Author: indiafreenotes

Four Major Participants of International Business

1. Exporting

Exporting is often the first choice when manufacturers decide to expand abroad. Simply stating, exporting means selling abroad, either directly to target customers or indirectly by retaining foreign sales agents or/and distributors. Either case, going abroad through exporting has minimal impact on the firm’s human resource management because only a few, if at all, of its employees are expected to be posted abroad.

2. Licensing

Licensing is another way to expand one’s operations internationally. In case of international licensing, there is an agreement whereby a firm, called licensor, grants a foreign firm the right to use intangible (intellectual) property for a specific period of time, usually in return for a royalty. Licensing of intellectual property such as patents, copyrights, manufacturing processes, or trade names abound across the nations. The Indian basmati (rice) is one such example.

3. Franchising

Closely related to licensing is franchising. Franchising is an option in which a parent company grants another company/firm the right to do business in a prescribed manner. Franchising differs from licensing in the sense that it usually requires the franchisee to follow much stricter guidelines in running the business than does licensing. Further, licensing tends to be confined to manufacturers, whereas franchising is more popular with service firms such as restaurants, hotels, and rental services.

One does not have to look very far to see how important franchising business is to companies here and abroad. At present, the prominent examples of the franchise agreements in India are Pepsi Food Ltd., Coca-Cola, Wimpy’s Damino, McDonald, and Nirula. In USA, one in 12 business establishments is a franchise.

However, exporting, licensing and franchising make companies get them only so far in international business. Companies aspiring to take full advantage of opportunities offered by foreign markets decide to make a substantial direct investment of their own funds in another country. This is popularly known as Foreign Direct Investment (FDI). Here, by international business means foreign direct investment mainly. Let us discuss some more about foreign direct investment.

4. Foreign Direct Investment (FDI)

Foreign direct investment refers to operations in one country that ire controlled by entities in a foreign country. In a sense, this FDI means building new facilities in other country. In India, a foreign direct investment means acquiring control by more than 74% of the operation. This limit was 50% till the financial year 2001-2002.

There are two forms of direct foreign investment: joint ventures and wholly-owned subsidiaries. A joint venture is defined as “the participation of two or more companies jointly in an enterprise in which each party contributes assets, owns the entity to some degree, and shares risk”. In contrast, a wholly-owned subsidiary is owned 100% by the foreign firm.

An international business is any firm that engages in international trade or investment. International trade refers to export or import of goods or services to customers/consumers in another country. On the other hand, international investment refers to the investment of resources in business activities outside a firm’s home country.

1. Insufficiency of Domestic Demand

If the domestic demand for the product is not sufficient to consume the production, the firm may take a decision to enter the foreign market. In this way he can equalize the production and demand.

2. To Utilize Installed Capacity

If the installed capacity of the firm is much more than the level of demand of the product in the domestic market, it can enter the international market and utilize its un-utilized installed capacity. In this way it can export the surplus production.

3. Legal Restrictions

Sometimes the Government of a country imposes certain restrictions on the growth and expansion of certain firms or on the production and distribution of certain commodities in the domestic market in order to achieve certain social objectives.

4. Relative Profitability

The export business is more attractive for its higher rate of profitability. The higher profitability rate also gives extra strength to the firm.

5. Less Business Risk

A diversified export business helps the exporting firm in mitigating the risk of sharp fluctuations in the business activity of the firm.

6. Increased Productivity

Due to certain social and technological developments the industrial production has increased to a great extent. The production will be higher at cheaper rate. The surplus production can be exported.

7. Social Responsibility

In order to meet the social responsibility some business firms take the decision to contribute to the National Exchequer by exporting their products.

8. Technological Improvements

Technological improvements also attract the business firm to enter foreign markets. It introduces new products with latest technological improvements and faces the competition successfully in the international markets.

9. Product Obsolescence

If a product becomes obsolete in domestic market it may be in demand in International markets. The firm has to make a survey for introducing the product in those markets.

10. International Collaboration

Developed countries fix their import quotas for different countries and for different commodities. A county can export various commodities to these developed countries to the extent of its quota.

11. International Business Brings Various Countries Closer

Better business relations are established among the countries. Government and non-government business commissions or business representatives visit other countries from time to time. The local representatives and other related persons came into contact with foreign representatives and come to know their habits and customs.

