international business and types

8/11/2019 international business and types

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1. INTRODUCTION

Global economy is at crossroads. There is no single or simple answer to current economic

problems. Transparency in the conduct of monetary and fiscal policies is needed to provide an

anchor for expectations. Developments that seem unusual, even unbalanced, need to necessarily

be judged unsustainable. For example, the potential gains offered by new technology,

particularly in the production of goods and financial services, may provide a sound rationale for

a number of trends that currently seem hard to explain. Yet, a starting point characterized by

significant macroeconomic imbalances and major financial restructuring does not present a

comforting environment for policymakers; given very low interest rates and virtual price stability

in many countries, the scope for lowering real policy rates is now limited. This chapter implies a

continuing need to focus on measures to strengthen the global financial system which looks to bethe most vulnerable part of marketbased economies.

1.1 Business

A business is an economic activity. It refers to buying and selling of goods. Todays business

carries a complex area of commerce and industries which includes the activities of both

production and distribution. To the enterprises business is related with the decision. What to

produce? When to produce? Whom to produce? Where to produce? How much to produce? In

simplest word we can say that the modern times business is very much complex. As the

environment is dynamic and changes frequently so the above questions always make the

business enterprises to rethink about their business strategies.

1.2 International Business

International business means the buying and selling of the goods and services across the border.

These business activities may be of government or private enterprises. Here the national border

are crossed by the enterprises to expand their business activities like manufacturing, mining,

construction, agriculture, banking, insurance, health, education, transportation, communication

and so on.

A business enterprise who goes for international business has to take a very wide and long view

before making any decision, it has to refer to social, political, historical, cultural, geographical,

physical, ecological and economic aspects of the another country where it had to business.


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International Business conducts business transactions all over the world. These transactions

include the transfer of goods, services, technology, managerial knowledge, and capital to other

countries. International business involves exports and imports.

International Business is also known, called or referred as a Global Businessor anInternational

Marketing.

An international business has many options for doing business, it includes,

1. Exporting goods and services.

2.

Giving license to produce goods in the host country.3. Starting a joint venture with a company.

4. Opening a branch for producing & distributing goods in the host country.

5. Providing managerial services to companies in the host country.

1.2.1 Features of International Business

The nature and characteristicsor features of international business are:-

1. Large scale operations: In international business, all the operations are conducted on a

very huge scale. Production and marketing activities are conducted on a large scale. It

first sells its goods in the local market. Then the surplus goods are exported.

2. Intergration of economies: International business integrates (combines) the economies

of many countries. This is because it uses finance from one country, labour from another

country, and infrastructure from another country. It designs the product in one country,

produces its parts in many different countries and assembles the product in another

country. It sells the product in many countries, i.e. in the international market.

3. Dominated by developed countries and MNCs: International business is dominated by

developed countries and their multinational corporations (MNCs). At present, MNCs

from USA, Europe and Japan dominate (fully control) foreign trade. This is because they

have large financial and other resources. They also have the best technology and research

and development (R & D). They have highly skilled employees and managers because
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they give very high salaries and other benefits. Therefore, they produce good quality

goods and services at low prices. This helps them to capture and dominate the world

market.

4. Benefits to participating countries : International business gives benefits to all

participating countries. However, the developed (rich) countries get the maximum

benefits. The developing (poor) countries also get benefits. They get foreign capital and

technology. They get rapid industrial development. They get more employment

opportunities. All this results in economic development of the developing countries.

Therefore, developing countries open up their economies through liberal economic

policies.

5. Keen competition: International business has to face keen (too much) competition in the

world market. The competition is between unequal partners i.e. developed and

developing countries. In this keen competition, developed countries and their MNCs are

in a favourable position because they produce superior quality goods and services at very

low prices. Developed countries also have many contacts in the world market. So,

developing countries find it very difficult to face competition from developed countries.

6. Special role of science and technology: International business gives a lot of importance

to science and technology. Science and Technology (S & T) help the business to have

large-scale production. Developed countries use high technologies. Therefore, they

dominate global business. International business helps them to transfer such top high-end

technologies to the developing countries.

7. International restrictions: International business faces many restrictions on the inflow

and outflow of capital, technology and goods. Many governments do not allow

international businesses to enter their countries. They have many trade blocks, tariff

barriers, foreign exchange restrictions, etc. All this is harmful to international business.

8. Sensitive nature: The international business is very sensitive in nature. Any changes in

the economic policies, technology, political environment, etc. has a huge impact on it.

Therefore, international business must conductmarketing research to find out and study

these changes. They must adjust their business activities and adapt accordingly to survive

changes.
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2. EMPIRICAL STUDY IN INTERNATIONAL BUSINESS

Today, business is acknowledged to be international and there is a general expectation that this

will continue for the foreseeable future. International business may be defined simply as business

transactions that take place across national borders. This broad definition includes the very small

firm that exports (or imports) a small quantity to only one country, as well as the very large

global firm with integrated operations and strategic alliances around the world. Within this broad

array, distinctions are often made among different types of international firms, and these

distinctions are helpful in understanding a firm's strategy, organization, and functional decisions

(for example, its financial, administrative, marketing, human resource, or operations decisions).

One distinction that can be helpful is the distinction between multi-domestic operations, with

independent subsidiaries which act essentially as domestic firms, and global operations, with

integrated subsidiaries which are closely related and interconnected. These may be thought of as

the two ends of a continuum, with many possibilities in between. Firms are unlikely to be at one

end of the continuum, though, as they often combine aspects of multi-domestic operations with

aspects of global operations.

International business grew over the last half of the twentieth century partly because of

liberalization of both trade and investment, and partly because doing business internationally had

become easier. In terms of liberalization, the General Agreement on Tariffs and Trade

(GATT)negotiation rounds resulted in trade liberalization, and this was continued with the

formation of the World Trade Organization (WTO) in 1995. At the same time, worldwide capital

movements were liberalized by most governments, particularly with the advent of electronic

funds transfers. In addition, the introduction of a new European monetary unit, the euro, into

circulation in January 2002 has impacted international business economically. The euro is the

currency of the European Union, membership in March 2005 of 25 countries, and the euro

replaced each country's previous currency. As of early 2005, the United States dollar continues

to struggle against the euro and the impacts are being felt across industries worldwide.

In terms of ease of doing business internationally, two major forces are important:

1. technological developments which make global communication and transportation

relatively quick and convenient; and
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2. the disappearance of a substantial part of the communist world, opening many of the

world's economies to private business.

2.1 DOMESTIC VS. INTERNATIONAL BUSINESS

Domestic and international enterprises, in both the public and private sectors, share the business

objectives of functioning successfully to continue operations. Private enterprises seek to function

profitably as well. Why, then, is international business different from domestic? The answer lies

in the differences across borders. Nation-states generally have unique government systems, laws

and regulations, currencies, taxes and duties, and so on, as well as different cultures and

practices. An individual traveling from his home country to a foreign country needs to have the

proper documents, to carry foreign currency, to be able to communicate in the foreign country, to

be dressed appropriately, and so on. Doing business in a foreign country involves similar issues

and is thus more complex than doing business at home. The following sections will explore some

of these issues. Specifically, comparative advantage is introduced, the international business

environment is explored, and forms of international entry are outlined.

