In India, chicken consumption was preferred over beef.
Moreover, chicken in India was preferred in the form of a tan-
IM
doori, fiery-red, spicy grilled dish to be eaten alongside rice and
vegetables. Furthermore, many Indian consumers preferred a
vegetarian diet. The company also faced stiff competition from
McDonald’s that had already gained a strong market share in the
fast-food sector. All these issues forced KFC to bring major chang-
es in operations as well as marketing promotions.
M

The company introduced some new dishes on its menu in accor-

dance with the Indian consumers’ taste. In their promotions, the
company focussed on displaying the use of Indian herbs to mimic
the red hue and hot spice of the traditional tandoori chicken. This
N

greatly enhanced the sale of KFC and attracted a lot of people

to the outlets. Apart from promoting its chicken items, KFC also
decided to introduce vegetarian dishes on the platter for attract-
ing maximum customers. The company made many additions in
the vegetarian menu, such as fried vegetable strips and burger
patties.

The company also adopted a smart pricing strategy to turn the

special-occasion appearing novelty restaurant into an everyday
option. In recent years, KFC has reduced its prices and launched
a new menu to cater the youth having little income but intending
to spend on food services offered at the right price. By adapting
new strategies, KFC has successfully spread its roots in the In-
dian market. By 2012, the number of outlets had reached 220. The
company observed 45% value growth year-over-year due to the
increase in outlets.

NMIMS Global Access - School for Continuing Education

274  International Business

Case study 7
n o t e s

questions

1. What innovations and changes helped KFC in succeeding

in India?
(Hints: Understanding the preferences of Indian
consumers, introduction of new dishes, adoption of price-
reduction strategies, etc.)
2. According to you, what are the important issues that a
company faces while making an entry into a new market?
(Hints: Challenges to set up the base, market dynamics,
presence of competitors, cultural differences, financial
considerations, etc.)

S
IM
M
N

NMIMS Global Access - School for Continuing Education

 Case study 8
n o t e s

INTERNATIONAL MARKETING RESEARCH

BY APPLE INC.

This Case Study discusses the international marketing research

done by Apple Inc. It is with respect to Chapter 7 of the book.

S
Apple Inc. is an American multinational corporation that designs
and markets consumer electronics, computer software and per-
sonal computers. It is famous for its world-class hardware prod-
IM
ucts, including the Macintosh line of computers, iPod, iPhone and
iPad. Apple’s software includes the Mac OS X operating system,
the iTunes media browser, the iLife suite of multimedia and cre-
ativity software, etc.
From its inclusive aesthetic designs to its unique advertising cam-
paigns, Apple has established an exclusive name in the consum-
M

er electronics industry. Today, the organisation has a large base of

loyal customers. It is one of the most widely respected and valued
brands that has shown its credibility, which is evident through the
continuous purchase and repurchase of its products by customers.
However, the success story of Apple is incomplete without ex-
N

plaining the hard work that Apple’s employees put in the exten-
sive market research and product design. However, Apple still
does not rely completely on market research for selling its prod-
ucts worldwide. It basically depends on the brand loyalty of its
customers who buy its products without any hitch.
When Apple launched the iPhone in the market, it targeted con-
sumers who needed a phone with a large storage capacity, ease of
communication and high quality of entertainment. While conduct-
ing the market research, Apple targeted four age groups: 15–20,
20–25, 25–45 and above 45 years. They developed different market
strategies for all these different target groups. For example, the
‘below 20 years’ target group was expected to get attracted with
the high-quality use of social networking sites. On the other hand,
the target customers between 25–45 years were expected to get
attracted by modern business applications and social or person-
al use of the iPhone. Apple conducted market surveys through
e-mails and interviews. It planned to bring the product into the
business world, where it could appeal the business class with its
“business cool” brand.

NMIMS Global Access - School for Continuing Education

276  International Business

Case study 8
n o t e s

The marketing research plan included asking feedback from pro-

spective customers on various features of the iPhone, implement-
ing changes wherever required and allowing users to design their
own personalised iPhone.

It is highly ironical that in spite of the high quality of research

work done by the Apple Inc., its Ex. CEO, late Steve Jobs, on sev-
eral occasions, has given a low profile to the value of market re-
search. He argued, “You cannot ask consumers to decree the next
big thing. Moreover, customers cannot see the value or need until
they see the product (Breillatt, 2010)”.

According to Steve Jobs, “It’s not about pop culture, and it’s not
about fooling people, and it’s not about convincing people that they
want something they don’t. We figure out what we want. And I think

S
we’re pretty good at having the right discipline to think through
whether a lot of other people are going to want it, too. That’s what
we get paid to do. So you can’t go out and ask people, you know, what
IM
the next big [thing] is? There’s a great quote by Henry Ford, right?
He said, ‘If I’d have asked my customers what they wanted, they
would have told me ‘A faster horse’’.