12. Helps in Maintaining Good Political Relations

The economic relations between two countries help each other to improve their political relations. Various countries having different political ideologies import or export their products. To conclude it is now undisputable that export business contributes to the national economy, national exchequer, individual exporting firms and maintains international, economic cultural and political relations among various countries. Countries have come closer on account of international business.

Importance of International Business: On the view of National Economy

1. It is important to meet imports of industrial needs.
2. Debt Servicing: This means to grant loan for and for their industrial development.
3. For rapid economic growth.
4. For profitable use of natural resources.
5. To face competition successfully-better quality goods production having lower or moderate prices. To improve the image of the producer as well as of the country in the minds of foreign customers.
6. Increase in employment opportunities.
7. To increase national income.
8. Increase in standard of living of the people.

Trade refers to the exchange of goods and services for money, which can be undertaken within the geographical limits of the countries or beyond the boundaries. The trade which takes place within the geographical boundaries of the country is called domestic business, whereas trade which occurs between two countries internationally, is called international business.

Entities engaged in international business often face more difficulties than the entities which conduct domestic business. Although international business enjoys large customer base as they operate in multiple countries. Here is an article which compiles the important differences between domestic and international business.

Domestic Business

The business transaction that occurs within the geographical limits of the country is known as domestic business. It is a business entity whose commercial activities are performed within a nation. Alternately known as internal business or sometimes as home trade. The producer and customers of the firm both reside in the country. In a domestic trade, the buyer and seller belong to the same country and so the trade agreement is based on the practices, laws and customs that are followed in the country.

There are many privileges which a domestic business enjoys like low transaction cost, less period between production and sale of goods, low transportation cost, encourages small-scale enterprises, etc.

International Business

International Business is one whose manufacturing and trade occur beyond the borders of the home country. All the economic activities indulged in cross-border transactions comes under international or external business. It includes all the commercial activities like sales, investment, logistics, etc., in which two or more countries are involved.

The company conducting international business is known as a multinational or transnational company. These companies enjoy a large customer base from different countries, and it does not have to depend on a single country for resources. Further, the international business expands the trade and investment amongst countries.

However, there are several drawbacks which act as a barrier to entry in the international market like tariffs and quota, political, socio-cultural, economic and other factors that affect the international business.

Comparison

Differences between Domestic and International Business

The most important differences between domestic and international business are classified as under:

1. Domestic Business is defined as the business whose economic transaction is conducted within the geographical limits of the country. International Business refers to a business which is not restricted to a single country, i.e. a business which is engaged in the economic transaction with several countries in the world.
2. The area of operation of the domestic business is limited, which is the home country. On the other hand, the area of operation of an international business is vast, i.e. it serves many countries at the same time.
3. The quality standards of products and services provided by a domestic business is relatively low. Conversely, the quality standards of international business are very high which are set according to global standards.
4. Domestic business deals in the currency of the country in which it operates. On the contrary, the international business deals in the multiple currencies.
5. Domestic Business requires comparatively less capital investment as compared to international business.
6. Domestic Business has few restrictions, as it is subject to rules, law taxation of a single country. As against this, international business is subject to rules, law taxation, tariff and quotas of many countries and therefore, it has to face many restrictions which are barriers in the international business.
7. The nature of customers of a domestic business is more or less same. Unlike, international business wherein the nature of customers of every country it serves is different.
8. Business Research can be conducted easily, in domestic business. As against this, in the case of international research, it is difficult to conduct business research as it is expensive and research reliability varies from country to country.
9. In domestic business, factors of production are mobile whereas, in international business, the mobility of factors of production are restricted.

Carrying out the activities of international business and its management is far more difficult than conducting a domestic business. Due to changes in political, economic, socio-cultural environment across the nations, most business entities find it difficult to expand their business globally. To become a successful player in the international market firms need to plan their business strategies as per the requirement of the foreign market.

Business activities done across national borders is International Business. The International business is the purchasing and selling of the goods, commodities and services outside its national borders. Such trade modes might be owned by the state or privately owned organization.

In which, the organization explores trade opportunities outside its domestic national borders to extend their own particular business activities, for example, manufacturing, mining, construction, agriculture, banking, insurance, health, education, transportation, communication and so on.

