International Business Management

International strategic management is the process by which a firm sets its objectives, scans the global environment, and chooses and implements strategies to compete across several countries. It aims to build and sustain competitive advantage in global markets.

Process (steps)

1. Mission, vision and objectives: define why the firm exists and what it wants to achieve globally.
2. Environmental analysis: study political, economic, social, technological and legal factors in each country (PEST), along with competitors and industry structure.
3. Internal analysis: assess the firm's resources, capabilities, strengths and weaknesses (SWOT).
4. Strategy formulation: choose the global approach and the mode of entry (exporting, licensing, joint venture, FDI).
5. Implementation: organise structure, allocate resources, and align marketing, finance, HR and production.
6. Evaluation and control: compare results with targets and correct course.

Main international strategies

• Global standardisation: the same products worldwide to gain cost efficiency.
• Localisation (multi-domestic): products adapted to each market.
• Transnational: combines global efficiency with local responsiveness.
• International: transfers home products and skills to foreign markets.

Importance: it guides resource allocation, copes with risk and uncertainty, and gives the firm a long-term direction.

BIMSTEC stands for the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation. It is a regional organisation of seven South and Southeast Asian countries around the Bay of Bengal: Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka and Thailand.

Background

• Founded on 6 June 1997 through the Bangkok Declaration as BIST-EC (Bangladesh, India, Sri Lanka, Thailand).
• Myanmar joined in December 1997 (becoming BIMST-EC), and Nepal and Bhutan joined in 2004. It took its present name in 2004.
• The permanent secretariat is in Dhaka, Bangladesh, since 2014.

Objectives

• Accelerate economic growth and social progress in the region.
• Promote mutual assistance in economic, technical and scientific fields.
• Create a free trade area and increase trade and investment.
• Improve transport, communication and connectivity.

Areas of cooperation: trade and investment, transport and communication, energy, tourism, technology, fisheries, agriculture, public health, poverty alleviation, counter-terrorism, environment and disaster management, culture and people-to-people contacts.

Importance

• It links South Asia with Southeast Asia, covering about 1.7 billion people.
• It is a major alternative platform for Nepal, because SAARC is largely inactive.
• It gives landlocked Nepal and Bhutan access to the sea through the Bay of Bengal.
• The BIMSTEC Charter was adopted in 2022, and a Free Trade Area Agreement is under negotiation.

The political environment is the set of government actions, political systems, ideologies and stability of the country in which a firm operates. It strongly shapes international business risk and opportunity.

Impacts on international business

1. Political stability. A stable country with predictable policy attracts investment and trade. Instability, coups, civil unrest or terrorism raise risk, disrupt operations and scare off investors.
2. Government policy toward foreign business. Open policies (tax incentives, repatriation rights, special economic zones) encourage entry. Restrictive policies (investment caps, local-content rules, licensing) discourage it.
3. Trade barriers. Tariffs, quotas, embargoes and subsidies decide how easily goods cross borders and how competitive a firm is.
4. Political risks. These include expropriation, nationalisation, confiscation, currency inconvertibility and restrictions on profit remittance.
5. Laws and regulations. Tax, labour, environmental and consumer laws raise or lower costs and affect strategy.
6. Political ideology. Democratic, market-oriented systems favour free enterprise. Communist or socialist systems may limit private and foreign ownership.
7. International relations. Treaties, sanctions, regional blocs and diplomatic tension open or close markets.

Managing the risk: political risk insurance, joint ventures with local firms, local lobbying, phased investment, and careful country risk analysis.

Political system

A political system is the set of institutions, rules and processes by which a country is governed: how power is acquired, who makes laws, and how public decisions are taken. It can be classified along two dimensions.

(a) Collectivism and individualism

• Collectivism stresses the primacy of group or state goals over individual goals. Its extreme form is socialism or communism, where the state owns the main means of production.
• Individualism stresses individual freedom and private enterprise, with minimal state interference. It supports free-market capitalism.

(b) Democracy and totalitarianism

• Democracy is government by the people, directly or through elected representatives, with free elections, a free press and protected rights. Forms are representative democracy and (rarely) direct democracy.
• Totalitarianism is rule by one person, party or group that controls political and often economic and social life, and denies political freedom. Forms include communist, theocratic, tribal and right-wing totalitarianism.

Most countries lie between these extremes.

Impact of political environment on international business

1. Stability. Stable governments give predictability, attract FDI and encourage long-term contracts, while instability raises risk and costs.
2. Government attitude to foreign firms. Incentives, investment promotion and free repatriation help, while restrictions on foreign ownership and licensing hinder.
3. Trade policy. Tariffs, quotas, embargoes, subsidies and sanctions decide access to markets.
4. Political risk. Expropriation, nationalisation, war, terrorism, riots and currency inconvertibility threaten assets and profits.
5. Legal and regulatory framework. Tax, labour, competition and environmental laws influence strategy and compliance cost.
6. Ideology and type of government. Market-friendly governments favour free enterprise, while planned systems restrict private participation.
7. International relations and regional blocs. Treaties and trade agreements open markets, while conflicts close them.

Managing political risk: thorough country risk assessment, political risk insurance, local joint ventures, local employment and sourcing, and staged investment.

Definition

Global business refers to all commercial activities (trade, investment, production, marketing and services) that a firm carries out across national borders, treating the world as a single market and sourcing, producing and selling wherever it is most advantageous. Multinational companies, exporters, importers and international investors are all engaged in it.

Opportunities of global business

1. Larger market: Access to more customers, higher sales and economies of scale when the domestic market is small (very relevant for Nepal).
2. Higher profit and growth: Selling in markets with higher prices or demand, and extending the product life cycle.
3. Lower costs: Access to cheaper labour, raw materials and efficient locations; economies of scale in production.
4. Resource and technology access: Obtaining scarce materials, capital, skills and new technology from other countries.
5. Risk diversification: Spreading business over many markets reduces dependence on one economy and the effect of local recession.
6. Competitive advantage: Learning from global competitors, better quality and innovation; building brand and global reputation.
7. Use of excess capacity: Surplus production can be sold abroad.
8. Employment and foreign exchange: Creates jobs, earns foreign currency and raises the standard of living.
9. Government incentives and trade agreements: Export promotion, special economic zones, preferential tariffs (e.g. WTO, SAFTA, BIMSTEC).
10. Cultural exchange and networking: Exposure to new ideas, partners and customers.

Globalization is the growing integration and interdependence of countries through the flow of goods, services, capital, people, technology and ideas. It has several types:

1. Economic globalization: Integration of national economies through international trade, foreign investment, capital flows and multinational firms. Institutions such as WTO, IMF and World Bank promote it.
2. Political globalization: Growth of international cooperation and organisations (UN, SAARC, EU), international law, treaties and spreading of democratic and political ideas, with a decreasing role of national sovereignty.
3. Cultural globalization: Spread and mixing of languages, food, fashion, media, music, sport and values across nations, through movies, the Internet and social media.
4. Technological globalization: Rapid worldwide spread of technology, ICT, the Internet, and innovation sharing, which makes communication and transport faster and cheaper.
5. Financial globalization: Integration of world financial markets, banking, stock exchanges and cross-border capital flows.
6. Social/demographic globalization: Migration, tourism, remittances and global social networks and movements.
7. Environmental/ecological globalization: Shared global concerns such as climate change, pollution and biodiversity, with international agreements (Paris Agreement).
8. Legal/military/health: Global laws and standards, defence alliances and joint action against pandemics (WHO).

