ms-97 mba assignment july dec 2010 Question 5

5. Indicate the impact of FDIs on LDCs in terms of technology transfer and local technological capability.

Foreign Direct Investments In Ldcs

The magnitude of global flows of FDI has grown at a rapid pace over the past two decades thegrowth has bean particularly steep since the mid 1980s. Table 13.1 shows that FDI flows have grown from US $ 11 billion in 1970 to $ 225 billion in 1990. FDI’s originate   almost entirely in the industrialized countries. An increasing proportion of these flows is also destined towards the industrialized countries.

FDIs represent flows of resources, which can be instrumental in expediting the developmental process in LDCs. However, the distribution of FDI inflows between the industrialized and developing countries is increasingly uneven. The bulk of the FDI inflows are hosted by the industrialized countries themselves. Table 13.3 shows that the share of developing countries in average annual FDI inflows has actually declined steadily from about 35 per cent during the 1960s and 1970s to 16.9 per cent during 1988-89.

Thus, developing countries are being gradually marginalized in the distribution of the FDI flows. In the coming years, this trend is likely to intensify further in view of the emerging developments in the world economy, such as, Single European Market, formation of the North American Free Trade Area, Pacific Rim Community, and reform of East European countries.

The distribution of whatever little FDI that flows to the developing countries itself is highly uneven across countries. The bulk of these flows are destined towards a handful of middle income Newly Industrializing Economies (NIEs) in South-east and East Asia and Latin America. As is evident from the Table 13.4, nearly two-thirds of the FDI flows from the developing countries are accounted for by the ten largest host economies.

The least developed countries, for the development of which FDIs could be of critical importance receive only a marginal proportion of FDIs. The Table shows that proportion of the least developed countries in annual FDI flows to the developing countries actually declined from 1.52 per cent, during the early 1980s, to 0.58 per cent, in the late 1980s. Further, the least developed countries are the only group of countries, which have lost, not only in terms of shares, but also in absolute terms. The average annual flows to them were of the order of US $ 190 million during the early 1980s, which declined to $ 170 million during the late 1980s…

The sectoral distribution of FDI flows suggests that manufacturing has attracted only a small proportion of FDI flows. Table 13.5 shows that manufacturing accounts for only about 35 per cent of the total FDI stocks owned by the four major home countries of FDI, viz., the United States, the UK, Japan and Germany. Further, the share of manufacturing shows a declining trend in all the cases over the 1977-84 (from 42 to 36 per cent in the case of the U.S., from 45 to 43 for the U.K.; from 34 to 32 for Japan, and from 48 to 43 per cent in case of Germany). Extractive sectors and services account for nearly two-thirds of the FDI. Service sectors, especially trading and banking, finance and insurance, account for increasing proportion of FDI. The figures given in the Table relate to the overall FDI stocks. In the FDI stocks in LDCs, it can be expected that the proportion of the primary sectors (petroleum, mining, agriculture and' plantations) would be considerably higher, and that of the manufacturing sectors would be even lower

IMPACT OF FDIs ON LDCs

Direct Impact

FDls comprise inflow of productive resources, such as, capital and foreign exchange are, generally, accompanied by flow of entrepreneurial and managerial skills and technology. FDIs complement the domestic savings in financing the capital formation in the host country. Thus FDIs contribute to the generation of output and employment. The foreign exchange inflow augments the supply of foreign exchange, which is often scarce in the developing countries. In most cases, however, the project being set up with FDI is dependent upon imported plant and machinery, and technology. The foreign exchange -inflow takes care of these import requirements, partially or fully.

The direct cost of FDI to the host country comprises remittances made on account of dividends on the equity held abroad, interest on loans or suppliers^' credits extended by the foreign investors, royalties and technical fees, for transfer of technology and other services provided by the foreign partner.

Unlike foreign borrowings, servicing remittances, viz., dividends in the case of FDI begin after the project starts making profits. However, the servicing burden of FDI builds up very fast, and consumes considerable foreign exchange resources of the host country. Further, these remittances have the tendency to grow over time as the enterprise consolidates and prospers.