However, by using market research, Apple could offer better cus-

tomer satisfaction. Apple enjoys high brand loyalty as customers
buy its products just by being loyal. There still remains the scope
M

of identifying its target market before designing a campaign strat-

egy, as the products such as iPhone and iPad compete with other
well established brands at a very large level. Market research can
also be used by Apple to regulate everything from a branding,
positioning strategy to the target market, and for this, Apple can
N

use descriptive research study to better understand the market.

questions

1. With reference to the aforementioned case study, discuss

the role of market research in the success of any product.
(Hint: A proper market research helps an organisation
in identifying its target market before designing a
product or promotional strategy to offer greater customer
satisfaction.)
2. Considering the success that Apple Inc. already enjoys in
the market, do you think that the company should rely
more on market research?
(Hint: Yes. Apple basically depends on customers who buy
its products just by being brand loyal. Though the company
produces great products, it could offer better customer
satisfaction by relying more on market research.)

NMIMS Global Access - School for Continuing Education

 Case study 9
n o t e s

TWO DOGS INTERNATIONAL’S PENETRATION

IN THE JAPANESE MARKET

This Case Study discusses the importance of product strategies in

organisations. It is with respect to Chapter 8 of the book.

MacGillivray was the owner of a small brewery and pub in Aus-

tralia. Once, it happened that he had a stock of lemons lying with
him. He contemplated as to what to do with those unused lemons.
So, he thought of a plan. He decided to make a brewery of these
lemons. Just like the local wine is produced from grapes and ap-
ples, he produced wine from these lemons in the same way. Thus,
a new type of wine was produced from these lemons, and he de-
cided to name it as ‘Two Dogs’. It was the first of its kind of wine
made from lemons. Although there were some popular traditional

S
drinks available in the Australian Market, yet this drink became
tremendously popular to the extent that it paved the way for some
other entrepreneurs to launch their product in the market such as
IM
Hooper’s Hooch and Mike’s Hard Lemonade. Later, the product
‘Two Dogs’ became so popular that the French beverage compa-
ny ‘Pernod Recard’ was prompted to acquire it, albeit it was later
taken over by Kirin Brewery Company of Japan.

In its quest to tap on the flourishing European market, the com-

pany launched its product in the United Kingdom, as ‘Two Dogs
M

International’. Later, from UK, it started exporting to other parts

of the Europe.

Before penetrating the Japanese market, the company did proper

marketing research, from where and when to launch its product,
N

the taste of already existing drinks in the same category in the

Japanese market and the likes and dislikes of Japanese custom-
ers. The political, economic, social, cultural and consuming hab-
its of consumers had to be taken into consideration before pene-
trating a new market. Because of proper homework, the product
launch was a great success in the Japanese market, and as is the
rule in marketing, when a product becomes popular among con-
sumers, many other entrepreneurs are prompted to launch their
product in the same category to tap the market. It also happened
in the case of Two Dogs International, when many new rival com-
petitors, such as DNA, KGB, Ruski and Cactus, emerged in the
market.

NMIMS Global Access - School for Continuing Education

278  International Business

Case study 9
n o t e s

questions

1. What prompted the Japanese company to acquire ‘Two

Dogs International’?
(Hint: The product ‘Two Dogs’ was so popular that in
order to tap on the flourishing markets, Kirin Brewery
Company of Japan acquired it.)
2. What strategy was adopted before launching ‘Two Dogs
International’ in the Japanese market?
(Hint: Before penetrating the Japanese market, the
company did proper marketing research and studied the
political, economic, social, cultural and consuming habits
of consumers.)

S
IM
M
N

NMIMS Global Access - School for Continuing Education

 Case study 10
n o t e s

DISTRIBUTION CHANNEL STRATEGY

OF PEPSICO IN INDIA

This Case Study discusses the international distribution channels

used by PepsiCo in India. It is with respect to Chapter 8 of the book. 

US-based PepsiCo is one of the largest beverage and snacks food

organisations of the world. The major reason for the growth of the
organisation is its efficient and strong distribution and logistics
management operations. According to Al Carey, Chief Operating
Officer, PepsiCo Beverages and Foods, North America, “PepsiCo
has continually been at the forefront of standards adoption, pro-
moting industry efficiency and adding value throughout our supply
chain”.

S
IM
Today, PepsiCo operates in more than 150 nations and gener-
M

ates revenue of more than $40 billion. It uses various distribution

modes, such as the Direct Store Delivery (DSD) system, broker
warehouse system, vending and food service system and pre-sell
method, for distributing its products across the world.
N

After entering the Indian market in 1989, as a joint venture with

the Punjab Government, PepsiCo started its beverage operations
with R K Jaipuria Group. It soon established its dominance in the
market with effective marketing and distribution strategies.