Globalization increases efficiency and choice, but can widen inequality and threaten local culture and industries.

Regional economic integration

It is an agreement among countries in a geographic region to reduce or remove trade barriers and to cooperate economically, so that trade and investment flow more freely among them. It has stages of increasing depth:

1. Preferential trade area
2. Free trade area (e.g. SAFTA, NAFTA)
3. Customs union (common external tariff)
4. Common market (free movement of labour and capital too)
5. Economic union
6. Political union

Economic union

• Combines a common market with a common currency and harmonised economic policies (monetary, fiscal, taxation, and social policies).
• Goods, services, labour and capital move freely, with a common external tariff.
• Requires a common central bank and policy coordination.
• Example: the European Union's Eurozone (euro, European Central Bank).
• Benefits: lower transaction costs, no exchange rate risk, larger market, greater efficiency. Costs: loss of national control over monetary and fiscal policy.

Political union

• The most advanced stage, in which member countries also share a common political apparatus: a common government, parliament, foreign and defence policies and laws.
• Member states give up a large part of their sovereignty.
• Examples: the United States, and the United Kingdom as a union of nations; the European Union is moving partly in this direction.
• Benefits: unified decision making and strong bargaining power. Costs: loss of sovereignty and national identity, which is politically difficult to achieve.

Functional management of international business means managing the main business functions (marketing, finance, production/operations, human resources) across several countries. The approach a firm adopts depends on how much it centralises decisions at home or lets foreign units adapt locally. The four classical approaches (the EPRG framework) are:

1. Ethnocentric approach

• Home-country orientation. Headquarters takes the key decisions, and home-country policies, products and practices are applied abroad with little change.
• Key foreign posts are filled by parent-country nationals (expatriates).
• Advantages: tight control, consistent quality and brand, easy transfer of know-how, and a good fit for firms with a technological or managerial edge.
• Disadvantages: ignores local tastes and laws, causes resentment among local staff, is costly because expatriates are expensive, and gives poor local responsiveness.

2. Polycentric approach

• Host-country orientation. Each subsidiary is treated as a separate national unit and decides its own marketing, finance and HR policies to suit local conditions.
• Local nationals manage the subsidiaries.
• Advantages: good local adaptation, local goodwill, lower staffing cost, and quicker local decisions.
• Disadvantages: duplication of effort, lost economies of scale, weak coordination, and a gap between headquarters and subsidiaries.

3. Regiocentric approach

• Regional orientation. The firm groups countries into regions (for example, South Asia or the EU) and integrates its functions within each region.
• Staff are moved within the region, and regional headquarters coordinate production, marketing and finance.
• Advantages: regional economies of scale, a balance between control and local response, and regional managers gain experience.
• Disadvantages: managers rarely reach top global posts, regional units may become insular, and global integration is weak.

4. Geocentric approach

• Global orientation. The world is treated as one market, and the best people, ideas and resources are used wherever they are found.
• Decisions are taken on a global strategy basis, with close cooperation between headquarters and subsidiaries.
• Staff are chosen on ability, not nationality.
• Advantages: the best use of global talent, global efficiency, a strong shared culture, and cross-border learning.
• Disadvantages: complex and costly to set up and communicate, high training and relocation costs, and national immigration rules can limit staff movement.

Conclusion: No approach is best in all cases. Firms often start ethnocentric, move to polycentric or regiocentric as they grow, and aim for geocentric as they become truly global.

Globalization is the growing integration of national economies through trade, investment, finance, technology and information flows. It has both benefits and costs.

Positive impacts

• Larger markets for firms, so higher sales, economies of scale and lower unit costs.
• More choice, better quality and lower prices for consumers.
• Inflow of foreign direct investment, capital and technology, which creates jobs and raises growth.
• Spread of knowledge, management skills and innovation.
• Higher competition, which pushes domestic firms to become more efficient.
• Cultural exchange, better communication and greater international cooperation.

Negative impacts

• Small domestic and infant industries may collapse under foreign competition.
• Widening income gaps between rich and poor countries, and between skilled and unskilled workers.
• Job losses when firms relocate to cheaper countries, and pressure on wages and labour standards.
• Environmental damage and over-use of natural resources.
• Erosion of local culture, language and traditions (cultural homogenisation).
• Dependence on foreign capital and goods, and exposure to global shocks (for example, financial crises).
• Loss of national economic sovereignty to multinational firms and international institutions.

World Trade Organization (WTO) is the international body that sets and enforces the rules of trade between nations. It was established on 1 January 1995, replacing the GATT (1947), and has its headquarters in Geneva, Switzerland. Nepal became its 147th member in 2004. It has more than 160 members.

Objectives

• Promote free, fair and predictable trade by lowering tariff and non-tariff barriers.
• Raise living standards, ensure full employment and expand production and trade.
• Use world resources optimally and protect the environment, in line with sustainable development.
• Help developing and least-developed countries share in the growth of trade.

Functions

• Administers the WTO trade agreements (goods, services through GATS, and intellectual property through TRIPS).
• Acts as a forum for trade negotiations (the ministerial conference meets every two years).
• Settles trade disputes through the Dispute Settlement Body.
• Reviews national trade policies (Trade Policy Review Mechanism).
• Offers technical help and training for developing countries, and cooperates with the IMF and the World Bank.

Basic principles

• Non-discrimination: most-favoured-nation (MFN) treatment and national treatment.
• Freer trade through negotiated reduction of barriers.
• Predictability through binding commitments and transparency.
• Promotion of fair competition, and special provisions for developing countries.

A multinational company (MNC), also called a multinational enterprise, is a business that owns or controls production or service facilities in two or more countries besides its home country. It has a parent company in the home country and subsidiaries or branches abroad, and it manages them under a common strategy and central control. Examples are Coca-Cola, Unilever, Toyota, Nestle and Samsung.

Main characteristics

• Operations and sales in many countries, with a head office in the home country.
• Very large size, assets and sales, often bigger than the GDP of small countries.
• Centralised control over global strategy, finance and technology.
• Heavy use of advanced technology, research and development, and skilled management.
• Strong capital base, with easy access to world finance.
• Global branding and marketing, and the ability to shift production to wherever costs are lowest.
• Foreign direct investment as the main mode of entry.

Advantages to host countries: capital, technology, jobs, exports and management skills. Criticisms: profit repatriation, dominance over local firms, transfer pricing, tax avoidance, and environmental and political influence.

Culture is the learned set of values, beliefs, customs and behaviour shared by a society. Its determinants include language, religion, education, social structure, awareness and norms.

(a) Awareness (cultural awareness)

• Awareness means the understanding people have of their own culture and of others. It covers their knowledge of what their society values, how it behaves, and how that differs from other societies.
• It is shaped by education, exposure to media, travel, contact with foreigners and past experience.
• In international business, managers who are culturally aware avoid blunders in negotiation, advertising, product design and dealing with staff. They avoid ethnocentrism, adapt their style, and build trust with local partners and customers.
• Low awareness leads to misunderstandings, such as using a colour, symbol or gesture that is offensive in the host culture.

(b) Norms

• Norms are the unwritten rules that tell members of a society what behaviour is acceptable. They are of two main kinds.
  • Folkways: everyday conventions of dress, greeting, manners and etiquette. Breaking them causes mild disapproval.
  • Mores: norms of moral importance (for example, taboos on certain foods, alcohol or dishonesty). Breaking them brings strong social disapproval or legal punishment.
• Norms decide what products people buy, how business meetings run, how time and gifts are treated, and how men and women interact at work.
• A firm must follow the host country's norms in its product, promotion and management practices, or it risks rejection by customers and employees.