2.2 THEORIES OF INTERNATIONAL TRADE AND INVESTMENT

In order to understand international business, it is necessary to have a broad conceptual

understanding of why trade and investment across national borders take place. Trade and

investment can be examined in terms of the comparative advantage of nations.

Comparative advantage suggests that each nation is relatively good at producing certain products

or services. This comparative advantage is based on the nation's abundant factors of

productionland, labor, and capitaland a country will export those products/services that use

its abundant factors of production intensively. Simply, consider only two factors of production,

labor and capital, and two countries, X and Y. If country X has a relative abundance of labor and

country Y a relative abundance of capital, country X should export products/services that use

labor intensively, country Y should export products/services that use capital intensively.

This is a very simplistic explanation, of course. There are many more factors of production, of

varying qualities, and there are many additional influences on trade such as government

regulations. Nevertheless, it is a starting point for understanding what nations are likely to export


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or import. The concept of comparative advantage can also help explain investment flows.

Generally, capital is the most mobile of the factors of production and can move relatively easily

from one country to another. Other factors of production, such as land and labor, either do not

move or are less mobile. The result is that where capital is available in one country it may be

used to invest in other countries to take advantage of their abundant land or labor. Firms may

develop expertise and firm specific advantages based initially on abundant resources at home,

but as resource needs change, the stage of the product life cycle matures, and home markets

become saturated, these firms find it advantageous to invest internationally.

2.3 THE INTERNATIONAL BUSINESS ENVIRONMENT

International business is different from domestic business because the environment changes

when a firm crosses international borders. Typically, a firm understands its domestic

environment quite well, but is less familiar with the environment in other countries and must

invest more time and resources into understanding the new environment. The following

considers some of the important aspects of the environment that change internationally.

The economic environment can be very different from one nation to another. Countries are often

divided into three main categories: the more developed or industrialized, the less developed or

third world, and the newly industrializing or emerging economies. Within each category thereare major variations, but overall the more developed countries are the rich countries, the less

developed the poor ones, and the newly industrializing (those moving from poorer to richer).

These distinctions are usually made on the basis ofgross domestic product per

capita (GDP/capita). Better education, infrastructure, technology, health care, and so on are also

often associated with higher levels of economic development.

In addition to level of economic development, countries can be classified as free-market,

centrally planned, or mixed. Free-market economies are those where government intervenes

minimally in business activities, and market forces of supply and demand are allowed to

determine production and prices. Centrally planned economies are those where the government

determines production and prices based on forecasts of demand and desired levels of supply.

Mixed economies are those where some activities are left to market forces and some, for national

and individual welfare reasons, are government controlled. In the late twentieth century there has

been a substantial move to free-market economies, but the People's Republic of China, the
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world's most populous country, along with a few others, remained largely centrally planned

economies, and most countries maintain some government control of business activities.

Clearly the level of economic activity combined with education, infrastructure, and so on, as well

as the degree of government control of the economy, affect virtually all facets of doing business,

and a firm needs to understand this environment if it is to operate successfully internationally.

The political environment refers to the type of government, the government relationship with

business, and the political risk in a country. Doing business internationally thus implies dealing

with different types of governments, relationships, and levels of risk.

There are many different types of political systems, for example, multi-party democracies, one-

party states, constitutional monarchies, dictatorships (military and nonmilitary). Also,

governments change in different ways, for example, by regular elections, occasional elections,

death, coups, war. Government-business relationships also differ from country to country.

Business may be viewed positively as the engine of growth, it may be viewed negatively as

theexploiter of the workers, or somewhere in between as providing both benefits and drawbacks.

Specific government-business relationships can also vary from positive to negative depending on

the type of business operations involved and the relationship between the people of the host

country and the people of the home country. To be effective in a foreign location an internationalfirm relies on the goodwill of the foreign government and needs to have a good understanding of

all of these aspects of the political environment.

A particular concern of international firms is the degree of political risk in a foreign location.

Political risk refers to the likelihood of government activity that has unwanted consequences for

the firm. These consequences can be dramatic as in forced divestment, where a government

requires the firm give up its assets, or more moderate, as in unwelcome regulations or

interference in operations. In any case the risk occurs because of uncertainty about the likelihood

of government activity occurring. Generally, risk is associated with instability and a country is

thus seen as more risky if the government is likely to change unexpectedly, if there is social

unrest, if there are riots, revolutions, war, terrorism, and so on. Firms naturally prefer countries

that are stable and that present little political risk, but the returns need to be weighed against the

risks, and firms often do business in countries where the risk is relatively high. In these

situations, firms seek to manage the perceived risk through insurance, ownership and
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management choices, supply and market control, financing arrangements, and so on. In addition,

the degree of political risk is not solely a function of the country, but depends on the company

and its activities as wella risky country for one company may be relatively safe for another.

The cultural environment is one of the critical components of the international business

environment and one of the most difficult to understand. This is because the cultural

environment is essentially unseen; it has been described as a shared, commonly held body of

general beliefs and values that determine what is right for one group, according to Kluckhohn

and Strodtbeck. National culture is described as the body of general beliefs and values that are

shared by a nation. Beliefs and values are generally seen as formed by factors such as history,

language, religion, geographic location, government, and education; thus firms begin a cultural

analysis by seeking to understand these factors.

Firms want to understand what beliefs and values they may find in countries where they do

business, and a number of models of cultural values have been proposed by scholars. The most

well-known is that developed by Hofstede in1980. This model proposes four dimensions of

cultural values includingindividualism,uncertainty avoidance,power distance and masculinity.

Individualism is the degree to which a nation values and encourages individual action and

decision making. Uncertainty avoidance is the degree to which a nation is willing to accept and

deal with uncertainty. Power distance is the degree to which a national accepts and sanctions

differences in power. And masculinity is the degree to which a nation accepts traditional male

values or traditional female values. This model of cultural values has been used extensively

because it provides data for a wide array of countries. Many academics and managers found this

model helpful in exploring management approaches that would be appropriate in different

cultures. For example, in a nation that is high on individualism one expects individual goals,

individual tasks, and individual reward systems to be effective, whereas the reverse would be the

case in a nation that is low on individualism. While this model is popular, there have been many

attempts to develop more complex and inclusive models of culture.

The competitive environment can also change from country to country. This is partly because of

the economic, political, and cultural environments; these environmental factors help determine

the type and degree of competition that exists in a given country. Competition can come from a

variety of sources. It can be public or private sector, come from large or small organizations, be
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domestic or global, and stem from traditional or new competitors. For the domestic firm the most

likely sources of competition may be well understood. The same is not the case when one moves

to compete in a new environment. For example, in the 1990s in the United States most business

was privately owned and competition was among private sector companies, while in the People's

Republic of China (PRC) businesses were owned by the state. Thus, a U.S. company in the PRC

could find itself competing with organizations owned by state entities such as the PRC army.

This could change the nature of competition dramatically.

The nature of competition can also change from place to place as the following illustrate:

competition may be encouraged and accepted or discouraged in favor of cooperation; relations

between buyers and sellers may be friendly or hostile; barriers to entry and exit may be low or

high; regulations may permit or prohibit certain activities. To be effective internationally, firmsneed to understand these competitive issues and assess their impact.