Thus, the direct impact of FDIs on the host country includes both positive and negative aspects. The favourable impact is by way of generation of output and employment by complementing the domestic savings and bringing in the much-needed entrepreneurial skills and foreign exchange resources for the developing countries. The adverse impact is on account of growing remittances of dividends, royalties and technical fees in the foreign exchange, which affect the balance of payments. It has been contended, however, that the direct remittances represent only a minor part of the total cost of FDIs on the developing host countries. More significant costs are indirect costs as discussed below.

Indirect Impact

The indirect impact of FDIs on LDCs also has both favourable and adverse elements as follows:

Among the indirect favourable effects of FDI one could include improvement in the access of the host country to the international markets through association with the MNEs, exposure to new technologies and organisation and management systems. The MNEs can help their developing host countries to expand the manufactured exports with their captive access to marketing outlets in the industrialised countries. They can also help in saving scarce foreign exchange by substituting imports of the host countries. A predominant proportion of FDIs in India has gone into import-substituting projects. Some studies for the Latin American countries have found evidence of favourable spill-overs of the presence of foreign enterprises on local enterprises in terms of improved labour productivity.

FDIs can have adverse effects on different parameters of development, such as, balance of payments, local technological capability, employment, market structure, etc.

Balance of Payments

Besides remittances of dividends, royalties and fees, as discussed above, operations of the MNE affiliates can affect the balance of payments of the host countries through their import dependence and export performance relative to that of their local counterparts, and through manipulation of transfer prices.

Import Dependence

            The dependence of foreign controlled enterprises on imported capital goods, raw materials, components and spares is, generally, higher than that in the case of their local counterparts. This could be because of the greater familiarity of the foreign investors with the foreign sources of goods, and to provide a market for the products of the other group companies. A number of studies of different countries confirm the tendency of the foreign firms to buy a lesser proportion of inputs from the local markets than their local counterparts.

Export Promotion

It is argued that the foreign enterprises are better equipped to undertake the manufactured exports because of their captive access to information and marketing outlets in the industrialised countries, and their ability to use internationally renowned brand names. The experience has shown, however, that the MNEs are very selective about using the developing countries as platforms for exports. Except for a few countries in the Southeast and East Asia, the experience of the developing countries has been disappointing in this regard. The studies from a number of countries have shown that export performance of foreign affiliates has not been any different, if not worse, than that of their local counterparts. Further, a considerable proportion of agreements concluded between the MNEs and their local affiliates include clauses restricting exports of the latter.

Transfer Pricing

The MNEs also use manipulation, of transfer prices to covertly transfer surpluses of the affiliates to the headquarters. The transfer price is the price at which intra-firm (i.e., between two affiliates of a MNE) trade takes place. Hence, imports of raw materials, spare parts and capital goods of the affiliates from the parent or other associates (and exports of affiliates to them) take place at transfer prices. Since the transfer prices are determined by the foreign parent, there is ample scope of their manipulation to their advantage. There is considerable evidence from India and other developing countries of indulgence of the MNEs in manipulating transfer prices to the disadvantage of the host nations. The extent of manipulation in certain cases exceeded 100 per cent.

Thus, FDIs affect balance of payments of the host countries, not only through initial capital inflows, foreign exchange spent on capital goods imports and servicing remittances, but also through foreign exchange generated through exports or saved through import substitution, imports of raw materials and components, which could be unreasonably high, and through possible manipulation of transfer prices.

Technology Transfer and Local Technological Capability

FDI is considered to be a vehicle of technology transfer. It is contended, therefore, that the FDI flows provide their host countries access to sophisticated and complex technologies. But the theoretical propositions and empirical findings suggest that FDI by itself does not necessarily improve the access of the host countries to more complex technologies.

Over the past four decades, arm's length licensing has emerged to be a viable and increasingly significant alternative to FDI for technology acquisition. Internalization theory is presently used to explain the FDI flows and foreign operations of firms. According to this theory, FDI is likely to be preferred as a mode of foreign production, if goodwill assets like brand names are included in the transfer (because of the need of maintaining quality) or where knowledge is idiosyncratic and, hence, its transfer requires movement of the personnel. New proprietary process technology, or process technologies that are standardized, and which can be written down and transmitted objectively, can be transferred easily through licensing.

