International Finance

OVERVI EW OF I NTERNATI ONAL
BUSI NESS
International Finance
Learning Objectives
After completing this chapter, you should be able to understand:
What is International Business (IB)
How Globalization impacts the economy on the
backdrop of IB
International Bank for Reconstruction and
Development (IBRD) and its impact
Role and Importance of World bank
Components of International Business
Contribution of International Finance
OVERVIEW OF INTERNATIONAL BUSINESS
Structure
1.1 Introduction
1.2 Introduction of International Business
1.3 Growing Importance of International Business
1.4 International Bank for Reconstruction and
Development (IBRD) and its impact
1.5 Drivers of International Business
1.6 Nature of International Finance
1.7 Significance of International Finance
1.8 Summary
1.9 Self Assessment Questions
1.1 Introduction
One of the most significant trends in past two decades
has been the rapid and sustained growth of
international business in the world;
markets have become truly global for
- products,
- services and
- financial instruments
world trade has expanded at 6% p.a.
markets are characterized by competition
more companies are going international and
their greater business is from overseas markets
1.1 Introduction
The opening of markets creates new
geographical space for companies
to expand in and access tangible
and intangible resources.
It also permits wider choice in the
methods like trade, FDI, licensing,
sub-contracting, franchising and partnering
to operate in different locations.
1.1 Introduction
Several companies from many countries are investing
abroad through mergers and acquisitions (M&A), or
through various forms of non-equity relationships.
The fragmentation and production processes across
international borders are an important new trend for
developing economies. Global trade rules have
fostered global production networks and an
associated rise in intra firm trade by progressively
lowering trade barriers.
Globalization
1.1 Introduction
Foreign capital has played a catalytic role in pushing
policies in the right direction and controlling number
of resources to the development effort.
Globalization is praised for the new opportunities such
as
access to new markets
technology transfer
increased production and
higher living standards
1.1 Introduction
The success or failure of an organization
is going to be more and more
dependent on
its ability to deal with
dynamic global environment.
International business is the process of focusing on
the resources of the world and objectives of the
organization on World business opportunities and
threats. The term emerged from what was earlier
known as export marketing.
A company that fails to go global is now in danger of
losing its domestic market to competitors with lower
costs, greater experience, better products, and in a nut
shell more value to the customer.
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also
International business can be defined as any business
activity or transaction that transcends the national
border.
But a firm importing a minor item not available locally
for its manufacture of products for sale domestically
cant be said to be in international business.
Many seemingly domestic products are truly
international in the sense that several of the parts and
components which make up these products are
manufactured in different countries as a part of global
sourcing and production sharing.
International Business derives its importance from:
Liberalization:
Universal economic policy liberalizations that
emerged after 1990s provided great impetus to
borderless business world. GATT/WTO account
for large share in international business, but
substantial liberalization is occurring outside
GATT/WTO as well. (e.g. policy changes in China)
The global trend can be best termed LPG
Liberalization, Privatization & Globalization.
Multinational Companies
These enterprises link their resources and
objectives with world market opportunities and
have been powerful force driving globalization
targets.
In 1997 there were 44500 MNCs and the figure
would be around 70K in 2007.
The MNCs leverage their strengths to link global
resources and opportunities and thereby strengthen
the globalization trend.
Technology Development
Technology has been a very important facilitating
factor of globalization, with its raising costs and
risks, which makes it imperative for firms to tap
world markets and to share these costs and
risks. On the other hand falling transport and
communications costs the death of distance
have made it economical to integrate distant
operations and ship products and services
across the globe in search of efficiency.
Technology Development
Technology is a universal factor.
A hospital in the US performs the required
diagnostics an X-ray and assorted scans.
In the next three minutes a radiologist in
Bengaluru, India receives the scanned images.
Immediatiately a report teleradiology is sent
back to the hospital by the radiologist.
Total 20 minutes for the report
Cost 30% lower in India than in the US
Transportation and Communication Revolution
The IT revolution has made an enormous
contribution to the emergence of the global
village. The microprocessor is responsible for
many advances in telecommunications
technology. The development in satellite, optical
fiber, wireless technologies and internet and
world wide web (WWW) has been revolutionized.
The power of microprocessors doubles and their
cost is halved every 18 months. ( Moores Law)
Product Development Costs and Efforts
The cost of new product development is very
huge in several industries such as
pharmaceuticals. To recoup such high costs an
international market is absolutely essential.
Further, because of the huge investment and
diverse requirements of skill associated with
new product development, cross border alliances
in research and development are becoming
more and more popular.
Quality and Cost
The two most important determinants of
demand are the quality and price of the offering.
These are better achieved when the
firm/company is international in its operations.