An important aspect of the competitive environment is the level, and acceptance, of

technological innovation in different countries. The last decades of the twentieth century saw

major advances in technology, and this is continuing in the twenty-first century. Technology

often is seen as giving firms a competitive advantage; hence, firms compete for access to the

newest in technology, and international firms transfer technology to beglobally competitive. It is

easier than ever for even small businesses to have a global presence thanks to the internet, which

greatly expands their exposure, their market, and their potential customer base. For economic,

political, and cultural reasons, some countries are more accepting of technological innovations,

others less accepting.

2.4 INTERNATIONAL ENTRY CHOICES

International firms may choose to do business in a variety of ways. Some of the most common

include exports, licenses, contracts and turnkey operations, franchises, joint ventures, wholly

owned subsidiaries, and strategic alliances.

Exporting is often the first international choice for firms, and many firms rely substantially on

exports throughout their history. Exports are seen as relatively simple because the firm is relying

on domestic production, can use a variety of intermediaries to assist in the process, and expects

its foreign customers to deal with the marketing and sales issues. Many firms begin by exporting
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reactively; then become proactive when they realize the potential benefits of addressing a market

that is much larger than the domestic one. Effective exporting requires attention to detail if the

process is to be successful; for example, the exporter needs to decide if and when to use different

intermediaries, select an appropriate transportation method, preparing export documentation,

prepare the product, arrange acceptable payment terms, and so on. Most importantly, the

exporter usually leaves marketing and sales to the foreign customers, and these may not receive

the same attention as if the firm itself under-took these activities. Larger exporters often

undertake their own marketing and establish sales subsidiaries in important foreign markets.

Licenses are granted from a licensor to a licensee for the rights to some intangible property (e.g.

patents, processes, copyrights, trademarks) for agreed on compensation (a royalty payment).

Many companies feel that production in a foreign country is desirable but they do not want toundertake this production themselves. In this situation the firm can grant a license to a foreign

firm to undertake the production. The licensing agreement gives access to foreign markets

through foreign production without the necessity of investing in the foreign location. This is

particularly attractive for a company that does not have the financial or managerial capacity to

invest and undertake foreign production. The major disadvantage to a licensing agreement is the

dependence on the foreign producer for quality, efficiency, and promotion of the productif the

licensee is not effective this reflects on the licensor. In addition, the licensor risks losing some of

its technology and creating a potential competitor. This means the licensor should choose a

licensee carefully to be sure the licensee will perform at an acceptable level and is trustworthy.

The agreement is important to both parties and should ensure that both parties benefit equitably.

Contracts are used frequently by firms that provide specialized services, such as management,

technical knowledge, engineering, information technology, education, and so on, in a foreign

location for a specified time period and fee. Contracts are attractive for firms that have talents

not being fully utilized at home and in demand in foreign locations. They are relatively short-

term, allowing for flexibility, and the fee is usually fixed so that revenues are known in advance.

The major drawback is their short-term nature, which means that the contracting firm needs to

develop new business constantly and negotiate new contracts. This negotiation is time

consuming, costly, and requires skill atcross-cultural negotiations. Revenues are likely to be

uneven and the firm must be able to weather periods when no new contracts materialize.
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Turnkey contracts are a specific kind of contract where a firm constructs a facility, starts

operations, trains local personnel, then transfers the facility (turns over the keys) to the foreign

owner. These contracts are usually for very large infrastructure projects, such as dams, railways,

and airports, and involve substantial financing; thus they are often financed by international

financial institutions such as the World Bank. Companies that specialize in these projects can be

very profitable, but they require specialized expertise. Further, the investment in obtaining these

projects is very high, so only a relatively small number of large firms are involved in these

projects, and often they involve a syndicate orcollaboration of firms.

Similar to licensing agreements, franchises involve the sale of the right to operate a complete

business operation. Well-known examples include independently ownedfast-food

restaurants like McDonald's and Pizza Hut. A successful franchise requires control oversomething that others are willing to pay for, such as a name, set of products, or a way of doing

things, and the availability of willing and able franchisees. Finding franchisees and maintaining

control over franchisable assets in foreign countries can be difficult; to be successful at

internationalfranchising firms need to ensure they can accomplish both of these.

Joint ventures involve shared ownership in a subsidiary company. A joint venture allows a firm

to take an investment position in a foreign location without taking on the complete responsibility

for the foreign investment. Joint ventures can take many forms. For example, there can be two

partners or more, partners can share equally or have varying stakes, partners can come from the

private sector or the public, partners can be silent or active, partners can be local or international.

The decisions on what to share, how much to share, with whom to share, and how long to share

are all important to the success of a joint venture. Joint ventures have been likened to marriages,

with the suggestion that the choice of partner is critically important. Many joint ventures fail

because partners have not agreed on their objectives and find it difficult to work out conflicts.

Joint ventures provide an effective international entry when partners are complementary, but

firms need to be thorough in their preparation for a joint venture.

Wholly-owned subsidiaries involve the establishment of businesses in foreign locations which

are owned entirely by the investing firm. This entry choice puts the investor parent in full control

of operations but also requires the ability to provide the needed capital and management, and to

take on all of the risk. Where control is important and the firm is capable of the investment, it is
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often the preferred choice. Other firms feel the need for local input from local partners, or

specialized input from international partners, and opt for joint ventures or strategic alliances,

even where they are financially capable of 100 percent ownership.

Strategic alliances are arrangements among companies to cooperate for strategic purposes.

Licenses and joint ventures are forms of strategic alliances, but are often differentiated from

them. Strategic alliances can involve no joint ownership or specific license agreement, but rather

two companies working together to develop a synergy. Joint advertising programs are a form of

strategic alliance, as are joint research and development programs. Strategic alliances seem to

make some firms vulnerable to loss of competitive advantage, especially where small firms ally

with larger firms. In spite of this, many smaller firms find strategic alliances allow them to enter

the international arena when they could not do so alone.

International business grew substantially in the second half of the twentieth century, and this

growth is likely to continue. The international environment is complex and it is very important

for firms to understand this environment and make effective choices in this complex

environment. The previous discussion introduced the concept of comparative advantage,

explored some of the important aspects of the international business environment, and outlined

the major international entry choices available to firms. The topic of international business is

itself complex, and this short discussion serves only to introduce a few ideas on international

business issues.


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3. TYPES OF INTERNATIONAL BUSINESS

There are number of ways for internationalization / globalization of business. these are referred

as foreign market entry strategies. Each of these ways has certain advantages and disadvantages.

One strategy for a particular business may not be very suitable for another business withdifferent environment. Therefore it is quite common that a company employs different strategies

for different markets.

INTERNATIONAL BUSINESS IS DIVIDED INTO FOLLOWING :

(a) Trading : Import and exports of goods and services have been very fast. In countries like

Japan, there are international trading houses, which transact enormous volume of business. The

export house, trading house, stare trading houses and superstar trading houses are merchant

exporters they buy and resell goods. They are comparatively small in size from giant trading

house of Japan.