The recent empirical studies confirm that it is not the more complex or sophisticated technologies that are transferred most through FDI. It is the technology for production of differentiated goods, sold under brand names with high advertising and marketing outlays that is most likely to be transferred through FDI. It is because of these tendencies that most developing country governments have evolved entry regulations to screen proposals of FDI and licensing collaborations; according to the national priorities and technological gaps.

In any case, FDIs or licensing agreements envisage transfer of production know-how. The know-how, or design capability is rarely provided by the foreign collaborators to the recipient enterprises, and that is the most important component of building local technological capability. The know-how is to be absorbed through learning by doing, reverse engineering, or during the process or product adaptations and R & D activities. In the case of FDI, the foreign collaborator is also participating in the management, controlling the technical functions. In these cases, therefore, the chances of the importing enterprise learning through processes, such as, reverse engineering are very limited. In-house R & D activity of the MNEs is usually centralised on a global or regional level, feeding all the affiliates. Several surveys have confirmed the MNE's tendency to concentrate R & D activity near headquarters or in the developed countries.

A recent study found the foreign controlled firms in India to have lesser propensity to undertake in-house R & D than their local counterparts, who obtained technology on a licensing basis. This tendency has been explained in terms of three factors. Firstly, though the foreign collaborators often restrict any changes in the original specifications/ designs supplied through restrictive clauses inserted in the collaboration agreements, the propensity to adhere to these restrictions may be less in case of a locally controlled firm than in the case of a firm controlled by the foreign collaborator itself. Secondly, unlike the MNE affiliates, the unaffiliated licensees do not enjoy continued and captive access to the research laboratories of the technology supplier. Hence, they have to set up their own laboratory. Finally, the technical collaboration agreements are of a finite duration (up to 5-10 years), while FDI entails a life-long relationship. Due to restrictions placed on the renewals of technical collaborations by the government, the local licensees may be anxious to absorb the technology before their expiry. Besides, independence of decision-making in the case of licensing collaborations or outright purchases allows the local firm to selectively delink and diversify the sources of technology resulting in cost effectiveness and greater technological competence.

Thus, FDI makes only a limited contribution to local technological capability building in the host countries. They appear to be inferior to licensing or outright purchases of technology (purely technical collaborations) as a channel of technology acquisition in terms of contribution to local technological capability.

In this context, there is a lot to learn from the experience of South Korea, which succeeded in building local technological capability and climb the technology ladder very fast. South Korea imported technology selectively on licensing or contractual basis, and absorbed it through reverse engineering. FDIs were restricted only to the export-oriented or to cases where closely held nature of technology would not allow it to be obtained on a contractual basis. The Korean enterprises promoted their own brand/trade names and trading houses instead of depending upon the western multinationals. Therefore, the Korean enterprises enjoyed independence of decision-making from the foreign collaborators, enabling them to absorb and adapt technologies with reverse engineering and in-house R & D activity.

Choice of Techniques and Employment

It is widely believed that, because of relative scarcity of labour and abundance of capital, the technologies developed-and employed by the western MNEs are progressively labour displacing and relatively more capital intensive. An excessive induction of such technologies in labour surplus economies may, therefore, create distortions like growing capital scarcity and unemployment. A number of studies comparing factor proportions of technologies employed by the foreign and local firms in a number of developing countries have found evidence of the higher capital intensity in the former case. Therefore, FDIs create fewer jobs per unit of investment than other investments in LDCs.

Market Structure

Entry of the MNEs can affect host country market structures adversely. Possession of intangible assets, such as, globally known brand names and their reliance on non-price mode of rivalry, viz., through product differentiation and advertising and heavy market promotion raise barriers to the entry of potential local entrants. Besides, the MNEs sometimes engage themselves into restrictive practices (RBPs), which are aimed at eliminating the existing or potential competition by mergers and acquisitions or by forming cartels. Hence, the presence of the MNEs generally leads to market concentration. Empirical studies of a few countries have confirmed a correlation between FDIs and market concentration even after controlling for common factors.