Rising Aspirations and Wants
Due to increasing level of education and
exposure to electronic media customers in each
nation wants a product that is world class.
Competition
Another factor for importance of international
business is increasing competition. Heightened
competition compels firms to explore new ways
of increasing their efficiency, including by
extending their international reach to new
markets at an early stage, with new ownership
and contractual arrangements and new activities
being located in new sites abroad.
World Economic Trends
One of the important trends is the difference in
the growth rates of the economies/markets. The
comparative slow growth of the developed
economies or the stagnation of some of their
markets and the fast growth of a number of
developing countries, prompt firms of developed
countries to turn to the expanding markets,
elsewhere.
The domestic economic growth and the outside
opportunities reduce the opposition to international
business.
World Economic Trends
Regional Integration
The proliferation of regional integration schemes, like
the European Union (EC), North American Free Trade
Agreement (NAFTA), SAARC, ASEAN, EEC, European Free
Trade Association (EFTA) etc. by creating a borderless
world among the members of such trade blocs, fosters
the internationalization trend.
Many of these regional blocs also give a fillip to the cross
border investments and financial flows.
$ `
$ `
Development of Leverages
Leverage is simply some type of advantage that
a company enjoys by virtue of the fact that it
conducts business in more than one country.
Any international company possesses four
important leverages
1. Experience transfer for expanding or
strengthening its international operations:
It can draw on management practices, strategies, products,
advertising, appeals or sales or promotional ideas that have
been tested in actual markets and apply them in other
comparable markets.
2. Scale economies:
The cost is one of the important determinants of success.
Cost advantage, in many cases, derives out of scale
economies which can be procured by going after global
market. Technological breakthroughs are substantially
increasing the scale economies and the market scale
required to break even.
3. Resource utilization:
International company can source resources internationally
with competence.
4. International strategy
A global strategy built on an information system that
scans the world-business environment to identify
opportunities, trends, threats, and resources.
The international strategy is a design to create a
winning offering on an international scale.
Achieve Higher Rate of Profit
When the domestic markets do not promise a
higher rate of profits, business firms search for
foreign markets which promise higher rate of
returns.
Expansion of Production
When companies find their production capacity
exceeds domestic demand, they (Toyota Motors)
are forced to sell in overseas markets and thus
utilize the capacity.
Limited Home Market
When the domestic markets are small (due to
small population or limited purchasing power)
companies like Ciba-Geigy located in Switzerland
with a population of six million or ITC selling high
end cigarettes in India have to look for overseas
markets to survive.
Ciba-Geigy had to concentrate on overseas
markets and establish manufacturing facilities in
foreign countries including India.
Political Stability
Political stability means both continuation of the
same party in power and continuation of the
same government policies for longer period.
Business community prefers to enter politically
stable countries for their business operations
and stay away from politically unstable countries
as much as possible.
Nearness to Raw Materials
The source of highly qualitative raw materials and
bulk raw materials is a major factor for attracting
the companies from various foreign countries.
Most of the US based and Europe based companies
located their manufacturing facilities in Saudi
Arabia, Qatar, Oman, Iran and other middle-east
countries due to the availability of petroleum.
Quality of Human Resource Availability
Software, high technology and telecommunications
companies located their operations in India mainly
because of availability of this resource
economically.
Imposition of Tariffs and Quotas
Tariffs and quotas are there in developing as well as
developed economies (for automobiles in the US).
Companies therefore prefer to invest directly in
such countries through partnerships or Joint
ventures.
1.4 International Bank for Reconstruction and Development
(IBRD)
The World Bank originated at Bretton Woods
Conference in 1944. It consists of following five
institutions that extended assistance to over
developing countries bringing a mix of finance and
ideas to improve living standards.
1. IBRD
2. IDA (International Development Association)
3. IFC (International Finance Corporation)
4. MIGA(Multilateral Investment Guarantee Agency)
5. ICSID(International Center for Settlement of
Investment disputes)
(IBRD)
Mission and Role of World Bank
To fight poverty with passion and professionalism
for lasting results.
To help people, help themselves and their
environment by providing resources, sharing
knowledge, building capacity and forging
partnerships in public and private sectors.
To be excellent institution able to attract, excite,
and nurture diverse and committed staff with
exceptional skills who know how to listen and learn.
(IBRD)
Mission and Role of World Bank contd.
To assist in the reconstruction and development of
the territories of the members, by facilitating
investment of capital for productive purposes,
including the restoration of economies destroyed by
war, the reconversion of productive facilities to
peace time needs and the encouragement of the
development of the productive facilities and
resources in less developed countries.
(IBRD)
To promote private foreign investment by means of
guarantees or participation in loans and other
investments made by private parties, and when
private capital is not available on reasonable terms
to supplement private investment by providing on
suitable conditions finance for productive purposes
out of its own funds raised by it and other
resources.
(IBRD)
To promote the long range balanced growth of
international trade and the maintenance of
equilibrium in the balance of payments by
encouraging international investment of the
productive resources of the members, thereby
assisting in raising productivity, the standards of
living and conditions of labor in the territories.
To make sure of availability of funds in the market.
(IBRD)
To provide funds to the borrowers at the possible
lowest cost through manipulating the currency mix
and opting the time when the interest rate in the
market is low.
To control volatility in net income and overall
charges of the loan.
(IBRD)
To promote an appropriate degree of maturity
transformation between borrowings and lending.
It borrows in the international capital market both
on medium-term and long-term basis, on currency
swaps under the discount net programme.
(IBRD)
Implications
Funds contribute directly to productive capacity
projects.
And indirectly promote local private enterprises.
Investments directly affect the well being of the
masses of poor people of developing countries.
(IBRD)
Implications- contd.
Energy development through oil and gas.
Contribution to a more sustainable balance of
payments in the medium and long-term and to the
maintenance of growth in the face of severe
constraints.
Support to high priority projects needed to restore
credit worthiness and growth.
International business is not a new phenomenon.
But the volume of international trade and the number
of players in it have increased dramatically over the
last decade. Today every nation and an increasing
number of companies buy and sell in the international
marketplace.
A number of developments around the world have
helped fuel this activity. Let us have look at important
key drivers.
International Production & Operations Management
The globalization process with its borderless network
of operations has created a complex system of
manufacturing and operations management that is
indifferent to where goods are manufactured, where
services are offered and where these goods and
services are distributed.
China today is the manufacturing center of the world
and India its information technology hub.
International Production & Operations Management
As international companies seek cost advantages to
compete successfully in the international marketplace,
they constantly look for countries that have lower input
costs.
They have adopted lean manufacturing that improve
productivity through cost and time management.
Opportunities are opened to small entrepreneurs in
many countries as they use modern management and
operations concepts as well as value chain
management.
International Marketing
International marketing includes the marketing of
goods and services across national boundaries and
the marketing operations of an organization that sells
or produces within the country but happens to be a
part of an enterprise that has presence in other
countries.
On the other hand, international marketing is simply an
attitude of mind and approach with a truly global
outlook.
International Human Resource Management
Managing a modern day international company with its
dynamic competitive environment requires a strong
internal governance process that starts with the people
that administer it.
As more and more companies embrace the resource
based view (RBV) of strategy, the employees offer the
core competencies for sustainable competitive
advantage.
International Human Resource Management
International Finance Management
When a company expands its business beyond its
national borders, its finance manger has to deal with
additional variables such as exchange rates, tariffs,
and regulatory, legal and cultural issues.
When a subsidiary is opened in other country, the
finance manger has to deal with issues related to
borrowings, lending in local markets and interacting
with foreign government, agencies and institutions.
The term foreign exchange basically refers to buying
currency of one country while selling the currency of
another country.
Initially Britain with its strong navy spread its
commercial interests far and wide. Hence its currency ,
Pound Sterling became benchmark.
Today most currencies are compared with US Dollar,
currently the most active and commercially strong
trading nation.
Many currencies are still
pegged to US $ for their
exchange rate.
A foreign exchange transaction is a shift of funds from
one country and currency to another by a trader, a
tourist or by an investor.
Foreign exchange or Forex transactions take place
24/7 through a global network of banks, financial
institutions and individuals.
Forex market is emerging as the worlds largest
financial market where enormous amounts are traded
on a daily basis.
1.7 Significance of International Finance
International finance is an important input in the
decision making process of different entities. It affects
all aspects of economic activity.
The activity can be in the form of
individuals making asset selection decision
firms taking financial management decision
fund mangers deciding in which market to deploy
funds and from where to exit
central banks controlling forex reserves
commercial banks making asset liability
decisions
or a financial crisis
1.8 Summary
International Business is the process of focusing on
the resources of the World and the objectives of the
organization on World business opportunities and
threats.
The term International Business has emerged from the
term international marketing which in turn emerged
from the term export marketing.
A company that fails to go global is in danger of losing
its domestic business to competitors with lower costs,
greater experience, better products and in a nutshell
more value for the customer.
1.9 Self Assessment Questions
1. What do you mean by International Business?
2. Explain the growing importance of International
Business.
3. Write note on World bank and its objectives.
4. Explain the factors responsible for growth of
International business.
5. Explain the concept of International Finance with
its significance in the economy.
THANKS

International Finance

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