(b) Manufacturing and Marketing : The manufacturing exports are those who export goods

manufactured by them. Many MNCs and other firms both small and large do manufacturing and

marketing

(c) Sourcing and Marketing : There are many MNCs and firms which outsource their products

which they market at home and abroad.

(d) Global Sourcing for Production : There are many firms that outsource globally their raw

material, intermediates etc required for their manufacturing.

(e) Services : Services is an enormous and fast growing sector of international

businesses. There is a large variety of services rendered Sinternationally. The broad segment

includes tourism and transportations, IT, banking, insurance, consultancies etc.

(f) Investments : International portfolio investment has been growing fast, as a result of

globalization.

FDI are associates with establishment of manufacturing or marketing facilities abroad.

So, in short we can say that every business in todays world is growing internationally and world

is coming closer and with this there are greater chances of revenue generation.

TYPES

Licensing

Licensing gives a licensee certain rights or resources to manufacture and/or market a

certain product in a host country.


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Licensing is a business agreement involving two companies: one gives the other special

permissions, such as using patents or copyrights, in exchange for payment.

An international business licensing agreement involves two firms from different

countries, with the licensee receiving the rights or resources to manufacture in the foreign

country.

Rights or resources may include patents, copyrights, technology, managerial skills, or

other factors necessary to manufacture the good.

Advantages of expanding internationally using international licensing include: the ability

to reach new markets that may be closed by trade restrictions and the ability to expand

without too much risk or capital investment.

Disadvantages include the risk of an incompetent foreign partner firm and lower income

compared to other modes of international expansion.

Licensing

A business arrangement in which one company gives another company permission to

manufacture its product for a specified payment.

Licensing is a business arrangement in which one company gives another company permission to


Licensing generally involves allowing another company to use patents, trademarks, copyrights,

designs, and other intellectual in exchange for a percentage of revenue or a fee. It's a fast way to

generate income and grow a business, as there is no manufacturing or sales involved. Instead,

licensing usually means taking advantage of an existing company's pipeline and infrastructure in

exchange for a small percentage of revenue.

An international licensing agreement allows foreign firms, either exclusively or non-exclusively,

to manufacture a proprietors product for a fixed term in a specific market.

To summarize, in this foreign market entry mode, a licensor in the home country makes limited

rights or resources available to the licensee in the host country. The rights or resources may

include patents, trademarks, managerial skills, technology, and others that can make it possible

for the licensee to manufacture and sell in the host country a similar product to the one the

licensor has already been producing and selling in the home country without requiring the

licensor to open a new operation overseas. The licensor's earnings usually take the form of one-

time payments, technical fees, and royalty payments, usually calculated as a percentage of sales.

Figure 1


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As in this mode of entry the transference of knowledge between the parental company and the

licensee is strongly present, the decision of making an international license agreement depend on

the respect the host government shows for intellectual property and on the ability of the licensor

to choose the right partners and avoid having them compete in each other's market. Licensing is a

relatively flexible work agreement that can be customized to fit the needs and interests of both

licensor and licensee. The following are the main advantages and reasons to use an international

licensing for expanding internationally:

Obtain extra income for technical know-how and services.

Reach new markets not accessible by export from existing facilities.

Quickly expand without much risk and large capital investment.

Pave the way for future investments in the market.

Retain established markets closed by trade restrictions.

Political risk is minimized as the licensee is usually 100% locally owned.

This is highly attractive for companies that are new in international business. On the other hand,

international licensing is a foreign market entry mode that presents some disadvantages and

reasons why companies should not use it, because there is:

Lower income than in other entry modes

Loss of control of the licensee manufacture and marketing operations and practices

leading to loss of quality

Risk of having the trademark and reputation ruined by a incompetent partner

The foreign partner also can become a competitor by selling its production in places

where the parental company has a presence

Franchising

Franchising is the practice of licensing another firm's business model as an operator.

Essentially, and in terms of distribution, the franchiser is a supplier who allows an

operator, or a franchisee, to use the supplier's trademark and distribute the supplier's

goods. In return, the operator pays the supplier a fee.

Thirty three countries, including the United States, China, and Australia, have laws that

explicitly regulate franchising, with the majority of all other countries having laws which

have a direct or indirect impact on franchising.

Franchise agreements carry no guarantees or warranties, and the franchisee has little or

no recourse to legal intervention in the event of a dispute.


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franchise

The authorization granted by a company to sell or distribute its goods or services in a

certain area.

franchisee

A holder of a franchise; a person who is granted a franchise.

franchiser

A franchisor, a company which or person who grants franchises.

Franchising is the practice of using another firm's successful business model. For the franchiser,

the franchise is an alternative to building "chain stores" to distribute goods that avoids the

investments and liability of a chain. The franchiser's success depends on the success of the

franchisees. The franchisee is said to have a greater incentive than a direct employee because he

or she has a direct stake in the business. Essentially, and in terms of distribution, the franchiser is

a supplier who allows an operator, or a franchisee, to use the supplier's trademark and distribute

the supplier's goods. In return, the operator pays the supplier a fee. Figure 1

In short, in terms of distribution, the franchiser is a supplier who allows an operator, or a

franchisee, to use the supplier's trademark and distribute the supplier's goods. In return, the

operator pays the supplier a fee.

Each party to a franchise has several interests to protect. The franchiser is involved in securing

protection for the trademark, controlling the business concept, and securing know how. The

franchisee is obligated to carry out the services for which the trademark has been made

prominent or famous. There is a great deal of standardization required. The place of service has

to bear the franchiser's signs, logos, and trademark in a prominent place. The uniforms worn by

the staff of the franchisee have to be of a particular design and color. The service has to be in

accordance with the pattern followed by the franchiser in the successful franchise operations.

Thus, franchisees are not in full control of the business, as they would be in retailing.

A service can be successful if equipment and supplies are purchased at a fair price from the

franchiser or sources recommended by the franchiser. A coffee brew, for example, can be readily

identified by the trademark if its raw materials come from a particular supplier. If the franchiser

requires purchase from his stores, it may come under anti-trust legislation or equivalent laws of

other countries. So too the purchase of uniforms of personnel, signs, etc., as well as the franchise

sites, if they are owned or controlled by the franchiser.


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Franchise agreements carry no guarantees or warranties, and the franchisee has little or no

recourse to legal intervention in the event of a dispute. Franchise contracts tend to be unilateral

contracts in favor of the franchiser, who is generally protected from lawsuits from their

franchisees because of the non-negotiable contracts that require franchisees to acknowledge, in

effect, that they are buying the franchise knowing that there is risk, and that they have not been

promised success or profits by the franchiser. Contracts are renewable at the sole option of the

franchiser. Most franchisers require franchisees to sign agreements that mandate where and

under what law any dispute would be litigated.

Exporting

Exporting is the practice of shipping goods from the domestic country to a foreign country.

This term export is derived from the conceptual meaning as to ship the goods and

services out of the port of a country.

In national accounts "exports" consist of transactions in goods and services (sales, barter,

gifts or grants) from residents to non-residents.

Statistics on international trade do not record smuggled goods or flows of illegal services.

A small fraction of the smuggled goods and illegal services may nevertheless be included

in official trade statistics through dummy shipments that serve to conceal the illegal

nature of the activities.

export

to sell (goods) to a foreign country

import

To bring (something) in from a foreign country, especially for sale or trade.