6. Write short notes on

a) Visible and Invisible Trade

Visible trade is trade in goods, physical things you can touch and weigh. Invisible trade is trade in services, like tourism and banking.
Governments that have any sense actively promote foreign trade because it brings more prosperity to the people who elect them. Places like Hawaii and the Greek islands earn their income from tourism, places like China and Bangladesh earn theirs from cheap labour manufacturing, and places like London and New York earn theirs from the arts and sport and financial services and company HQs. Then everybody sells what they do best and buys what others do better and the result is everybody is better off than if we all tried to be self-sufficient like we had to be 1500 years ago.

b) Environmental Scanning

Environmental scanning is a process of gathering, analyzing, and dispensing information for tactical or strategic purposes. The environmental scanning process entails obtaining both factual and subjective information on the business environments in which a company is operating or considering entering.

There are three ways of scanning the business environment:

• Ad-hoc scanning - Short term, infrequent examinations usually initiated by a crisis
• Regular scanning - Studies done on a regular schedule (e.g. once a year)
• Continuous scanning (also called continuous learning) - continuous structured data collection and processing on a broad range of environmental factors.

Most commentators feel that in today's turbulent business environment the best scanning method available is continuous scanning because this allows the firm to act quickly, take advantage of opportunities before competitors do and respond to environmental threats before significant damage is done.

c) ASEAN

The Association of Southeast Asian Nations, commonly abbreviated ASEAN  in English, the official language of the bloc), is a geo-political and economic organization of 10 countries located in Southeast Asia, which was formed on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand.^[5] Since then, membership has expanded to include Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam. Its aims include the acceleration of economic growth, social progress, cultural development among its members, the protection of the peace and stability of the region, and to provide opportunities for member countries to discuss differences peacefully.

ASEAN spans over an area of 4.46 million km² with a population of approximately 580 million people, 8.7% of the world population. In 2009, its combined nominal GDP had grown to more than USD $1.5 trillion.^[7] If ASEAN was a single country, it would rank as the 9th largest economy in the world in terms of nominal GDP.

ms-97 mba assignment july dec 2010 Question 4

4. Discuss the approaches adopted by multinational enterprises to meet its manpower requirements.

Approaches to nationality problem:

A multinational enterprise may use any one of the following four approaches or a mix of some of these to meet its manpower requirements:

• Ethnocentric
• Polycentric
• Regiocentric and Geocentric

These terms, though explained in one of the previous units, need to be discussed in the context of human resource management. Ethnocentric policy is characterized by a MNEs preference for using home country nationals for all senior positions and rewarding them more generously over the host country nationals. The discrimination if carried too far alienates and demoralizes other country nationals who may feel having (getting) a second class citizens' status and treatment. Hardship may be created for some country nationals also if they have to go on frequent tours to transfers.

In polycentric approach the host country nationals are preferred for local positions. The local units get greater degree of autonomy in recruiting personnel for managerial and other positions. The knowledge of local language, culture and environment on the part of local managers helps create a more favourable attitude among employees of the local organisation and the dealers and customers. The danger from too much localizing is that it may alienate the local unit from the mainstream organisation because of the absence of expatriate managers who serve as links in the communication process.

In region centric approach, managers are recruited on regional basis. For instance, an American multinational operating, in Europe may prefer to have European managers at regional headquarters in Europe in large numbers instead of sending people from the headquarters. IBM has two international headquarters: one in New York and the other in Paris. This approach helps in reducing the cost of recruitment, maintenance and training and also enables handling regional problems more effectively.

The geocentric approach is based on the philosophy of global outlook of the management. It shows MNEs commitment to employ best brains available from anywhere. The top positions even in headquarters may go to host or even third country nationals. Very few multinationals follow this approach as the culture and tradition of the corporation is built over the years on the basis of certain objectives. philosophies and practices.

Legal Considerations

The laws of most countries require employment of local nationals if available in adequate numbers from within. Immigration visa is a pre-requisite to take up any assignment by foreigners. In US and Germany, for instance, the rules for work .

Recruitment: sources and stages

MNEs meet their manpower requirements from three sources (1) home country nationals, (2) host country nationals and (3) third country nationals. The home country nationals are those who belong to the place of origin of the company. The host country nationals are the citizens of the place of location of subsidiaries and third country nationals conic from- other than the home and host countries of MNEs. In the early phase of internationalisation of business most companies recruited from home office or home country. As the business expanded and activities diversified, managers were recruited from the host country, and if needed, from the third countries.

An MNE which starts with export of goods in overseas markets relies heavily on local managers and sales personnel in the first stage of operations. When it starts MNEs manufacturing abroad the top and senior managerial and technical personnels are sent from the head office. It may recruit some managers from the host country who’ll behelpful in obtaining licences, doing liaison work with local politicians, government officials, industry associations, banks and financial institutions.

When entering into manufacturing operations abroad, an MNE may bring technical experts from home. The locals may be recruited for junior managerial supervisory or operative jobs. Their familiarity with local language, culture and environment is helpful in starting and controlling the operations. When the MNE diversifies introduces new technology or wants to penetrate into new markets, it may like to recruit third country nationals with relevant expertise and experience.

Well established MNEs may centralise operational and managerial techniques, manufacturing processes technologies and standards in other countries. This may require transfer from one unit to another, training at head office, creating a pool of expert personnel and making them available to different units on short or long term assignments. On top managerial and technical posts MNEs may prefer to place home nationals. Studies show that 75% of the chief executives in American multinationals are from U.S.A., 92% in European multinationals are from Europe and almost 100% in Japanese multinationals are from Japan. The practice to send large number of expatiate managers overseas to manage the operations of subsidiaries has declined over the years. Host country nationals are preferred for managerial and technical jobs by many companies. American MNEs in Europe for instance have around 70% senior management personnel from Europe. US companies were also the first to allow more locals in their subsidiaries in developing countries. Japanese MNEs, however, prefer their own nationals to fill up senior and in many cases even supervisory positions in their subsidiaries overseas.

ms-97 mba assignment july dec 2010 Question 3

3. ‘An effective evaluation system must start from the beginning of the life cycle of the investment.’ Why? Explain with reference to Project Performance Evaluation.

Project Performance Evaluation

Project investments in new enterprises, or for expansion, diversification and modernisation of the existing establishments become profit centres when completed. Their performance until production commences cannot, therefore, be measured in terms of output or profits.

On the other hand, an effective evaluation system has to start from the beginning of the life cycle of the investment. Once the initial investment, which is substantial, has been committed, it produces a heavy impact on the operating results for a long period.

It has been observed that projects often suffer from large time and cost overruns. It is true, especially of international projects, which have to pass through inter-country regulatory measures in one or both countries, and involve external factors which are not too precise.

Projects are generally evaluated in terms of capital expenditures incurred. This is an erroneous approach, since it is not related to the work accomplished. When evaluated in physical terms, the process ignores costs involved. A given quantum of work (e.g. civil construction of 10,000 cubic meters) is completed within the scheduled timeframe, but might have cost more by Rs 2 million over the budgeted cost of Rs 20 million. Both methods do not take into account the efficiency of the project management (in terms of cost. and capital inputs in relation to work done or performance).

In the pre-investment estimates of a process plant project, the budgetary allocation for civil work upto June, 1984, was Rs 184 million. The actual expenditure was of the order of Rs 173 million upto that date. Two views were taken. The first one was that the project has lagged behind schedule since capital expenditure target on civil works was short by Rs 11 million. The second view was that there was a saving of Rs 11 million. In fact, both assessments were erroneous. The savings were due only to the deferment of foundation-laying, which was expected to cost Rs 20 million but would now cost Rs 18 million. Even with the reduced cost of foundations, there was a cost overruns on civil works. There was, besides, a slippage in the time schedule (with deferment of the foundation-laying activity).

Slippages in project management occur due to a diversity of variables, which differ from project to project and from one component of a project to another. It also occurs in terms of inputs (material, manpower). A break-up is, therefore, necessary in accordance with the objectives of the project.

The alternative is the Value-based Project Monitoring (VbPM) System. VbPM seeks to establish relationships between the value of the work planned (VWP) and the value of work actually done (VWA). The value of work does not mean the monetary cost of work; it denotes the `real' quantum of work. Paradoxical as it may seem, the real quantum is sometimes measured in terms of monetary values. This becomes necessary, because the work to be measured is an aggregation of several component activities, which cannot have a uniform measure (for example, civil construction and machinery erection). The problem can be resolved by using `constant' prices. The prices at which the VWA is measured is the same as applied to VWP. This will not determine the cost overrun but slippage in work performance. To arrive at cost overruns, it will be necessary to escalate the physical slippage by price inflation.

For a better understanding of the system, it may be appropriate to identify that cost of projects increase because of the following seven basic factors:

• Price increase due to inflation,
• Changes in project design (including technological and location changes),
• Deficiencies in project design and the need for post-planning revision,
• Mistakes committed in construction and erection,
• Non-availability of resources on schedule,
• Less efficient management causing delays in implementation,
• Eternalities (factors beyond the control of project management).

      It is obvious that the first step is the recording of data juxtaposed against the projected estimates. The data required are by activity and resource inputs. The values are to be recorded in physical quantities as well as values, both in current and constant prices: The extent to which the dissection of the data, in term; of activities and resource inputs, is needed would depend on the size of the project and^-the critically of the inputs and management objectives.

The analysis and appraisal is first geared to the identified activity centers. It is then extended to activity groups, and then to the project as a whole. The transcription of the data takes the form as shown in Exhibit 1, called ^"Value-based Project Monitoring Chart". This exhibit has been designed for the total project. The curves delineated are all cumulative.

The ordinates S1, S2, S3, mark the audit or monitoring stations in the time scale. There could be as many audit stations 'as the management finds effective. These should, nonetheless, be chosen with good care. Too many of them have been found to be distracting for the project team; too little to be ineffective. The amount of overrun, at any point of time, is given by the vertical distance between the two curves VWP and VWA, and not between costs which is generally assumed.

 Prerequisites and Precautions:

• The objectives of performance evaluation should be defined precisely.
• The candidate for performance evaluation - an individual, a group or a firm - should be clearly identified,
• Performance evaluation should be period-specific. Performance can and does vary from one period to another.
• Assumptions made in making the evaluation should be articulated without reservations.
• The limitations of the evaluation indicators should be spelt in clear terms.
• Each performance evaluation should be used for the specific purpose for which it is made. Any evaluation transposed for any other objective should be adjusted suitably.
• Performance evaluation should be forthright, not open to different meanings or conclusions.

ms-97 mba assignment july dec 2010 Question 2

2. Briefly explain the mechanisms adopted by MNEs for achieving flexible coordination in different countries. Give examples.

FLEXIBLE COORDINATION

MNEs had traditionally developed either autonomous national units to respond to the local environment or had the decision making centralized at the headquarters for strategic direction and operational support. In recent years, due to increased complexity. MNEs have adopted several mechanisms.

Mechanisms

Three mechanisms originating in different countries have emerged among MNEs:

·         Centralization (Japanese)

·         Formalization (American)

·         Socialization (Europe)

As the Japanese MNEs expanded overseas, the managers of parent company managed the subsidiaries. The centralization, by leveraging corporate resources, led to rapid decision making. With the growth in size and complexity of overseas business, the centralized coordination however became difficult. The subsidiaries started sending information, asking for guidance, support and decisions. This led to increased dependence of subsidiaries and overloading of the central process.

American MNEs adopted formalized system for coordination purposes. This process reduced costs. The authority is distributed between headquarters and subsidiaries. Most of the decisions are The company's established `way' of doing/accomplishing a certain task is considered the best. P&G had `Proctor way' of marketing. This involved exhaustive product and market testing before launching a product. The pre launching activities sometimes helped the competitors in launching imitative products. Further the attention of managers may be focused in meeting the requirements of the systems rather than meeting the consumer needs.

The system enacted by European MNEs was influenced by founding families. The coordination relied on close personal relationships. This involved careful recruitment, development and acculturation of key managers which essentially meant socialization. This system overcame the headquarters overload problem arising from centralization and inflexibility formalization. The system relied on shared values and objectives. Unilever had internalized this system from the beginning. The system work effective till it started facing problems by 1980s due to environmental changes.

Integrating Multiple Tools

As many existing coordination mechanisms proved inadequate to meet the environmental changes, MNEs started integrating different tools. This involved building coordination capabilities and allocating responsibilities.

Firstly, the issue of coordination relates to the value and intensity of task due to diffused assets and resources. Secondly, the need fps- using diverse tools was felt because it was believed that flexibility was necessary in the face of fast changes taking place. 41 Strategic Considerations for international operations, While Americans tried to revive the informal processes and value systems in their firms, European firms tried to centralize some functions such as Philips which created product divisions to coordinate the worldwide policy. In all these the tools used to change are self-regulating and managed. The self regulatory means are adopted, e.g. P&G in creating Euro Brand Teams, and Matsushita to internal `bidding' by product divisions for R&D allocations, In addition to the self-regulation, some systems are managed by integration.

Allocating Responsibilities

There are two issues involved in coordination: the flows between units and the strategic roles of units. The flows are of three kinds: goods, resources and information. The flow of goods involves integrating the network. of interdependence of units with respect to components, sub-assemblies and finished goods. The second flow relates to resources-financial, technical and human. Many of these were managed centrally. The third flow is that of information. Information flows are mostly achieved through the socialization mechanism. Matsushita used the socialization as a leveraged learning in its foreign units by arranging. `block meetings' of subsidiaries in regions to highlight the `best practices.'

ms-97 mba assignment july dec 2010 Question 1

1. Identify the Central Actors in International Business and discuss the differences between Domestic and International Business.

An international business is a business whose activities are carried out across national borders. This differs from a domestic business because a domestic business is a business whose activities are carried out within the borders of its geographical location.

A domestic company is one that confines its activities to the local market, be it city, state, or the country it is in. It deals, generally, with one currency, local customs and cultures, business laws of commerce, taxes and products and services of a local nature.

            The international company, on the other hand deals with businesses and governments in one or more foreign countries and is subject to treaties, tariffs. Currency rates of exchange, politics, cultural differences, taxes, fees, and penalties of each country it is doing business in. It may also be conducting business in it's home country, but the emphasis is on trading in the international marketplace.

 

Major Difference between Domestic and International Business

Conducting and managing international business operations is more complex than undertaking domestic business. Differences in the nationality of parties involved, relatively less mobility of factors of production, customer heterogeneity across markets, variations in business practices and political systems, varied business regulations and policies, use of different currencies are the key aspects that differentiate international businesses from domestic business. These, moreover, are the factors that make international business much more complex and a difficult activity.

Major Differences

Scope:

Scope of international business is quite wide. It includes not only merchandise exports, but also trade in services, licensing and franchising as well as foreign investments. Domestic business pertains to a limited territory. Though the firm has many business

 establishments in different locations all the trading activities are inside a single boundary.

Benefits:

International business benefits both the nations and firms. Domestic business have lesser benefits when compared to the former.

• To the nations: Through international business nations gain by way of earning foreign exchange, more efficient use of domestic resources, greater prospects of growth and creation of employment opportunities. Domestic business as it is conducted locally there would be no much involvement of foreign currency. It can create employment opportunities too and the most important part is business
•  since carried locally and always dealt with local resources the perfection in utilization of the same resources would obviously reap the benefits.
• To the firms: The advantages to the firms carrying business globally include prospects for higher profits, greater utilization of production capacities, way out to intense competition in domestic market and improved business vision. Profits in domestic trade are always lesser when compared to the profits of the firms dealing transactions globally.

Market Fluctuations:

Firms conducting trade internationally can withstand these situations and huge losses as their operations are wide spread. Though they face losses in one area they may get profits in other areas, this provides for stabilizing during seasonal market fluctuations. Firms carrying business locally have to face this situation which results in low profits and in some cases losses too.

Modes of entry:

A firm desirous of entering into international business has several options available to it. These range from exporting/importing to contract manufacturing.

abroad, licensing and franchising, joint ventures and setting up wholly owned subsidiaries abroad. Each entry mode has its own advantages and disadvantages which the firm needs to take into account while deciding as to which mode of entry it should prefer. Firms going for domestic trade does have the options but not too many as the former one.

To establish business internationally firms initially have to complete many formalities which obviously is a tedious task. But to start a business locally the process is always an easy task. It doesn't require to process any difficult formalities.

Purvey:

Providing goods and services as a business within a territory is much easier than doing the same globally. Restrictions such as custom procedures do not bother domestic entities but whereas globally operating firms need to follow complicated customs procedures and trade barriers like tariff etc.

Sharing of Technology:

International business provides for sharing of the latest technology that is innovated in various firms across the globe which in consequence will improve the mode and quality of their production.

Political relations:

International business obviously improves the political relations among the nations which give rise to Cross-national cooperation and agreements. Nations co-operate more on transactional issues.