Basically international business is a cross border transaction between individuals, businesses, or government entities. The transaction can be of anything that has value, examples include:

• Physical Goods
• Services such as banking, insurance, construction, etc.
• Technology such as software, arms, and ammunition, satellite technology, etc.
• Capital and
• Knowledge

For ease of understanding, in this article, the word “goods” will include all of the above-mentioned items. For regular commodities, we will be using the word “physical goods”.

Types of International Businesses

All the major international business conducted in the world can come under seven main types. These can also be termed as modes of business.

1. Imports and Exports

Simplest and most commonly used method, imports and exports can be seen as the foundation of international business. Imports are an inflow of goods into the markets of home country for consumption, in contrast, export means selling of goods to foreign countries. In short, imports means inflow whereas export means outflow of goods in any form.

2. Licensing

Licencing is one of the easiest ways to expand a business internationally. When a company has a standardized product with ownership rights, it can use licensing to distribute and sell the products in the international market. Licenses come in many forms, some of which are patent, copyright, trademark, etc. Products such as books and movies are usually distributed internationally through licensing agreements.

3. Franchising

A very effective method to expand a business nationally as well as internationally, franchising is similar to licensing. In this, a parent company gives the right to another company to conduct business using the parent company’s name/ brand and products. The parent company becomes the franchiser and the receiving company becomes the franchisee. Many of the biggest restaurant chains in the world have used the franchisee model to expand internationally. Some examples include – McDonald, Pizza Hut, Starbucks, Domino’s Pizza and many more

4. Outsourcing and Offshoring

Outsourcing means giving out contracts to international firms for certain business processes. For example, giving out accounting function to an international firm. This is usually effective when the cost of conducting these processes are comparatively much cheaper in some other country than in the home country. For example, many developed countries such as the USA, Australia, the UK, etc. outsource its functions to companies in India, China, etc. because it is cheaper.

Offshoring is similar to outsourcing in the sense that a function is moved away from the home country. However, it is different in the sense that the facility is physically moved to another country but the management stays with the company itself. For example, Apple Inc. is conducting its manufacturing function in China, however, it is completely controlled by Apple Inc.

5. Joint Ventures and Strategic Partnerships

A joint venture is a contract between two parties, one is an international company while another company is local to where the business has to be conducted. Both parties contribute to the equity and management of the company. As a result, both share the profit as well. These parties can mutually decide the percentage of equity and profit sharing.

These types of ventures and partnerships come into existence when both the party has something to offer. For example, the local company may have the brand name and network within the country while the international company may have advanced technology. A classic example of a joint venture is Tata Jaguar collaboration in India. Sometimes there are government restrictions to international companies against holding 100% equity in certain areas such as defense. In such cases, international companies can take the benefit of the new market by a joint venture.

6. Multinational Companies

Multinational companies, as the name suggests, are companies that are conducting business in multiple countries. They actually set up the whole business in multiple countries. Some such examples are Amazon, Citigroup, Coca-Cola, etc.

These companies have independent operations in each country, and each country has its own set of offices, employees, etc. In fact, even the products and marketing campaigns are customized as per local needs. For example, Nestle introduced a Matcha flavor Kit Kat in Japan as the flavor is very popular in that country, however, they don’t offer the same flavor in India. This customization is one of the many benefits of being a multinational company.

7. Foreign Direct Investment

Foreign direct investment is an investment made by an individual or a company located in one country to the business interest located in another foreign country. In this the investing company usually commits more than capital, they share management, technology, processes, etc, with the company that they have invested in. The foreign direct investments can take many forms such as a subsidiary company, associate company, joint venture, merger, etc.

These are the major types through which people, companies, and government conduct international business. However, means of business is just one minor speck of the international business environment.

One must consider many factors when setting up any business internationally. These factors include –

Factors to Consider Before Starting International Business Operations

1. Geographical Factors

Simple challenges that come with the change in geography have to be studied when considering international business. There are differences in storage requirement, supply chain requirements, connectivity issues, etc. from country to country. Colgate-Palmolive will face a thousand challenges even before its soaps and shampoos can reach rural areas of India where there is a lack of basic necessities such as water, electricity, transportation, etc.

2. Social Factors

Social factors are very important in international business. It is very difficult to set up shops in countries that are politically disturbed or are going through some tensions. For example, most companies don’t want to expand its business in Afghanistan, as there is so much disturbance.