PepsiCo understands the importance of an effective distribution

channel for a strong positioning of any product. It focuses strong-
ly on its distribution strategy that can help its products to reach
the final consumers. The main features of the distribution chan-
nel of PepsiCo are as follows:
‰‰ PepsiCo has a very strong and impeccable sales and distribu-
tion network.
‰‰ Ithad the advantage of being the pioneer when it arrived in
the Indian market, and it took the advantage by grabbing the
market.

NMIMS Global Access - School for Continuing Education

280  International Business

Case study 10
n o t e s

‰‰ The organisation adds strength to its overall presence in the

market through franchisee-based operations, which are com-
bined with the organisation’s operations. These franchisees
hold all the rights, from decision making to taking care of vari-
ous operations, and PepsiCo does not interfere in this. Howev-
er, the franchisees are expected to report to PepsiCo at explicit
time intervals.
‰‰ Advertising campaigns are totally under the control of Pepsi-
Co. They are apprehended and implemented by the organisa-
tion, and franchisees never obstruct them.
‰‰ PepsiCo has developed a good relationship with retailers, by
providing them superior services and schemes.
‰‰ PepsiCo focuses on maintaining a good relationship with dis-

S
tributors, as they are a vital part of the organisation, by the
virtue of being the focal point of the distribution channel.

PepsiCo has a very advanced distribution system, which is well

IM
supported by a state-of-the-art logistics system. PepsiCo’s prod-
ucts, such as snack foods and beverages, are distributed daily
through various retail channels across the country. The organisa-
tion aims at ensuring the availability of products at all the distri-
bution centres with easy access.
M

According to PepsiCo, it has a very strong distribution network,

as its products can be found anywhere. It has distributers in ev-
ery part of the country, who store and distribute the products to
different retailers. PepsiCo focuses on adapting a distribution sys-
tem that can fulfil the need of its consumers by using the most
N

modern technology. Some of the most popular distribution sys-

tems that are followed by PepsiCo in India are as follows:
‰‰ Direct Store Delivery (DSD) System: PepsiCo launched a
new distribution method that is known as chilled DSD system.
This is a comparatively small distribution method, created for
items that required continuous refrigeration. DSD system
processes direct order from grocery and convenience stores
to the distribution units and ensures the delivery of previous
orders. Orders are taken manually in the DSD system. Pep-
siCo guarantees that products reach stores on time and are
arranged properly at the stores’ shelves.
‰‰ Customer Warehouse System: Some of PepsiCo’s products
are directly delivered to customer warehouses and retail
stores from the manufacturing plants. This distribution sys-
tem is known as customer warehouse, which is a less expen-
sive system and used for products that are less delicate, have

NMIMS Global Access - School for Continuing Education

 CASE STUDY 10: DISTRIBUTION CHANNEL STRATEGY OF PEPSICO IN INDIA  281

Case study 10
n o t e s

a low turnover and come under non-impulsive product category.

‰‰ Foodservice and Vending Sales Force: The next kind of distribu-
tion system used by PepsiCo is known as foodservice and vending
sales force. It distributes snacks, foods and beverages to vending
operators and distributers. This distribution system can be nor-
mally seen in schools, businesses, stadiums, restaurants and simi-
lar kinds of locations.

questions

1. Discuss the reason behind the success and growth of

PepsiCo in India.
(Hint: The major reason behind the success and growth
of PepsiCo in India is its efficient and strong distribution

S
and logistics management operations.)
2. What are the strategies that PepsiCo adopts for ensuring
a strong distribution network in India?
IM
(Hint: PepsiCo focuses on adapting a distribution system
that can fulfil the need of its consumers by using the most
modern technology and systems, such as the direct store
delivery (DSD) system, customer warehouse system and
foodservice and vending sales force.)
M
N

NMIMS Global Access - School for Continuing Education

N
M
IM
S
 Case study 11
n o t e s

IMPORT RESTRICTIONS ON GOLD IN INDIA

This case study discusses the import restrictions on gold in India.

This is with respect to the Chapter 9 of the book.

Gold is an essential part of our lives. If we see on the global front,

after the import of crude oil, gold is India’s biggest import item.
It accounts for more than 30 per cent of the global gold market.
Government in India has made restrictions on the import of gold
since 1947. This is because the high consumption rate of gold is
unproductive for the Indian economy as this leads to fall in the
foreign reserves. Other problems include the smuggling of gold,
drug trafficking, foreign exchange leakage, black market in for-
eign currencies and tax evasion.