Examples

When individuals from Country A purchase goods from Country B, this process is known

as exporting for Country B (since their goods are being sold) and importing for Country

A (since they are buying the goods).

Licensing is a business arrangement in which one company gives another company permission to


Licensing generally involves allowing another company to use patents, trademarks, copyrights,

designs, and other intellectual in exchange for a percentage of revenue or a fee. It's a fast way to


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generate income and grow a business, as there is no manufacturing or sales involved. Instead,

licensing usually means taking advantage of an existing company's pipeline and infrastructure in

exchange for a small percentage of revenue.

An international licensing agreement allows foreign firms, either exclusively or non-exclusively,

to manufacture a proprietors product for a fixed term in a specific market.

To summarize, in this foreign market entry mode, a licensor in the home country makes limited

rights or resources available to the licensee in the host country. The rights or resources may

include patents, trademarks, managerial skills, technology, and others that can make it possible

for the licensee to manufacture and sell in the host country a similar product to the one the

licensor has already been producing and selling in the home country without requiring the

licensor to open a new operation overseas. The licensor's earnings usually take the form of one-

time payments, technical fees, and royalty payments, usually calculated as a percentage of sales.

Figure 1

As in this mode of entry the transference of knowledge between the parental company and the

licensee is strongly present, the decision of making an international license agreement depend on

the respect the host government shows for intellectual property and on the ability of the licensor

to choose the right partners and avoid having them compete in each other's market. Licensing is a

relatively flexible work agreement that can be customized to fit the needs and interests of both

licensor and licensee. The following are the main advantages and reasons to use an international

licensing for expanding internationally:

Obtain extra income for technical know-how and services.

Reach new markets not accessible by export from existing facilities.

Quickly expand without much risk and large capital investment.

Pave the way for future investments in the market.

Retain established markets closed by trade restrictions.

Political risk is minimized as the licensee is usually 100% locally owned.

This is highly attractive for companies that are new in international business. On the other hand,

international licensing is a foreign market entry mode that presents some disadvantages and

reasons why companies should not use it, because there is:

Lower income than in other entry modes

Loss of control of the licensee manufacture and marketing operations and practices

leading to loss of quality


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Risk of having the trademark and reputation ruined by a incompetent partner

The foreign partner also can become a competitor by selling its production in places

where the parental company has a presence

Importing

Imports are the inflow of goods and services into a country's market for consumption.

A country specializes in the export of goods for which it has a comparative advantage

and imports those for which it has a comparative disadvantage. By doing so, the country

can increase its welfare.

Comparative advantage describes the ability of a country to produce one specific good

more efficiently than other goods.

A country enhances its welfare by importing a broader range of higher-quality goods and

services at lower cost than it could produce domestically.

import

To bring (something) in from a foreign country, especially for sale or trade.

comparative advantage

The concept that a certain good can be produced more efficiently than others due to a

number of factors, including productive skills, climate, natural resource availability, and

so forth.

Examples

A country in certain tropical areas of the world has a comparative advantage at growing

crops like sugar or coffee beans, but it would be much less efficient at growing wheat

(due to the climate). Therefore, they should export their sugar/coffee beans and import

wheat at a lower cost than trying to grow wheat themselves.

The term "import" is derived from the concept of goods and services arriving into the port of a

country (Figure 1). The buyer of such goods and services is referred to an "importer" and is

based in the country of import whereas the overseas-based seller is referred to as an "exporter".

Thus, an import is any good (e.g. a commodity) or service brought in from one country to

another country in a legitimate fashion, typically for use in trade. It is a good that is brought in

from another country for sale.

Imported goods or services are provided to domestic consumers by foreign producers. An import

in the receiving country is an export to the sending country. Imports, along with exports, form


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the basics of international trade. Import of goods normally requires the involvement of customs

authorities in both the country of import and the country of export; those goods are often subject

to import quotas, tariffs, and trade agreements. While imports are the set of goods and services

imported, "imports" also means the economic value of all goods and services that are imported.

Imports are the inflow of goods and services into a country's market for consumption. A country

enhances its welfare by importing a broader range of higher-quality goods and services at lower

cost than it could produce domestically. Comparative advantage is a concept often applied to

importing and exporting. Comparative advantage is the concept that a country should specialize

in the production and export of those goods and services that it can produce more efficiently than

other goods and services, and that it should import those goods and services in which it has a

comparative disadvantage.

Contract Manufacturing

In contract manufacturing, a hiring firm makes an agreement with the contract

manufacturer to produce and ship the hiring firm's goods.

A hiring firm may enter a contract with a contract manufacturer (CM) to produce

components or final products on behalf of the hiring firm for some agreed-upon price.

There are many benefits to contract manufacturing, and companies are finding many

reasons why they should be outsourcing their production to other companies.

Production outside of the company does come with many risks attached. Companies must

first identify their core competencies before deciding about contract manufacture.

Contract manufacturing

Business model in which a firm hires a contract manufacturer to produce components or

final products based on the hiring firm's design.

A contract manufacturer ("CM") is a manufacturer that enters into a contract with a firm to

produce components or products for that firm (Figure 1). It is a form of outsourcing. In a contract

manufacturing business model, the hiring firm approaches the contract manufacturer with a

design or formula. The contract manufacturer will quote the parts based on processes, labor,

tooling, and material costs. Typically a hiring firm will request quotes from multiple CMs. After

the bidding process is complete, the hiring firm will select a source, and then, for the agreed-

upon price, the CM acts as the hiring firm's factory, producing and shipping units of the design

on behalf of the hiring firm.


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Benefits

Contract manufacturing offers a number of benefits:

Cost Savings: Companies save on their capital costs because they do not have to pay for a

facility and the equipment needed for production. They can also save on labor costs such

as wages, training, and benefits. Some companies may look to contract manufacture in

low-cost countries, such as China, to benefit from the low cost of labor.

Mutual Benefit to Contract Site: A contract between the manufacturer and the company it

is producing for may last several years. The manufacturer will know that it will have a

steady flow of business at least until that contract expires.

Advanced Skills: Companies can take advantage of skills that they may not possess, but

the contract manufacturer does. The contract manufacturer is likely to have relationships

formed with raw material suppliers or methods of efficiency within their production.

Quality: Contract Manufacturers are likely to have their own methods of quality control

in place that help them to detect counterfeit or damaged materials early.

Focus: Companies can focus on their core competencies better if they can hand off base

production to an outside company.

Economies of Scale: Contract Manufacturers have multiple customers that they produce

for. Because they are servicing multiple customers, they can offer reduced costs in

acquiring raw materials by benefiting from economies of scale. The more units there are

in one shipment, the less expensive the price per unit will be.

Risks

Balanced against the above benefits of contract manufacturing are a number of risks:

Lack of Control: When a company signs the contract allowing another company to

produce their product, they lose a significant amount of control over that product. They

can only suggest strategies to the contract manufacturer; they cannot force them to

implement those strategies.

Relationships: It is imperative that the company forms a good relationship with its

contract manufacturer. The company must keep in mind that the manufacturer has other

customers. They cannot force them to produce their product before a competitors. Most

companies mitigate this risk by working cohesively with the manufacturer and awarding

good performance with additional business.