An economic system is the way a society organises the production, distribution and consumption of goods and services, and decides who owns resources. It answers three questions: what to produce, how to produce, and for whom to produce.

Types of economic systems

1. Market (capitalist) economy
   • Private ownership of resources, and decisions made by price and demand and supply.
   • Strong competition and consumer choice, efficiency and innovation.
   • Weakness: inequality and neglect of public goods. Examples: the USA and Hong Kong (close to this model).
2. Command (planned or socialist) economy
   • The state owns the main resources and decides output and prices through central planning.
   • Aims for equality and full employment.
   • Weakness: inefficiency, shortages and little incentive to innovate. Examples: the former USSR and North Korea.
3. Mixed economy
   • Private and public sectors exist together, and government regulates the market and provides public services.
   • Combines efficiency with welfare. Examples: Nepal, India, the UK and most countries today.
4. Traditional economy: based on customs and subsistence, with simple technology (some rural societies).

Relevance to international business: the economic system decides openness to trade, extent of private ownership, protection of property rights and the ease of doing business.

The exchange rate is the price of one currency in terms of another. Many factors move it, among them the following two.

1. Inflation rate (relative price levels)

• A country with higher inflation than its trading partners sees its goods become costlier, so exports fall and imports rise. Demand for its currency falls and the currency depreciates.
• Low inflation raises the value of a currency.
• This is the logic of purchasing power parity: the currency of the higher-inflation country tends to fall by roughly the inflation difference.

2. Interest rates

• Higher interest rates attract foreign capital seeking better returns. Demand for the domestic currency rises and it appreciates.
• Lower rates cause capital outflow and depreciation.
• Real interest rates (nominal rate minus inflation) matter most.

Other factors: balance of payments position, government intervention by the central bank, political stability, economic growth, and speculation.

Franchising

• Franchising is a contractual arrangement in which the franchisor gives the franchisee the right to use its brand name, trademark, business system, products and know-how in return for an initial fee and continuing royalties.
• The franchisor gives training, marketing support and operating standards. The franchisee invests its own capital and runs the outlet.
• Examples: McDonald's, KFC, Pizza Hut, Subway.
• Advantages: rapid expansion with low capital, and limited risk. Drawbacks: weaker control over quality, and the risk of building a future competitor.

Turnkey operations

• A turnkey project is one in which a firm designs, builds and equips a complete facility abroad, tests it, trains local staff, and hands it over to the client ready to operate ("turn the key").
• It is common in construction of power plants, refineries, cement plants, airports and telecommunication systems.
• The contractor earns a fixed fee for its technology and expertise, and the host owns and runs the plant.
• Advantages: a way to exploit process technology where direct investment is restricted, and low political risk. Drawbacks: no long-term presence, it may create a competitor, and it may give away technological secrets.

Global marketing strategy is the plan by which a firm markets its products across countries. The firm decides how far to standardise or adapt the marketing mix.

1. Standardisation (global) strategy

• One product, price, promotion and distribution approach in all markets.
• Gains: economies of scale, consistent brand image and lower cost. Examples: Coca-Cola and Apple.
• Risk: ignores local differences.

2. Adaptation (localisation) strategy

• The marketing mix is modified for each country's tastes, laws and income levels. McDonald's, for instance, offers a vegetarian menu in India.
• Gains: better customer fit. Drawbacks: higher cost.

3. Combined (glocal) strategy: a standard core product with local adaptations.

Elements of the global marketing mix

• Product: standardise, adapt, or design a new product for the market.
• Price: consider costs, duties, exchange rates and local purchasing power. Policies include skimming and penetration pricing.
• Place (distribution): choose channels and intermediaries, and handle logistics.
• Promotion: global or localised advertising, with attention to language and culture.

Other approaches: market segmentation and targeting on a global basis, and market-entry choices such as exporting, licensing and joint ventures.

Global finance strategy is how a multinational firm raises, moves and uses funds worldwide at the lowest cost and risk. The sources of funds are as follows.

1. Internal sources

• Retained earnings of the parent and the subsidiaries.
• Depreciation reserves, and internal transfers between units (intra-company loans, transfer pricing, royalties and dividends).

2. External sources, home country

• Bank loans and overdrafts from home banks.
• Equity from the home stock market and bond issues.

3. External sources, host country

• Local bank loans, which reduce exchange rate exposure.
• Local equity and bond markets.
• Trade credit and government incentives or grants.

4. International (global) sources

• Eurocurrency market: loans and deposits in currencies held outside the country of issue.
• International bond market: foreign bonds and Eurobonds.
• Global equity markets: listing shares on foreign exchanges, and Depositary Receipts (ADR/GDR).
• Development institutions: the World Bank, IFC, ADB and export-import banks.
• Export credit agencies and syndicated loans.
• Foreign direct investment and joint ventures as a source of equity capital.

International business consists of all commercial transactions, private and governmental, between parties of two or more countries. It covers exporting and importing goods, services trade, foreign direct investment, licensing, franchising, joint ventures, and operations of multinational companies. The purpose is profit, and the flows are those of goods, services, capital, technology and people across national borders.

Modes of international business

• Merchandise exports and imports
• Service exports (tourism, banking, IT)
• Licensing and franchising
• Contract manufacturing and turnkey projects
• Joint ventures and wholly owned subsidiaries (foreign direct investment)

Opportunities of international business

1. Bigger markets and higher sales. A firm that has saturated its home market can grow by selling abroad.
2. Economies of scale. Larger output spreads fixed costs and cuts unit cost.
3. Access to cheaper resources. Raw materials, labour, land and capital may be cheaper elsewhere.
4. Access to technology and know-how. Firms learn from foreign partners and competitors.
5. Diversification of risk. Losses or recession in one country can be offset by gains in another.
6. Extending the product life cycle. A product declining at home can still sell in less developed markets.
7. Using excess capacity and exploiting competitive advantage. Idle capacity can serve foreign demand, and a firm's brand or technology can earn more abroad.
8. Government incentives. Export promotion, tax holidays and special economic zones.
9. Benefits to nations. Foreign exchange earnings, employment, higher living standards and a wider choice of goods for consumers.
10. Competition and image. Following competitors abroad, and building a global brand and prestige.

Conclusion: International business offers growth, efficiency and risk spreading, but it requires attention to cultural, political, legal and exchange rate risks.

Globalization is the process by which national economies, markets, cultures and societies become increasingly integrated through the flow of goods, services, capital, technology, information and people across borders. It is driven by trade liberalisation, advances in transport and communication, the internet, multinational companies and international organisations such as the WTO, IMF and World Bank.

Types of globalization

1. Economic globalization. Integration of national economies through trade, foreign investment, financial flows and the global production networks of multinationals. Examples are free trade agreements and global supply chains.
2. Financial globalization. Free movement of capital across world money and capital markets, such as international banking, cross-border share trading and currency markets. Often treated as part of economic globalization.
3. Political globalization. Growing cooperation between states, and rise of global institutions and treaties (the UN, WTO, regional blocs such as the EU, SAARC and BIMSTEC) that shape policy beyond national borders.
4. Cultural globalization. Spread and mixing of ideas, language, food, fashion, music, films and values worldwide, through media, tourism and migration. It can enrich cultures but may also weaken local identity.
5. Technological globalization. Rapid worldwide diffusion of technology, the internet, mobile communication and e-commerce, which shrinks time and distance.
6. Ecological (environmental) globalization. Recognition that environmental problems such as climate change and pollution are global and need joint action, as in the Paris Agreement.
7. Social and informational globalization. Cross-border movement of people, migration, and sharing of news and information.