S
Investment in the physical form of gold is either stored in bank
lockers or exchanged for jewellery, which is not invested further.
If it gets invested further, it may make a huge difference to the
productive capacity of the economy.
IM
The government does not want individuals to import gold because
of the following reasons:
‰‰ Rising import bill: Gold is considered as a drain on resources.
The government has to spend precious foreign exchange on
the gold reserves that are of less value to the economy. It just
M

raises the import bill, and this is considered as a wasteful ex-

penditure.
‰‰ Widening trade deficit: Rise in imports leads to current ac-
count deficit that leads to fall in the foreign exchange assets.
N

‰‰ Economic instability: Rising deficit exposes the country to

the risk of the reversal of capital flows.
‰‰ Obstacle to development: The blockage of gold in savings locks
the liquidity and hinders the development of the economy.

The Gold Control Act 1968 contained tight controls on gold-re-

lated activities. The Act placed severe restrictions on gold dealers
and gold jewellery exporters. The restrictions did not permit large
production for satisfying overseas orders. Also, a certified gold-
smith was not allowed to receive more than 100gms of standard
gold for manufacturing jewellery. However, this act failed to con-
trol gold imports. This also led to hurdles in gold exports in India
as gold dealers were required to operate from licensed premises
only. Thus, foreign buyers could not visit widely scattered places
of manufacture for buying. The Gold Control Act was abolished in
1990, after which the government made various reforms.

NMIMS Global Access - School for Continuing Education

284  International Business

Case study 11
n o t e s

The government increases the import duty on gold from time to

time to hinder imports. However, these fail to curb the interna-
tional trade of gold. This is because gold gives far better returns
than other asset classes such as stocks and bonds.

The lack of alternative investments is also one of the reasons for

Indian investors to invest in gold. Thus, the need is to build a bet-
ter investment climate, where exports increase and FDI comes in
the country.

questions

1. What tricks can be practiced by gold smugglers to evade

the import duty?

S
(Hint: using tax-free special economic zone; fake receipts)
2. Apart from import duties, what are the other import
restrictions?
IM
(Hint: Tariffs, Exchange Permits, Quotas, Import Licenses
and boycotts)
M
N

NMIMS Global Access - School for Continuing Education

 Case study 12
n o t e s

UNETHICAL LABOUR PRACTICES OF NIKE

This Case Study discusses the importance of ethical practices in or-

ganisations. It is with respect to Chapter 10 of the book.

S
IM
Nike is the world’s leading manufacturer and supplier of athletic
shoes, apparel and sports equipment. It is an American multina-
tional corporation, engaged in designing, developing, and market-
ing of footwear, apparel, equipment, accessories etc. It employs
more than 56,500 people worldwide.
M

(Source: http://www.statista.com/statistics/243199/number-of-employees-of-nike-world-
wide/.)

Being the world’s largest athletic brand, Nike is highly criticised

for using labour sweatshops in Asia where employees were forced
to work for more than sixty hours in a week. These sweatshops
N

also employed women with very less wages. Workers have many
complaints from their employers regarding verbal and physical
abuse. A worker, working in the embroidery division of one of
these sweatshops said, “They throw shoes and other things at us.
They growl and slap us when they get angry. Our bosses point their
feet at us, calling us names like dog, pig or monkey.”

Although, the low production cost in these sweatshops enabled

the organisation to generate much greater revenue, the problems
of unethical issues were rising at a large scale. Being such a popu-
lar brand, Nike was required to sustain its brand image. Though,
Nike claimed to put effort into resolving these issues of abuse, it
failed to guarantee that the horrible working conditions of these
sweatshops will improve.

Nike put an enquiry that stated that the workers at two of its Asian
factories were subjected to serious physical and verbal abuse, in-
cluding the penalty of compelling workers to stand in the sun.
Hannah Jones, a Nike executive said, “We do see other issues of

NMIMS Global Access - School for Continuing Education

286  International Business

Case study 12
n o t e s

that similar nature coming up across the supply chain but not on a
frequent level. We see issues of working conditions on a less egre-
gious nature across the board.”

Prakash Sethi, a corporate strategy professor at Baruch College

at the City University of New York, said: ‘I simply find it impos-
sible that a company of the size and market power of Nike is im-
potent in persuading a local factory in Indonesia or anywhere
else in meeting its code of conduct.’ Nike decided to improve the
inhuman conditions of its 1,000 overseas factories which came
under heavy criticism for failing to meet Nike’s own standards
for contract manufacturers. Nike finally admitted finding abusive
treatment of employees in many of its plants and invested heavily
in training managers and more closely observing their activities.

S
questions

1. What are the unethical labour issues practiced by Nike?

IM
(Hint: Many of the Asian manufacturing units of Nike
have been witnessing a number of unethical issues in
terms of over work, less wages and verbal and physical
abuse of workers.)
2. What are the steps that the company is taking to resolve
the problem?
M

(Hint: Nike admitted finding abusive treatment of

employees in many of its plants. Therefore, it is investing
heavily in training managers and monitoring their
activities.)
N

NMIMS Global Access - School for Continuing Education

 International Business
Management Theory
and Practice

International Business