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Quality: When entering into a contract, companies must make sure that the

manufacturers standards are congruent with their own. They should evaluate the

methods in which they test products to make sure they are of good quality. The company

has to ensure the contract manufacturer has suppliers that also meet these standards.

Intellectual Property Loss: When entering into a contract, a company is divulging their

formulas or technologies. This is why it is important that a company not give out any of

its core competencies to contract manufacturers. It is very easy for an employee to

download such information from a computer and steal it. The recent increase in

intellectual property loss has corporate and government officials struggling to improve

security. Usually, it comes down to the integrity of the employees.

Outsourcing Risks: Although outsourcing to low-cost countries has become very popular,

it does bring along risks such as language barriers, cultural differences, and long lead

times. This could make the management of contract manufacturers more difficult,

expensive, and time-consuming.

Capacity Constraints: If a company does not make up a large portion of the contract

manufacturers business, they may find that they are de-prioritized over other companies

during high production periods. Thus, they may not obtain the product they need when

they need it.

Loss of Flexibility and Responsiveness: Without direct control over the manufacturing

facility, the company will lose some of its ability to respond to disruptions in the supply

chain. It may also hurt their ability to respond to demand fluctuations, risking their

customer service levels.

Join t Ventures

In a joint venture business model, two or more parties agree to invest time, equity, and

effort for the development of a new shared project.

Joint business ventures involve two parties contributing their own equity and resources to

develop a new project. The enterprise, revenues, expenses and assets are shared by the

involved parties.

Since money is involved in a joint venture, it is necessary to have a strategic plan in

place.

As the cost of starting new projects is generally high, a joint venture allows both parties

to share the burden of the project as well as the resulting profits.


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joint venture

A cooperative partnership between two individuals or businesses in which profits and

risks are shared.

Examples

Sony Ericsson is a joint venture between Swedish telecom corporation Ericsson

and Japanese electronics manufacturer Sony to develop cellular devices.

A joint venture Figure 1 is a business agreement in which parties agree to develop a new entity

and new assets by contributing equity. They exercise control over the enterprise and

consequently share revenues, expenses and assets.

When two or more persons come together to form a partnership for the purpose of carrying out a

project, this is called a joint venture. In this scenario, both parties are equally invested in the

project in terms of money, time and effort to build on the original concept. While joint ventures

are generally small projects, major corporations use this method to diversify. A joint venture can

ensure the success of smaller projects for those that are just starting in the business world or for

established corporations. Since the cost of starting new projects is generally high, a joint venture

allows both parties to share the burden of the project as well as the resulting profits.

Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In

short, both parties must be committed to focusing on the future of the partnership rather than just

the immediate returns. Ultimately, short term and long term successes are both important.To

achieve this success, honesty, integrity and communication within the joint venture are

necessary.

A consortium JV (also known as a cooperative agreement) is formed when one party seeks

technological expertise, franchise and brand-use agreements, management contracts, and rental

agreements for one-time contracts. The JV is dissolved when that goal is reached. Some major

joint ventures include Dow Corning, MillerCoors, Sony Ericsson, Penske Truck Leasing,

Norampac, and Owens-Corning.


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Outsourcing

Outsourcing business functions to developing foreign countries has become a popular way

for companies to reduce cost.

Outsourcing is the contracting of business processes to external firms, usually in

developing countries where labor costs are cheaper.

This practice has increased in prevalence due to better technology and improvements in

the educational standards of the countries to which jobs are outsourced.

The opposite of outsourcing is called insourcing, and it is sometimes accomplished via

vertical integration. However, a business can provide a contract service to another

business without necessarily insourcing that business process.

outsourcing

The transfer of a business function to an external service provider.

offshoring

The location of a business in another country for tax purposes.

insourcing

The obtaining of goods or services using domestic resources or employees as opposed to

foreign.

Examples

Corporations may outsource their helpdesk or customer service functions to 3rd party call

centers in foreign countries because these skilled laborers can do these jobs at a lesser

cost than their equivalents in the domestic country.

Outsourcing is the contracting out of a business process, which an organization may have

previously performed internally or has a new need for, to an independent organization from

which the process is purchased back as a service. Though the practice of purchasing a business

functioninstead of providing it internallyis a common feature of any modern economy, the

term outsourcing became popular in America near the turn of the 21 stcentury. An outsourcing

deal may also involve transfer of the employees and assets involved to the outsourcing business

partner. The definition of outsourcing includes both foreign or domestic contracting (Figure 1),

which may include offshoring, described as a company taking a function out of their business

and relocating it to another country.


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The opposite of outsourcing is called insourcing, and it is sometimes accomplished via vertical

integration. However, a business can provide a contract service to another business without

necessarily insourcing that business process.

Reasons for Outsourcing

Companies outsource to avoid certain types of costs. Among the reasons companies elect to

outsource include avoidance of burdensome regulations, high taxes, high energy costs, and

unreasonable costs that may be associated with defined benefits in labor union contracts and

taxes for government mandated benefits. Perceived or actual gross margin in the short run

incentivizes a company to outsource. With reduced short run costs, executive management sees

the opportunity for short run profits while the income growth of the consumers base is strained.

This motivates companies to outsource for lower labor costs. However, the company may or may

not incur unexpected costs to train these overseas workers. Lower regulatory costs are an

addition to companies saving money when outsourcing.

Import marketers may make short run profits from cheaper overseas labor and currency mainly

in wealth consuming sectors at the long run expense of an economy's wealth producing sectors

straining the home county's tax base, income growth, and increasing the debt burden. When

companies offshore products and services, those jobs may leave the home country for foreign

countries at the expense of the wealth producing sectors. Outsourcing may increase the risk of

leakage and reduce confidentiality, as well as introduce additional privacy and security concerns.

Offshoring

Offshoring entails a company moving a business process from one country to another.

Offshoring is the relocation of certain business processes from one country to the other,

resulting in large tax breaks and lower labor costs.

Offshoring can cause controversy in a company's domestic country since it is perceived

to impact the domestic employment situation negatively.

Offshoring of a company's services that were previously produced domestically can be

advantageous in lowering operation costs, but has incited some controversy over the

economic implications.

outsourcing

The transfer of a business function to an external service provider.

offshoring


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The location of a business in another country for tax purposes.

captive

held prisoner; not free; confined

"Offshoring" (Figure 1) is a company's

relocation of a business process from one

country to another. This typically involves

an operational process, such as

manufacturing, or a supporting process,

such as accounting. Even state governments

employ offshoring. More recently,

offshoring has been associated primarily

with the sourcing of technical and

administrative services that support both

domestic and global operations conducted

outside a given home country by means of

internal (captive) or external (outsourcing)

delivery models.The subject of offshoring, also known as "outsourcing," has produced

considerable controversy in the United States. Offshoring for U.S. companies can result in large

tax breaks and low-cost labor.

Offshoring can be seen in the context of either production offshoring or services offshoring.

After its accession to the World Trade Organization (WTO) in 2001, the People's Republic of

China emerged as a prominent destination for production offshoring. Another focus area includes

the software industry as part of Global Software Development and the development of Global

Information Systems. After technical progress in telecommunications improved the possibilities

of trade in services, India became a leader in this domain; however, many other countries are

now emerging as offshore destinations.