3. Legal Policies

Every country has different laws and governing policies. A company should check all the legal requirements in the country in which it wants to conduct business. The basic laws that need attention are organization laws, securities laws, consumer protection laws, employees protection laws, and many more. The process can be lengthy but it is necessary.

4. Behavioral Factors

Every country has different cultures and beliefs, and people can be very sensitive to these beliefs. An international company, if not careful, can land a lot of issues if they don’t take care of the country’s behavioral factors. For example, McDonald cannot sell its beef burgers in India, else it will have to face the brunt of the Indian population that is majority Hindu.

5. Economic Forces

These factors include the county’s currency values, market size, cost, inflation, etc. These are important because it directly affects the profitability of operations. Every company should consider these factors before expanding internationally if they want to manage its bottom line.

All these above-mentioned factors play an important role in how successful or unsuccessful an entity will be in its international business adventures. All these factors should be considered in the research and planning stage to get maximum benefit out of it.

Organizational Development or simply O.D. is a technique of planned change. It seeks to change beliefs, attitudes, values and structures-in fact the entire culture of the organization so that the organization may better adapt to technology and live with the pace of change.

O.D. is a comprehensive strategy for organization improvement. O.D. is a long range effort to improve an organization’s problem solving and renewal processes, particularly through a more effective and collaborative management culture.

Objectives of Organizational Development

(a) Improvement in the performance of the organization.

(b) Improvement in the ability of the organization to adapt to its environment, and

(c) Improvement in inter-personal and inter-group behaviour to secure team work.

Characteristics of Organizational Development

1. Organizational development is an educational strategy for bringing a planned change.
2. It is related to real problems of the organization.
3. Laboratory training methods based on experienced behaviour are primarily used to bring change.
4. O.D. uses change agent (or consultant) to guide and affect the change. The role of change agent is to guide groups towards more effective group processes rather than telling them what to do. Change agents simply assist the group in problem solving processes and the groups solve the problems themselves.
5. There is a close working relationship between change agents and the people who are being changed.
6. O.D. seeks to build problem-solving capacity by improving group dynamics and problem confrontation.
7. O.D. reaches into all aspects of the organization culture in order to make it more humanly responsive.
8. O.D. is a long term approach (of 3 to 5 years period) and is meant to elevate the organization to a higher level of functioning by improving the performance and satisfaction of organization members.
9. O.D. is broad-based and describes a variety of change programmes. It is concerned not only with changes in organizational design but also with changes in organizational philosophies, skills of individuals and groups.
10. O.D. is a dynamic process. It recognises that the goals of the organization change and hence the methods of attaining them should also change.
11. O.D. utilizes systems thinking. It is based on open, adaptive systems concept. The organization is treated as an interrelated whole and no part of the organization can be changed without affecting other parts.
12. O.D. is research based. Change agents conduct surveys, collect data, evaluate and then decisions are taken.
13. O.D. uses group processes rather than individual process. It makes efforts to improve group performance.
14. O.D. is situational and contingency oriented.
15. Organization Development and Management Development are complementary rather then conflicting.

Steps in Organizational Development (O.D)

Lawrence and Lorsch have provided the following steps in organizational development:-

1. Problem identification—Diagnosis

O.D. program starts with the identification of the problem in the organization. Correct diagnosis of the problem will provide its causes and determine the future action needed.

2. Planning Strategy for Change

O.D. consultant attempts to transform diagnosis of the problem into a proper action plan involving the overall goals for change, determination of basic approach for attaining these goals and the sequence of detailed scheme for implementing the approach.

3. Implementing the Change

O.D. consultants play an important role in implementing change.

4. Evaluation

D. is a long-term process. So there is a great need for careful monitoring to get process feedback whether the O.D. programme is going on well after its implementation or not. This will help in making suitable modifications, if necessary. For evaluation of O.D. programme, the use of critic sessions, appraisal of change efforts and comparison of pre and post training behavioural patterns are quite effective.

Change agent is an individual or group, who carry out the task of instigating and managing change in the organization. He/She is someone, who directly or indirectly influences change, i.e. the change agents are appointed by the organizations to transform the ways, the organization is managed, or the business is conducted.

Types of Change Agent

The change agent can be internal or external to the organization who plays the role of a catalyst to implement change in the organization.