Conclusion: Globalization is multi-dimensional. It brings growth and connectivity, but also inequality, cultural erosion and environmental stress.

Foreign exchange market

The foreign exchange (forex) market is the global market in which currencies are bought and sold. It determines the exchange rate, the price of one currency in terms of another. It is the largest financial market in the world, open round the clock through banks, central banks, brokers, corporations and traders, and works mostly over the counter by telephone and electronic networks.

Functions

• Transfers purchasing power between countries and currencies.
• Provides credit for international trade.
• Allows hedging against exchange rate risk (forwards, futures, options, swaps).
• Supports speculation and arbitrage.

Participants: commercial banks, central banks, corporations and exporters/importers, investment funds, brokers and individuals.

Factors affecting the exchange rate

1. Inflation. Higher inflation than trade partners weakens a currency, because its goods become less competitive.
2. Interest rates. Higher rates attract foreign capital and strengthen the currency.
3. Balance of payments / current account. A deficit means more demand for foreign currency and so depreciation, while a surplus tends to appreciate.
4. Economic growth and performance. Strong growth attracts investment and raises demand for the currency.
5. Government and central bank intervention. Buying or selling currency, and policy such as capital controls.
6. Political stability. Stable countries attract capital, while instability causes capital flight.
7. Speculation and expectations. Anticipated changes in value lead traders to buy or sell, often moving rates in the short term.
8. Public debt. High government debt and the risk of default weaken the currency.
9. Terms of trade. If export prices rise relative to import prices, the currency tends to strengthen.
10. Supply and demand for the currency from trade, investment and remittances. Remittances, for example, strengthen the Nepalese rupee.

Demographics are the statistical characteristics of a population: size, growth, age structure, gender, income, education, household structure and migration. They are changing quickly across the world and reshape global business.

Major demographic changes

1. Population growth and shifting centres. World population has passed 8 billion, and growth is concentrated in Asia and Africa while it stagnates in Europe and Japan. Markets such as India and Southeast Asia gain importance.
2. Ageing population. Developed countries and China have a rising share of older people. This raises demand for healthcare, pensions, leisure and assistive products, and creates labour shortages.
3. Young population in developing countries. Large youth populations are a source of labour and a growing consumer base (the demographic dividend). They also demand jobs and education.
4. Urbanisation. Rapid movement to cities concentrates demand and makes distribution easier, but it strains infrastructure.
5. Migration. Cross-border movement of workers, with remittances, makes workforces multicultural and creates diaspora markets.
6. Rising incomes and middle class. A growing middle class in emerging economies increases demand for consumer goods, cars, education and travel.
7. Changing family and gender roles. Smaller households, more working women and dual-income families change what and how people buy.
8. Higher education levels and a diverse workforce. Companies manage multicultural teams.

Business implications: firms must pick markets by demographic trend, redesign products, adapt marketing, relocate production to youthful labour markets, and manage diversity.

Multinational companies (MNCs) can be classified in several ways. The common classification, based on how they manage their global operations, is as follows.

1. Multi-domestic (decentralised) MNC

• Each foreign subsidiary acts as a nearly independent unit and adapts its products and policies to the local market.
• Strong local responsiveness, but weak coordination and little scale economy. Example: Nestle in many food markets.

2. Global (centralised) MNC

• Operations are centralised at the headquarters, which sets strategy and standard products for the whole world.
• Strong efficiency and control, but weak local adaptation. Example: Intel and many electronics firms.

3. International MNC

• Develops products and skills at home and transfers them to foreign markets, with limited adaptation. Subsidiaries depend on the parent for technology.

4. Transnational MNC

• Integrates global efficiency, local responsiveness and worldwide learning. Resources and decision-making are spread across a network of units. Example: Unilever and Procter & Gamble.

Classification by the orientation of management (EPRG)

• Ethnocentric: home-country oriented and controlled.
• Polycentric: host-country oriented, with locally managed subsidiaries.
• Regiocentric: regional orientation.
• Geocentric: global orientation, with the best people anywhere.

Classification by operations

• Horizontal: the same product in many countries.
• Vertical: different stages of production in different countries.
• Conglomerate: unrelated businesses in various countries.

Customs union and political union are two higher levels of regional economic integration. The ascending levels are: preferential trade area, free trade area, customs union, common market, economic union and political union.

Customs union

• A group of countries that remove all trade barriers (tariffs and quotas) among themselves and also adopt a common external tariff against non-members.
• It involves a common trade policy, so members cannot make separate trade deals with outsiders.
• Customs duties are collected jointly and shared.
• Examples: the EU (as a customs union), MERCOSUR, the East African Community, and the Southern African Customs Union.
• Benefits: trade creation, larger market and economies of scale. Costs: trade diversion and loss of national tariff autonomy.

Political union

• The highest level of integration, where countries share a common government and political institutions in addition to full economic union.
• Member states transfer a good part of their sovereignty on foreign policy, defence, law and finance to a central authority.
• It builds on a common market with common currency, taxation and monetary policy.
• Examples: federal states such as the USA and India, and the EU moving partly in that direction (a common parliament, citizenship and, among most members, a single currency).
• Benefits: uniform policy and strong bargaining power. Costs: loss of national sovereignty and identity.

Culture is the shared set of values, beliefs, language, customs, religion and behaviour of a society. Cultural differences are the variations in these elements between countries and groups, and they strongly influence how business is done abroad.

Areas of cultural difference

1. Language. Verbal and non-verbal communication, and translation errors in names and slogans.
2. Religion. Holidays, dietary rules and attitudes to work, money and interest (for instance, Islamic banking and the status of the cow in Hinduism).
3. Values and attitudes. Attitudes to time, risk, status, change and authority.
4. Customs and manners. Greetings, gift giving, dress and negotiation style.
5. Social structure and education. Family, class, gender roles and literacy.

Hofstede's dimensions are a common framework for comparing cultures: power distance, individualism versus collectivism, masculinity versus femininity, uncertainty avoidance, and long-term versus short-term orientation. Hall's distinction between high-context and low-context cultures is another.

Impact on international business

• Marketing: product design, branding, colours, advertising and packaging must suit local culture.
• Negotiation: the pace, directness, the role of relationships and decision making differ.
• Management and HR: motivation, leadership, teamwork and communication styles differ.
• Mistakes cause lost sales, offence and failed ventures.

Handling differences: research the culture, train staff, hire local managers, adapt products and practices, and show respect and flexibility.

Intellectual property rights (IPR) are legal rights that protect the creations of the human mind, such as inventions, designs, brand names and artistic works. They give the owner exclusive rights over use for a period, so that others cannot copy or exploit them without permission. They matter in international business, because technology, brands and software are major assets that can be copied across borders.

Main types

1. Patent. An exclusive right for an invention (product or process), usually for 20 years.
2. Copyright. Protects original literary, artistic, musical works, software and films, generally for the author's life plus 50-70 years.
3. Trademark. Protects names, logos, symbols and slogans that identify a firm's goods or services, renewable indefinitely.
4. Industrial design. Protects the visual appearance of a product.
5. Trade secret. Protects confidential business information such as the Coca-Cola formula.
6. Geographical indication. Protects products tied to a place, such as Darjeeling tea.

International protection

• WTO TRIPS Agreement sets minimum standards for IPR among members.
• WIPO (World Intellectual Property Organization) administers treaties, such as the Paris Convention, the Berne Convention and the Patent Cooperation Treaty.

Issues: piracy, counterfeiting and weak enforcement in some countries. Firms respond by registering IP in each market, using licensing contracts carefully, and enforcing rights legally.

The level of economic development of a country describes its stage of progress in output, income, living standards and economic structure. It influences market size, buying power, infrastructure and the business approach, so international firms analyse it before choosing a market.

Indicators: GDP and GNI per capita, Human Development Index (HDI), literacy, life expectancy, industrial share of output, infrastructure and poverty rates.

Classification (World Bank, by GNI per capita)

• Low-income
• Lower-middle-income
• Upper-middle-income
• High-income

Common classification by development

1. Developed (industrialised) countries. High income and living standards, advanced technology, large service sector and strong infrastructure. Examples are the USA, Japan and Germany. They offer large markets with mature, competitive demand.
2. Developing countries. Middle income, industrialising and growing fast, with rising middle class and improving infrastructure. Examples are India, Brazil, Vietnam and Thailand.
3. Newly industrialised countries (NICs) and emerging markets, such as China, South Korea and Mexico, which have moved quickly from agriculture to manufacturing and exports.
4. Least developed countries (LDCs). Low income, an agriculture-dependent economy, weak infrastructure and low human development. Nepal is an example (Nepal is scheduled to graduate from LDC status in 2026).

Rostow's stages of growth: traditional society, preconditions for take-off, take-off, drive to maturity and age of high mass consumption.

Business implications: developed markets suit high-value, high-tech products, while developing and LDC markets suit basic, low-cost goods, with attention to infrastructure, purchasing power and risk.

An exchange rate system (regime) is the way a country manages its currency's value in relation to other currencies. The main types are as follows.

1. Fixed (pegged) exchange rate system

• The government or central bank fixes the currency's value against another currency (for example, gold or the US dollar) or a basket, and defends it by buying or selling reserves.
• Gives stability and certainty for trade, but needs large reserves and limits independent monetary policy.
• Example: the Nepalese rupee is pegged to the Indian rupee at NPR 1.60 per INR 1.

2. Floating (flexible) exchange rate system

• The value is set by demand and supply in the foreign exchange market without official intervention.
• Allows automatic adjustment of the balance of payments and independent monetary policy, but brings volatility and uncertainty.
• Examples: the US dollar, euro and yen.

3. Managed (dirty) float

• Basically market-determined, but the central bank intervenes to smooth fluctuations or steer the rate. Examples: India and many developing countries.

4. Crawling peg

• The rate is fixed but adjusted in small, regular steps according to inflation or other indicators, such as in some Latin American countries.

5. Currency board / dollarisation (hard peg)

• The currency is rigidly tied to a foreign one, backed by reserves, or a foreign currency is adopted outright (Ecuador uses the US dollar).

6. Gold standard and Bretton Woods (historical)

• Currencies were fixed to gold, or to the dollar which was convertible to gold, until 1971.

In international trade, the exporter and importer are in different countries, often do not know each other, and use different laws. The mode of payment therefore balances the exporter's wish for security against the importer's wish for assurance of delivery. The common modes, from most to least secure for the exporter, are as follows.

1. Cash in advance (prepayment)

• The importer pays before the goods are shipped, by bank transfer, draft or card.
• Safest for the exporter, but risky for the importer. It is used for small orders, new buyers or high-risk markets.

2. Letter of credit (L/C)

• The importer's bank issues a written undertaking to pay the exporter a stated amount, if the exporter presents the specified documents (invoice, bill of lading, insurance and so on) in compliance with the terms.
• It substitutes the bank's credit for the buyer's. Types include revocable and irrevocable, confirmed and unconfirmed, sight and usance (time), and transferable credits.
• Safe for both parties and the most widely used, but costly and document-heavy.

3. Documentary collection (draft)

• The exporter ships the goods and sends the documents through its bank to the importer's bank, which releases them against payment (documents against payment, D/P) or acceptance of a time draft (documents against acceptance, D/A).
• Cheaper than an L/C, but with no bank guarantee of payment.

4. Open account

• Goods are shipped and delivered first, and the importer pays later (for example, in 30-90 days).
• Most favourable to the importer, but riskiest for the exporter. It is used with trusted, long-standing buyers.

5. Consignment

• The exporter ships goods to the importer or agent, who pays only when they are sold. The exporter keeps ownership until then, and so bears the highest risk.

6. Other methods: bank transfer (SWIFT), bank drafts, and counter-trade (barter, buy-back).

Functional management in international business concerns how a firm manages marketing, finance, production and HR across countries. The approaches follow the EPRG framework; two of them are described here.

Ethnocentric approach

• The home country is the reference point. Strategy and decisions are centralised at headquarters, and home-country practices, products and standards are applied abroad with little change.
• Key posts in foreign subsidiaries are held by parent-company nationals (expatriates).
• Advantages: strong control, consistent quality and image, easy transfer of know-how, and less need for local managerial talent.
• Disadvantages: lack of local adaptation, resentment of local staff because of limited careers, high expatriate costs, and cultural insensitivity.
• Suited to firms entering the early stage of internationalisation, or where technology is the main edge.

Regiocentric approach

• The firm sees the world as a set of regions (for example, Europe, South Asia, North America) and organises its functions on a regional basis.
• A regional headquarters coordinates production, marketing, finance and HR for the region, and people are moved within it. Policies are uniform within a region but differ between regions.
• Advantages: regional economies of scale, a balance between global control and local response, and better regional coordination.
• Disadvantages: weak global integration, a regional rather than global outlook among managers, and limited promotion beyond the region.
• Suited to regions with common culture, trade blocs or similar markets.

International business refers to all commercial transactions (trade, investment, services, technology transfer) conducted between parties in two or more countries, by private firms or governments, for profit or other objectives.

Challenges of international business

• Political and legal risks: Instability, expropriation, regulations, differing legal systems and trade barriers.
• Economic risks: Inflation, recession, different levels of development and tax regimes.
• Exchange-rate risk: Currency fluctuations affect profit and prices.
• Cultural differences: Language, religion, values and business customs cause misunderstandings.
• Competition: Both local and global rivals, often with better local knowledge.
• Trade barriers: Tariffs, quotas, embargoes and non-tariff barriers.
• Logistics and infrastructure: Transport, distribution and communication problems, higher costs.
• Managing global operations: Coordination, control and staffing across distance and time zones.
• Financing and payment risk: Delays, non-payment, differing banking practices.
• Intellectual property and ethical issues: Piracy, corruption, and environmental concerns.

Firms handle these by market research, risk analysis, partnerships, hedging and cultural training.

Globalization is the growing integration and interdependence of world economies, societies and cultures through the cross-border flow of goods, services, capital, technology, information and people.

Drivers of globalization

• Technological advances: Internet, mobile communication and faster transport shrink distance.
• Trade liberalisation: Reduced tariffs and barriers through GATT/WTO and regional agreements.
• Capital market and financial integration: Free movement of capital and FDI.
• Multinational companies: Expansion of production and marketing worldwide.
• Falling transport and communication costs.
• Market and political reforms: Privatisation and opening of China, India, Eastern Europe.
• Growing consumer similarity: Convergence of tastes and rising demand for global brands.
• Competitive pressure: Need to cut costs, find resources and new markets.
• International institutions: WTO, IMF and World Bank.

A multinational company (MNC) is a business that owns, controls and manages production or service facilities in two or more countries, with headquarters in the home country and coordinated global strategy. Examples: Unilever, Coca-Cola, Toyota.

Problems of multinational companies

• Political risk: Nationalisation, expropriation, instability and policy changes in host countries.
• Cultural and language barriers: Misunderstandings with employees, customers and government.
• Exchange-rate fluctuations: Affect profits and repatriation.
• Legal and regulatory differences: Varying taxation, labour and environmental laws, ownership limits.
• Coordination and control: Difficulty managing distant subsidiaries and balancing global and local needs.
• Host-country criticism: Accused of exploiting labour and resources, harming local firms, tax avoidance, and interfering in politics.
• Staffing problems: Cost of expatriates and conflicts with local employees.
• Ethical and social issues: Corruption, pollution and unfair practices.
• Competition and trade barriers.

Modes of entry are the ways a firm enters a foreign market.

• Exporting: Selling home-made goods abroad, directly or through agents or distributors. Low risk and investment but limited control and exposed to tariffs.
• Licensing: Granting a foreign firm the right to use patents, brand or technology for a royalty. Low cost, but risk of creating a competitor.
• Franchising: Licensing a complete business system and brand, e.g. McDonald's.
• Contract manufacturing: A local firm produces goods on the company's behalf.
• Turnkey projects: Building and handing over a ready-to-run facility.
• Joint venture: Shared ownership with a local partner; shares risk, capital and local knowledge but may cause conflicts.
• Strategic alliances: Cooperation between firms without forming a new entity.
• Wholly owned subsidiary: Greenfield investment or acquisition; full control, but highest cost and risk.
• Management contracts and countertrade are other options.

The choice depends on risk, cost, control desired, resources and the host country's rules.

Demographic factors

• Population size and growth: Larger populations mean bigger markets and labour pools.
• Age structure: Young populations demand education, jobs and consumer goods; ageing ones demand healthcare.
• Gender and household structure: Women's workforce participation and family size alter consumption.
• Income distribution and education levels: Determine purchasing power and skills.
• Urbanisation and migration: Concentrate demand and shift labour.

Cultural factors

• Language: Affects communication, advertising and negotiation.
• Religion: Affects consumption, holidays and business practice.
• Values and attitudes: Attitudes to time, work, authority, risk and change.
• Customs, manners and social organisation: Etiquette, gift giving, family and class structure.
• Education and material culture.

Firms must adapt products, marketing and management practices to these factors to succeed abroad.

The global economy is the interconnected system of national economies linked through trade in goods and services, flows of capital and investment, movement of labour and sharing of technology and information. Countries' production, consumption and financial markets are interdependent, so events in one area affect others. It is shaped by multinational firms and institutions such as the WTO, IMF and World Bank.

Socio-cultural environment includes a society's language, religion, values, customs, education, social structure and attitudes. Its implications for international business are:

• Consumer behaviour: Culture decides preferences and what products are accepted, e.g. beef in India or pork in Muslim countries.
• Marketing: Advertising messages, colours, symbols, brand names and packaging must suit local culture, otherwise they offend or fail.
• Communication and negotiation: Language barriers and differing styles (direct vs indirect, importance of relationships).
• Management and HR practices: Motivation, leadership, decision making and attitudes to authority vary.
• Work practices: Religious holidays, working hours, gender roles and attitude to time.
• Social structure and class: Affect hiring, supply chain and distribution.
• Business ethics: Gift-giving and corruption are viewed differently.

Firms succeed by researching culture, adapting products and training managers in cross-cultural skills.

Two determinants of culture:

(a) Language: It is the main medium of communication and transmits values and traditions. Differences in language and its use (e.g. high-context vs low-context) shape how people think, negotiate and respond to marketing.

(b) Religion: Religious beliefs set moral values, attitudes to work, wealth and consumption, dietary habits, holidays and dress, and so influence demand and business practices.

Others include education, social structure, values and attitudes, and customs.

A legal system is the set of rules and the process by which laws are made, interpreted and enforced in a country. Main types are common law (based on precedent, e.g. USA, UK, India), civil law (codified statutes, e.g. France, Germany), theocratic law (religious, e.g. Islamic law) and mixed systems.

Implications for business

• Contracts: Enforceability and interpretation of contracts differ; firms must specify governing law and dispute resolution.
• Property rights and IPR: Protection of ownership, patents and trademarks varies.
• Taxation, labour and company law: Affect cost, hiring and form of organisation.
• Product safety and liability laws: Determine standards and compensation.
• Trade and investment regulation: Import/export licences, FDI limits, repatriation rules and antitrust laws.
• Foreign laws with global reach: Anti-corruption laws such as the US FCPA.
• Dispute settlement: Courts, arbitration (e.g. ICC, UNCITRAL).

Firms need local legal advice to comply and reduce risk.

Level of economic development indicates how advanced and productive a country's economy is, and it determines the market size, purchasing power and infrastructure that an international firm will meet.

Classification (World Bank, by GNI per capita): low income, lower-middle income, upper-middle income and high income. Alternatively: developed countries (USA, Japan), developing countries (India, Brazil), newly industrialised countries (South Korea, Taiwan earlier) and least developed countries (LDCs) such as Nepal and Bangladesh.

Indicators: GDP and GNI per capita, Human Development Index, literacy rate, life expectancy, share of agriculture/industry/services, infrastructure and poverty rate.

Business implications: Developed markets offer high demand, skilled labour and technology but intense competition. Developing markets offer growth, cheap labour and resources but have weaker infrastructure and higher risk.

Spot market: The foreign exchange market where currencies are bought and sold for immediate delivery, normally settled within two business days. The price is the spot exchange rate, determined by current supply and demand. It is used for immediate payments, such as paying an import bill, and it is the base for forward and other rates. Quotes are given as bid (buy) and ask (sell) rates.

Cross exchange rate: The rate between two currencies calculated from their rates against a third currency, usually the US dollar, when no direct quote exists.

Example: if USD/NPR = 133 and USD/INR = 83, then

$\text{INR/NPR} = \frac{133}{83} \approx 1.60$

so 1 INR = NPR 1.60. Cross rates keep exchange rates consistent and prevent arbitrage between currencies.

Modes of payment in international trade, from most to least secure for the exporter:

• Cash in advance: Payment before shipment; no risk for exporter but risky for the importer.
• Letter of credit (L/C): The importer's bank undertakes to pay against compliant documents; secure for both parties, and the most common method.
• Documentary collection: Banks pass documents to the buyer either against payment (D/P) or against acceptance (D/A) of a draft.
• Open account: Goods are shipped and payment is made later; used with trusted buyers, with risk on the exporter.
• Consignment: Payment is made only after the foreign agent sells the goods.
• Countertrade: Goods exchanged for goods or services (barter, counterpurchase, buyback).

International strategic management is the process of analysing the global environment, setting objectives, formulating, implementing and evaluating strategies so that a firm can compete and achieve its goals across several countries.

Process

• Environmental analysis: Studying political, economic, legal, technological, cultural and competitive conditions at home and abroad.
• Mission and objectives: Defining the global scope, targets for growth, market share and profit.
• Strategy formulation: Using SWOT analysis to decide where to compete and how, and choosing the mode of entry.
• Strategy implementation: Organisation structure, resource allocation, staffing, and functional policies in marketing, finance, production and HR.
• Evaluation and control: Measuring performance against targets and correcting deviations.

Strategic options (Bartlett and Ghoshal): international, multi-domestic, global and transnational strategy, depending on pressure for cost reduction against local responsiveness.

The geocentric approach is the world-oriented approach in the EPRG framework. The firm treats the whole world as one market and does not favour the home or any host country. Headquarters and subsidiaries form an integrated global network.

Features

• Best people from any nationality fill key positions.
• Decisions are made on a global basis through collaboration between headquarters and subsidiaries.
• Global standards are set with local flexibility; resources and knowledge flow in all directions.
• Common organisational culture and global integration of marketing, production, finance and HR.

Advantages: efficient use of talent and resources, balance between global integration and local responsiveness, worldwide learning.

Disadvantages: high cost of training and relocation, complex communication and coordination, and time-consuming decision making. Examples: Nestle, Unilever and other large global firms.

Globalization is the process of increasing integration and interdependence of national economies, markets, cultures and societies through cross-border flows of goods, services, capital, technology, information and people.

Impact of globalization on international business Positive

• Larger markets: Firms can sell worldwide and reach economies of scale.
• Lower costs: Access to cheap labour, materials and efficient global supply chains.
• More competition and innovation: Pushes firms to improve quality.
• Easier capital flows and FDI.
• Technology and knowledge transfer across countries.
• Wider consumer choice and global brands.

Negative

• Intense competition, threatening small and local firms.
• Greater risk: Economic crises and exchange-rate volatility spread across borders.
• Cultural homogenisation and loss of local identity.
• Inequality, job losses in some sectors and environmental damage.
• Complex management of global operations and ethics.

Overall, globalization offers firms large opportunities, but they must manage its risks through strategy and adaptation.

Foreign market: A market outside a firm's home country where it sells its goods and services, or invests. Its characteristics (size, income, culture, competition, regulation) differ from the domestic market, so firms study it before entering through exporting, licensing, joint ventures or subsidiaries.

Modes of payment in international trade

• Cash in advance: Buyer pays before shipment; safest for the exporter.
• Letter of credit (L/C): The importer's bank guarantees payment against compliant shipping documents; secure for both sides and most common.
• Documentary collection: Banks handle documents against payment (D/P) or acceptance (D/A) of a draft.
• Open account: Delivery first, payment later on agreed credit terms; riskiest for the exporter.
• Consignment: Exporter is paid only after the agent sells the goods.
• Countertrade: Barter, counterpurchase or buyback where goods replace money, used when currency is scarce.

Socio-cultural implications on international business

• Consumer behaviour: Culture shapes tastes, habits and acceptance of products.
• Marketing: Language, symbols, colours, packaging and advertising must be adapted to avoid offence.
• Communication and negotiation: Language barriers and differing styles of negotiation, time and relationships.
• Management and HR: Attitudes to authority, teamwork, motivation and gender roles affect organisation and staffing.
• Work practices: Religious holidays, working hours and dress codes.
• Ethics: Gift giving, bribery and business customs differ.
• Poor understanding leads to failure; cultural awareness gives advantage.

Determinants of culture

• Language (spoken and unspoken communication).
• Religion and beliefs.
• Values and attitudes.
• Customs, manners and etiquette.
• Education.
• Social structure (family, class, groups).
• Material culture (technology, economy) and aesthetics.

Economic system: The way a country organises the production, distribution and consumption of goods and services, and owns and allocates resources. Types are market economy (private ownership, price mechanism), command economy (state ownership and planning), mixed economy (both) and traditional economy.

Determinants of economic development

• Natural resources: Land, minerals, water, energy.
• Human resources: Size, education, skills and health of the labour force.
• Capital formation: Savings and investment in machinery and infrastructure.
• Technology and innovation: Raises productivity.
• Entrepreneurship and management.
• Political stability and good governance: Rule of law, low corruption.
• Infrastructure: Transport, power and communication.
• Economic policy and institutions: Sound financial systems, property rights and trade policy.
• Social and cultural factors: Attitudes to work and saving.
• International trade and foreign investment.

International business is all commercial activity that crosses national borders, covering the exchange of goods, services, capital, technology and knowledge between firms or governments of two or more countries.

Forms: exports and imports, licensing, franchising, contract manufacturing, joint ventures, foreign direct investment, and international services such as tourism, banking and transport.

Features: operation in different political, legal, cultural and currency environments; higher risk and complexity; larger markets; and use of foreign exchange.

Importance: It expands markets and profits, lowers costs through economies of scale and cheaper resources, spreads risk, transfers technology, earns foreign exchange, creates jobs and raises living standards.

Challenges: political risk, cultural differences, exchange-rate fluctuation, trade barriers and strong global competition.

The demographic environment covers the size, growth, structure and distribution of a country's population. It matters because people create demand and supply the workforce.

Main elements

• Population size and growth: A large, growing population (India, China, Nepal's youth bulge) means a large market and a large labour pool. A shrinking population (Japan, parts of Europe) means a shrinking domestic market.
• Age structure: A young population demands education, clothing, consumer goods and mobile services. An ageing population demands healthcare, pensions and retirement services.
• Gender and household structure: Family size, the number of working women and single-person households change buying patterns.
• Urbanisation and distribution: Urban populations have higher incomes, better access to media and different tastes from rural ones. Markets are easier to serve in dense areas.
• Income, education and occupation: These determine purchasing power and the skill level of the labour force.
• Ethnic, language and religious composition: These affect product design, advertising and consumer behaviour.
• Migration: Emigration and remittances (important for Nepal) affect labour supply and consumption. Immigration adds labour and new demand.

Importance to international business: Demographic data helps a firm select markets, segment customers, forecast demand, decide where to locate production and plan human resources.

The World Trade Organization (WTO) is an international organization that deals with the rules of trade between nations. It was established on 1 January 1995 as the successor to GATT (1947), after the Uruguay Round. Its headquarters is in Geneva, Switzerland. Nepal became its 147th member in 2004. It has more than 160 members.

Objectives

• Promote free, fair and predictable trade by reducing tariffs and other trade barriers.
• Provide a forum for trade negotiations.
• Settle trade disputes between members.
• Help developing and least developed countries integrate into world trade.
• Raise living standards, ensure full employment and use world resources sustainably.

Principles

• Non-discrimination: most-favoured-nation (MFN) treatment and national treatment.
• Freer trade through negotiated reduction of barriers.
• Predictability through bound tariffs and transparency.
• Promotion of fair competition.
• Special treatment for developing countries.

Functions

• Administering WTO trade agreements (GATT, GATS, TRIPS, etc.).
• Hosting trade negotiations.
• Settling disputes through the Dispute Settlement Body.
• Reviewing national trade policies.
• Technical assistance and training for developing countries.
• Cooperating with the IMF and World Bank.

Structure: The Ministerial Conference is the top body and meets at least every two years. Below it are the General Council, the Dispute Settlement Body and the Trade Policy Review Body, then the councils and committees, and the Secretariat headed by the Director-General.

A multinational company (MNC) is a firm that owns and controls production or service facilities in two or more countries, with its headquarters in a home country.

Positive aspects (benefits) of MNCs, mainly to host countries

1. Capital inflow: MNCs bring foreign direct investment, which fills the savings and foreign-exchange gap of developing countries.
2. Technology transfer: They bring modern machinery, processes and management know-how.
3. Employment creation: They create direct jobs and indirect jobs among suppliers and distributors.
4. Skill development: Local staff receive training, which raises the quality of the workforce.
5. Export promotion and balance of payments: MNC output is exported through their global networks, earning foreign exchange. Imports are also substituted.
6. Better products and competition: Consumers get quality goods at competitive prices, and local firms are pushed to improve.
7. Infrastructure and linkages: MNCs develop roads, power and communication facilities. They also create backward linkages with local suppliers.
8. Government revenue: They pay taxes and duties.
9. Optimum use of resources and economies of scale: Global operations reduce costs and use resources efficiently.
10. Research and development: They spread innovation across countries.

Benefits to the home country include profits, royalties, access to markets and raw materials, and jobs for managers.

MNCs also have drawbacks, such as profit repatriation, harm to local industry and political interference. Their positive aspects are greatest when the host government regulates them well.

The political environment consists of the government system, political stability, laws and policies of a country that affect business. It is a major risk and opportunity factor in international business.

Components

• Political system and ideology: Democracy, communism, monarchy and so on. They decide how much freedom firms have. Systems may be capitalist, socialist or mixed.
• Political stability: Frequent changes of government, strikes, riots, terrorism or war raise risk and discourage investment.
• Government policies: Trade policy, tariffs, quotas, licensing, taxation, foreign investment rules, and privatisation or nationalisation.
• Political risks: Expropriation, confiscation, nationalisation, currency inconvertibility, contract cancellation, and bans on profit repatriation.
• Government attitude to foreign business: Whether it offers incentives or imposes restrictions.
• International relations: Treaties, sanctions, embargoes and regional blocs (SAARC, EU) affect trade.
• Legal system: Common law, civil law and religious law, together with the strength of contract enforcement.

Managing political risk: Study the country before entering, use joint ventures with local partners, buy political risk insurance, lobby, adopt a good corporate-citizen image and diversify across countries.

A spot market (cash market) is a financial or commodity market in which goods, currencies or securities are traded for immediate delivery and payment at the current price, called the spot price. Settlement normally happens "on the spot", or within two business days for foreign exchange.

Features

• Transactions are settled immediately.
• The price is the current market price, set by demand and supply.
• It can be physical or over the counter.
• It applies to currencies, commodities (oil, gold, grain) and securities.

Spot exchange rate: This is the rate at which one currency is exchanged for another for immediate delivery. For example, if the spot rate is Rs 160 per USD, then USD 1,000 costs Rs 160,000 now.

Contrast with a forward or futures market, where the price is fixed now but delivery and payment take place at a future date.

Importance in international business: It lets firms convert currency and buy commodities quickly. It also serves as the benchmark for forward and futures pricing, though it exposes firms to price fluctuation.

A firm that decides to go abroad must choose how it will enter the foreign market. The choice depends on the firm's resources, the level of control wanted, risk, cost, and the host country's rules. The main modes are as follows.

1. Exporting

• Indirect exporting: goods are sold through export agents, trading houses or export management companies. Risk and investment are low, but control is low.
• Direct exporting: the firm sells to foreign distributors or customers by itself. It gets more control and profit, but must handle documents, logistics and marketing.

2. Licensing The licensor gives a foreign firm (licensee) the right to use its patent, trademark, technology or know-how for a fee or royalty. It needs little capital and avoids tariffs, but the firm loses control over quality and may create a future competitor.

3. Franchising A form of licensing in which the franchisor gives a complete business system (brand, operating method, training) to a local franchisee for fees and royalty, for example McDonald's or KFC.

4. Contract manufacturing and outsourcing Production, or a business function, is given to a local firm under contract while the company keeps marketing. It saves cost, but quality control and dependence on the supplier are concerns.

5. Turnkey projects The firm designs, builds and tests a complete plant and hands it over ready to run, for example power plants or cement factories.

6. Joint venture Two or more firms create a new jointly owned company in the host country. It shares cost, risk and local knowledge, and is often needed where governments restrict foreign ownership. Disadvantages are conflicts of control and sharing of technology.

7. Strategic alliance Firms cooperate on a specific activity (R&D, marketing, distribution) without forming a new company.

8. Wholly owned subsidiary The firm owns 100% of the foreign operation, either through a greenfield investment (building from scratch) or by acquiring an existing company. It gives full control and protects technology, but needs the largest investment and carries the highest political and commercial risk.

Summary: From exporting to wholly owned subsidiary, commitment, control and risk increase together, so a firm usually starts with low-risk modes and moves to higher-commitment modes as it gains experience.

Meaning

Franchising is a contractual arrangement in which the franchisor gives the franchisee the right to use its brand name, trademark, products, business system and support in return for an initial fee and continuing royalty (usually a percentage of sales). It is a form of licensing that covers the whole business format, and it is a popular way of entering foreign markets with little capital.

Types

• Product and trade-name franchising: the dealer sells the supplier's products under its name, for example car dealerships and Pepsi/Coca-Cola bottlers.
• Business-format franchising: the franchisee receives the full operating system, training, supplies and marketing, for example McDonald's, KFC, Pizza Hut, Subway and Domino's.
• Master franchising: a local firm gets the right to open and sub-franchise outlets in a whole country or region.

Examples

• McDonald's, KFC, Pizza Hut and Burger King operate worldwide through franchisees.
• Hotels such as Hilton and Marriott, and service brands such as 7-Eleven and Hertz, use franchising.
• In Nepal, international brands such as KFC, Pizza Hut and Domino's operate through local franchise holders.

Advantages

• Rapid expansion with low capital and low risk for the franchisor.
• Franchisee's local knowledge and motivation, since it owns the outlet.
• Steady royalty income.

Disadvantages

• Difficulty keeping uniform quality and brand image.
• Risk of creating a competitor after the contract ends.
• Possible conflict over fees, control and local adaptation, and loss of some profit to the franchisee.

Concept

Management approaches in international business (the EPRG framework) describe the attitude of headquarters towards foreign operations: ethnocentric, polycentric, regiocentric and geocentric. The geocentric approach is a world-oriented approach: the company treats the whole world as one market and chooses the best people, ideas, resources and methods from anywhere, regardless of nationality.

Features

• No preference for home or host country; the global interest of the firm comes first.
• Key managers are selected on ability, whatever their nationality, so a manager can be of any origin and work in any country.
• Decisions are made by collaboration between headquarters and subsidiaries, with two-way communication.
• Standardisation is used where it brings efficiency and adaptation where local needs demand it ("think global, act local").
• Resources, production and R&D are located wherever they are most efficient.
• Common global evaluation and control standards.

Advantages

• Better use of talent and resources worldwide, with cross-cultural learning and innovation.
• Economies of scale with a global brand and integrated strategy.
• Fewer conflicts between headquarters and subsidiaries and a strong global corporate culture.
• Flexibility to respond to local conditions.

Disadvantages

• High cost of training, relocating and paying a global management team.
• Complex coordination and communication across many countries.
• Time-consuming decision making and need for a well-developed information system.
• Local governments may demand local employment and ownership.

Example: Multinationals such as Unilever, IBM and Coca-Cola select managers across nationalities and move products and ideas between countries.

Meaning

Outsourcing is the practice of contracting a business function or process (such as manufacturing, IT, customer support or accounting) to an outside supplier, often in another country (offshore outsourcing), so that the firm can concentrate on its core activities.

Importance in international business

1. Cost reduction: labour and operating costs are lower in countries such as India, the Philippines and Nepal, giving lower prices and higher profit.
2. Focus on core competencies: the firm spends its management time and capital on activities that give it competitive advantage, such as design and branding.
3. Access to expertise and technology: specialised vendors give skilled people, modern technology and best practice without heavy investment.
4. