IBTI Flashcards
I meansthe speedup of movements and exchanges (of human beings, goods, services, capital, technologies, or cultural practices) all over the planet. One of the effects this is that it promotes and increases interactions between different regions and populations around the globe.
Globalization
It changes the way nations, businesses, and people interact. Specifically, it changes the nature of economic activity among nations, expanding trade, opening global supply chains, and providing access to natural resources and labor markets.
Globalization
Forces or Drivers Behind Globalization
Advancement of Technologies
Reduction in Cross-trade Barriers
Increase in Consumer Demand
High Competition
It refers to one of the crucial factors of globalization. Since 1990s, enhancement in telecommunications and Information Technology (IT) has marked remarkable improvements in access of information and increase in economic activities. This has led to the growth of various sectors of economies throughout the world.
Advancement of Technologies
Every- country restricts the movement of goods and services across its border. It imposes tariffs and quotas on the goods and services imported in its country. In addition, the random changes in the regulations create a chaos in global business environment. Such practices impose limits on international business activities. However, gradual relief in the cross-border trade restrictions by most governments induces free trade, which, in turn, increases the growth rate of an economy.
Reduction in Cross-trade Barriers
Constitutes an important driver for bringing about globalization. An organization generally strives hard to grain competitive edge in the market. The frequent increase in competition in the domestic market compels organizations to go global. Thus, various organizations enter other countries (for selling goods and services) to expand their market share.
They export goods in foreign markets where the price of goods and services are relatively high. Many organizations have achieved larger global market shares through mergers and acquisitions, strategic alliances, and joint ventures. So, these are the major factors that have contributed a lot in globalization and the growth of global economy.
High Competition
Two Criticism of Globalization
Increase in Social Tensions
Lack of Class Mobility
8 Modes of Entry Into International Business
Exporting
Licensing
Franchising
Joint Venture
Foreign Direct Investment
Merger & Acquisition
Strategic Alliance
Contract Manufacturing
It refers to the trade ofgoods, services, technology, capital and/or knowledge acrossnational bordersand at a global scale.
It involves cross-bordertransactionsof goods and services between two or more countries. Transactions of economic resources include capital, skills, and people for the purpose of the international production of physical goods and services such as finance, banking, insurance, and construction.
International Business
It is the process of selling goods and services produced in one country to other country.
EXPORTING
Two kinds of Exporting
Direct and Indirect
it refers to selling products directly to a foreign customer or distributor.
Direct Export
involves exporting through domestically based export intermediaries. The exporter has no control over his product in the foreign market.
Indirect Export
List of Advantages and Disadvantages of Exporting
Advantages –
It is less risky
Under direct export the exporter has control over selection of market
It helps in fast market access
Disadvantages –
High start-up cost in case of direct exports
In Indirect export, the exporter has no control over distribution of products
Exporting through export intermediaries increase the cost of product
Advantages and Disadvantages of Licensing
Advantages –
Less investment is involved
Low cost of labor
Disadvantages-
This method is time consuming
Decline in product quality may harm the reputation of licensor
it is a method in which a firm gives permission to a person to use its legally protected product or technology and to do business in a particular manner, for an agreed period of time and within an agreed territory. It is a very easy method to enter foreign market as less control and communication is involved.
Licensing
It is a system in which semi-independent business owners pay fees and royalty to a parent company in return for the right to be identified by its trademark, to sell its product or services, and often to use its business format or system
Franchising
What are the advantages and disadvantages of franchising?
Advantages –
It is less risky
Advantage of expertise of franchiser
Highly motivated employees
Disadvantages-
Difficulty in keeping trade secrets
Franchisee may become a future competitor
A wrong franchisee may ruin company’s name and goodwill
It is a mode of entering foreign market through investment. Investment may be direct or indirectly through financial institutions. FDI influences the investment pattern of the economy and helps to increase overall development. The extent to which FDI is allowed in a country is subjected to the government regulations of that country.
FOREIGN DIRECT INVESTMENT
what are the advantages and disadvantages of foreign direct investment ?
Advantages –
Modifications can be made at any point of time
It is an easy mode of entry
Disadvantages-
The government policies may not be helpful
The return on investment may be low
It is a strategy used by companies to enter a foreign market by joining hands and sharing ownership and management with another company. It is used when two or more companies want to achieve some common objectives and expand international operations.
JOINT VENTURE
Objectives of Joint Venture
The common objectives are :m
Foreign market entry
Risk/reward sharing
Technology sharing
Joint product development
It is useful to meet shortage of financial resources, physical or managerial resources
Advantages and Disadvantages of Joint Venture
Advantages –
Technological competence
Optimum use of resources
Partners are able to learn from each other
Disadvantages –
Conflicts over asymmetric investment
Cultural and political stability may pose a threat to successful operations
Conflicts in management
It is a combination of two or more district entities into one, the desired effect being accumulation of assets and liabilities of distinct entities and several other benefits such as, economies of scale, tax benefits, fast growth, synergy and diversification etc. The merging entities cease to be in existence and merge into a single servicing entity.
Mergers
It implies acquisition of controlling interest in a company by another company. It does not lead to dissolution of company whose shares are acquired. It may be a friendly or hostile acquisition or a bail out takeover.
Acquisition
It is when a foreign firm hires a local manufacturer to produce their product or a part of their product. This method utilizes the skills of a local manufacturer and helps in reducing cost of production. The marketing and selling of the product is the responsibility of the international firm.
Contract Manufacturing
What are the advantages and disadvantages of contract manufacturing ?
Advantages –
Low cost of production
Development of medium and small scale industries
No dilution of control
Disadvantages –
- Difficulty in maintaining quality standards
- Local manufacturers in foreign market may lose business
It is a voluntary formal agreement between two companies to pool their resources to achieve a common set of objectives while remaining independent entities. It is mainly used to expand the production capacity and increase market share for a product. Alliances help in developing new technologies and utilizing brand image and market knowledge of both the companies.
Strategic Alliance
What is the business transaction that occurs within the geographical limits of the country. It is a business entity whose commercial activities are performed within a nation.
Domestic Business
It 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
International Business
Key Differences Between Domestic and International Business
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.
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.
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.
Domestic business deals in the currency of the country in which it operates. On the contrary, the international business deals in the multiple currencies.
Domestic Business requires comparatively less capital investment as compared to international business.
It acts as a main driver to facilitate globalization. Over the years, with increase in the level of income and standard of living, the demand of consumers for various products has also increased. Apart from this, nowadays, consumers are well aware about products and services available in other countries, which impel many organizations to work in association with foreign players for catering to the needs of the domestic market
Increase in Consumer Demand