1. Internal Change Agent

When the change agent, is internal to the organization then he/she is usually the employee such as a manager, senior executive, leader, HR professional or any other person from the staff who has mastered in behavioural sciences and intervention technology of organization development. They are appointed by the organization to look after the change process.

2. External Change Agent

The external change agent is the one who is brought to the organization from outside such as consultants. The company’s rules regulations and policies are not imposed on them, and so they can deeply analyze and bring different viewpoints to a situation and challenge the existing state of affairs.

However, this can also be seen as a disadvantage, as the external change agent is not aware of the company’s history, work processes, and personnel.

Roles of a Change Agent

Change agents aim at making changes in the existing processes or culture of the organization that sticks. And to do so, they focus on the matters relating to organizational effectiveness, innovation, and advancement.

He/She is someone who always seeks an opportunity for change, determines the best approach and bring about change. They are the one who possesses skills and competencies to initiate, facilitate and coordinate organizational change.

Change Agents help the organization in understanding the requirement and relevance for change and takes all necessary steps required to manage change and also anticipates the problem; that might take place during or after the change is implemented in the organization. He/She is responsible to transform vision into a realistic plan and execute it.

Skills of a Change Agent

(i) Cognitive Skills: The skills which require some level of pro-action from the side of the change agent for the purpose of self-understanding, conceptualization, and evaluation.

(ii) Action Skills: Change Agent works as a consultant, researcher, trainer, counsellor, etc. in an organization, so, he/she should possess the required skills and competencies.

(iii) Communication Skills: He/She is responsible for spreading change information, and making the organization realize the need for change, for which he/she must possess excellent communication and pervasive skills.

Many multinational corporations have their own in-house change specialist, who works with the management team of the organization to recognize the need for change and facilitate change efforts.

Characteristics of a Change Agent

1. Clear Vision

As mentioned above, a “change agent” does not have to be the person in authority, but they do however have to have a clear vision and be able to communicate that clearly with others.  Where people can be frustrated is if they feel that someone is all over the place on what they see as important and tend to change their vision often.  This will scare away others as they are not sure when they are on a sinking ship and start to looking for ways out.  It is essential to note that a clear vision does not mean that there is one way to do things; in fact, it is essential to tap into the strengths of the people you work with and help them see that there are many ways to work toward a common purpose.

2. Patient yet persistent

Change does not happen overnight and most people know that.  To have sustainable change that is meaningful to people, it is something that they will have to embrace and see importance.  Most people need to experience something before they really understand that, and that is especially true in schools.  With that being said, many can get frustrated that change does not happen fast enough and they tend to push people further away from the vision, then closer.  The persistence comes in that you will take opportunities to help people get a step closer often when they are ready, not just giving up on them after the first try.  I have said continuously that schools have to move people from their point ‘A’ to their point ‘B’, not have everyone move at the same pace. Every step forward is a step closer to a goal; change agents just help to make sure that people are moving ahead.

3. Asks tough questions

It would be easy for someone to come in and tell you how things should be, but again that is someone else’s solution.  When that solution is someone else’s, there is no accountability to see it through.  It is when people feel an emotional connection to something is when they will truly move ahead.  Asking questions focusing on, “What is best for kids?”, and helping people come to their own conclusions based on their experience is when you will see people have ownership in what they are doing.  Keep asking questions to help people think, don’t alleviate that by telling them what to do.

4. Knowledgeable and leads by example

Stephen Covey talked about the notion that leaders have “character and credibility”; they are not just seen as good people but that they are also knowledgeable in what they are speaking about.  Too many times, educators feel like their administrators have “lost touch” with what is happening in the classroom, and many times they are right.  Someone who stays active in not necessarily teaching, but active in learning and working with learners and can show by example what learning can look like now will have much more credibility with others.  If you want to create “change”, you have to not only be able to articulate what that looks like, but show it to others. I have sat frustrated often listening to many talk about “how kids learn today” but upon closer look, the same speakers do not put themselves in the situation where they are actually immersing themselves in that type of learning.  How can you really know how “kids learn” or if something works if you have never experienced it?

5. Strong relationships built on trust

All of the above, means nothing if you do not have solid relationships with the people that you serve.  People will not want to grow if they do not trust the person that is pushing the change.  The change agents I have seen are extremely approachable and reliable.  You should never be afraid to approach that individual based on their “authority” and usually  they will go out of their way to connect with you.