The economic logic is to reduce costs. People who can use some of their skills more cheaply than

others have a comparative advantage. Countries often strive to trade freely items that are of the

least cost to produce.

Related terms include "nearshoring," "inshoring" and "bestshoring," otherwise know as

"rightshoring." Nearshoring is the relocation of business processes to (typically) lower cost

foreign locations that are still within close geographical proximity (for example, shifting United


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States-based business processes to Canada/Latin America). Inshoring entails choosing services

within a country, while bestshoring entails choosing the "best shore" based on various criteria.

Business process outsourcing (BPO) refers to outsourcing arrangements when entire business

functions (such as Finance & Accounting and Customer Service) are outsourced. More specific

terms can be found in the field of software development; for example, Global Information

System as a class of systems being developed for/by globally distributed teams.

Multinational F irms

With the advent of improved communication and technology, corporations have been able

to expand into multiple countries.

Multinational corporations operate in multiple countries.

MNCs have considerable bargaining power and may negotiate business or trade policies

with success.

A corporation may choose to locate in a special economic zone, a geographical region

that has economic and other laws that are more free-market-oriented than a country's

typical or national laws.

Multinational corporation

A corporation or enterprise that operates in multiple countries.

Examples

McDonalds operates in over 119 different countries, making it a fairly large MNC by any

standard

A multinational corporation (MNC) or multinational enterprise (MNE) is a corporation

registered in more than one country or has operations in more than one country. It is a large

corporation which both produces and sells goods or services in various countries (Figure 1). It

can also be referred to as an international corporation. The first multinational corporation was the

Dutch East India Company, founded March 20, 1602.

Corporations may make a foreign direct investment. Foreign direct investment is direct

investment into one country by a company located in another country. Investors buy a company

in the country or expand operations of an existing business in the country.


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A corporation may choose to locate in a special economic zone, a geographical region with

economic and other laws that are more free-market-oriented than a country's typical or national

laws.

Multinational corporations are important factors in the processes of globalization. National and

local governments often compete against one another to attract MNC facilities, with the

expectation of increased tax revenue, employment and economic activity. To compete, political

powers push toward greater autonomy for corporations. MNCs play an important role in

developing economies of developing countries.

Many economists argue that in countries with comparatively low labor costs and weak

environmental and social protection, multinationals actually bring about a "race to the top."

While multinationals will see a low tax burden or low labor costs as an element of comparative

advantage, MNC profits are tied to operational efficiency, which includes a high degree of

standardization. Thus, MNCs are likely to adapt production processes in many of their operations

to conform to the standards of the most rigorous jurisdiction in which they operate.

As for labor costs, while MNCs pay workers in developing countries far below levels in

countries where labor productivity is high (and accordingly, will adopt more labor-intensive

production processes), they also tend to pay a premium over local labor rates of 10% to 100%.

Finally, depending on the nature of the MNC, investment in any country reflects a desire for a

medium- to long-term return, as establishing a plant, training workers and so on can be costly.

Therefore, once established in a jurisdiction, MNCs are potentially vulnerable to arbitrary

government intervention like expropriation, sudden contract renegotiation and the arbitrary

withdrawal or compulsory purchase of licenses. Thus both the negotiating power of MNCs and

the "race to the bottom" critique may be overstated while understating the benefits (besides tax

revenue) of MNCs becoming established in a jurisdiction.

Di rect Investment

FDI is practiced by companies in order to benefit from cheaper labor costs, tax exemptions,

and other privileges in that foreign country.

FDI is the flow of investments from one company to production in a foreign nation, with

the purpose of lowering labor costs and gaining tax incentives.

FDI can help the economic situations of developing countries, as well as facilitate

progressive internal policy reforms.


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A major contributing factor to increasing FDI flow was internal policy reform relating to

trade openness and participation in international trade agreements and institutions.

Foreign direct investment

investment directly into production in a country by a company located in another country,

either by buying a company in the target country or by expanding operations of an

existing business in that country.

Examples

Intel is headquartered in the United States, but it has made foreign direct investments in a

number of Southeast Asian countries where they produce components of their products in

Intel-owned factories.

Foreign direct investment (FDI) is investment into production in a country by a company located

in another country, either by buying a company in the target country or by expanding operations

of an existing business in that country.

FDI is done for many reasons including to take advantage of cheaper wages in the country,

special investment privileges, such as tax exemptions, offered by the country as an incentive to

gain tariff-free access to the markets of the country or the region. FDI is in contrast to portfolio

investment which is a passive investment in the securities of another country, such as stocks and

bonds.

One theory for how to best help developing countries, is to increase their inward flow of FDI.

However, identifying the conditions that best attract such investment flow is difficult, since

foreign investment varies greatly across countries and over time. Knowing what has influenced

these decisions and the resulting trends in outcomes can be helpful for governments, non-

governmental organizations, businesses, and private donors looking to invest in developing

countries.

A study from scholars at Duke University and Princeton University published in the American

Journal of Political Science, The Politics of Foreign Direct Investment into Developing

Countries: Increasing FDI through International Trade Agreements," examines trends in FDI

from 1970 to 2000 in 122 developing countries to assess what the best conditions are for

attracting investment. The study found the major contributing factor to increasing FDI flow was

internal policy reform relating to trade openness and participation in international trade

agreements and institutions. The researchers conclude that, while democracy can be conducive


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to international cooperation, the strongest indicator for higher inward flow of FDI for

developing countries was the number of trade agreements and institutions to which they were

party.

Countertrade

Countertrade is a system of exchange in which goods and services are used as payment

rather than money.

Countertrade is the exchange of goods or services for other goods or services. This

system can be typified as simple bartering, switch trading, counter purchase, buyback, or

offset.

Switch trading: Party A and B are countertrading salt for sugar. Party A may switch its

obligation to pay Party B to a third party, known as the switch trader. The switch trader

gets the sugar from Party B at a discount and sells it for money. The money is used as

Party A's payment to Party B.

Counter purchase: Party A sells salt to Party B. Party A promises to make a future

purchase of sugar from Party B.

Buyback: Party A builds a salt processing plant in Country B, providing capital to this

developing nation. In return, Country B pays Party A with salt from the plant.

Offset agreement: Party A and Country B enter a contract where Party A agrees to buy

sugar from Country B to manufacture candy. Country B then buys that candy.

barter

The exchange of goods or services without involving money.

Switch trading

Practice in which one company sells to another its obligation to make a purchase in a

given country.

counter purchase

Sale of goods and services to one company in another country by a company that

promises to make a future purchase of a specific product from the same company in that

country.

Examples

Bartering: One party gives salt in exchange for sugar from another party.


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Countertrade means exchanging goods or services which are paid for, in whole or part, with

other goods or services, rather than with money. A monetary valuation can, however, be used in

counter trade for accounting purposes. Any transaction involving exchange of goods or service

for something of equal value.

There are five main variants of countertrade:

1. Barter: Exchange of goods or services directly for other goods or services without the use

of money as means of purchase or payment.

2. Switch trading: Practice in which one company sells to another its obligation to make a

purchase in a given country.

3. Counter purchase: Sale of goods and services to one company in aother country by a

company that promises to make a future purchase of a specific product from the same

company in that country.

4. Buyback: This occurs when a firm builds a plant in a country, or supplies technology,

equipment, training, or other services to the country, and agrees to take a certain

percentage of the plant's output as partial payment for the contract.

5. Offset: Agreement that a company will offset a hard currency purchase of an unspecified

product from that nation in the future. Agreement by one nation to buy a product from

another, subject to the purchase of some or all of the components and raw materials from

the buyer of the finished product, or the assembly of such product in the buyer nation.

(Figure 1)

Countertrade also occurs when countries lack sufficient hard currency or when other types of

market trade are impossible. In 2000, India and Iraq agreed on an "oil for wheat and rice" barter

deal, subject to UN approval under Article 50 of the UN Persian Gulf War sanctions, that would

facilitate 300,000 barrels of oil delivered daily to India at a price of $6.85 a barrel, while Iraq oil

sales into Asia were valued at about $22 a barrel. In 2001, India agreed to swap 1.5 million

tonnes of Iraqi crude under the oil-for-food program.


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4. CHALLENGES AND THREATS FOR INTERNATIONAL BUSINESS

International business has been a much discussing topic. Threat to international business is the

major fences the growing of the same trade in all over the world. Economics expert have

disagree on the reality of international business for a country benefits. When a country increased

their exports in to foreign market its economically situation are growing and its high beneficial

for its economy. But if we see for other hand the country and its imports are increase can be

create threat for importer country economy. The policy maker of the country economy have been

worry and making strike rules to keep the balance between the agreement of two country,

International business can be develop the country economy, at the main time many local players

can be outdid by financially stronger multinational by forced close down their business or get

merge to multinational companies. In many cases multinational companies become so powerful

compare to the locals companies particularly in small countries, for their own benefit they can

dictate the political terms to the government of the country.

INTRODUCTION

During the colonial period, the risks for foreign investment were virtually non-existent, as an

investor with money colonies hold Imperial State had almost absolute Protection. Even if the

investment in countries was made, which was not less Colonial rule, the protection is often

repaired by diplomatic means the collective perception of pressure from countries of origin of the

investors involved. But the end of colonialism, the subsequent appearance of economic

nationalism and the lack of protection through the exercise of military power have greatly

increased the risks for foreign investment in the modern world (Maathai, W, 1995).

A company to engage in the trade across international borders will probably determine that the

risks are higher than the normal business risks on the domestic market. Risks of international

trade as a result of the need for, a different corporate culture, or even a different language saw to

cope themselves with different laws in another country. Economic risks include the risk of non-

payment by the buyer and credit movements in the rate of interest or exchange rates risk. When

delivered the goods abroad, risk of damage to or loss of the goods, contract disputes or denial of

the goods by the purchaser can arise. The political risks of international trade include the


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2-Political Risk:

Political risk can be defined as Political risk is a nature of risk confronted by investors,

corporations, and governments. It is the type of risk that can be unstated and achieved with

coherent forethought and investment (Glenn, 1994).

The type of risk that an investment's earnings could hurt as a result of political vicissitudes or

unpredictability in a country, Instability affecting investment returns could stem from a change in

government, legislative bodies, other foreign policy makers, or military control. Political risk can

also be called as "geopolitical risk," and becomes more of a factor as the time prospect of an

investment becomes longer (Atchison, David W & David J, 2003).

Political risk can be divided in the following steps

-Political uncertainty of a country

-War and terrier

-Surrounding of political region

-Risk in the non-renewal exports and imports license

3- Country buyer and seller risk:

For international executive needs to avoid the main drawbacks of country risk assessment by

looking for information in a variety of places, leading relevant analysis, and changing opinions if

necessary. A company must set acceptable risk objectives based on its reward goals and risk

tolerance. The key to reducing risk is a thorough assessment of the country and customers.

Maintaining a systematic approach for each customer and country in this analysis will assure that

each evaluation is consistent, relevant, and objective (Rittenberg & Martens, 2012).

For buyer and seller that they are involved in international trade that they may be facing the

following risks

Government policies

Trade and international business restrictions

The shortage of foreign currency in the investment country

The exchange regulation policies


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Seller performance risk

Interest rate risk

Buyer acceptance risk

Buyer credit risk/liquidation

4-Commercial risks:

Commercial risks can be defined as as a firm/organization have to transaction with foreigner

buyer working in a changed lawful and political environment in international trade, the risk to

smooth behavior of the commercial transaction upsurge various, and financial risk accepted by a

seller when spreading credit without any collected or resources. In simple words all other risk

except the political risk (Najam, 2001).

Commercial risks are to the deprivation loss or in demand to another party or markets.

International business enhance to upsurge in different ways risk to equate to local risk. This is

the mostly due to lengthier distance partner between you and your counterparty, strange culture,

economic and political environment as well as local and nonlocal rules.

The custom of transections term such as payment and collection documentary credit and normal

transfer delivery terms like the incoterms decrease or remove various risks regarding to your

business including to cancellation of orders, delayed payment or late delivery (Mary C, Bart, Ay,

Sahin & Robert G, 2012).

Example of commercial risks

Nature of business and nature transection with buyer

Buyer financial position

You have different type understanding/clarification of which you are decided upon

Your business partner is not bequeathing accomplish the agreement

Your business partner are not capable for delivery the payment on time and potential loss of

shipments are acceptable

1 - A sellers incapable to deliver the required quantity or quality of goods

2 - Probability of shipment being refused


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3 - Value of the shipments

5-Others risks to International Trade:

In other risks culture difference, lake of knowledge, overseas markets, language barriers

corruption in business and natural risks these are risks which create the problems for the

foreigner investors (Games, 2011).

In details the other risks are includes

Lake of knowledge for overseas markets entrance

Natural risks due to numerous type of natural disasters which cannot be in human control

Language differences is the main problem in all over the world i.e. Chains and Japanese have

big problem to understood Arabic and English, and majors business opportunities for china

,Korea and Japanese companies are gulf countries

Autonomous risk the capability of the administration of a country to pay off its amount overdue

(Debts)

Inclination to corrupt business associates like many country have corrupt business organization

i.e. in Zimbabwe, Pakistan

Culture differences for example cultures believe the payment of an inducement to help business

is unconditionally lawful


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5. CASE STUDY

5.1 DOING BUSINESS IN INDIA: NEW ZEALAND CASE STUDIES

We have put together two different examples, illustrating New Zealand businesses offering

expertise to India in security management, and baggage and cargo airport systems. The casestudies focus on the logistics and processes of establishing a New Zealand company's presence in

the Indian market.

Glidepath

Glidepath, a New Zealand baggage, cargo and parcel automation company, is a world leader in

manufacturing airport baggage systems with 500 completed projects in 61 countries under its

belt. The company employs 220 staff and turns over NZ$80m annually.

India, Chennai airport - installation of Glidepath arrival carousels

First and foremost, Glidepaths interest in India stemmed from enormous revenue potential

offered by the countrys growing travel market and the desire by the Indian

international business and types

Documents

Transcript of international business and types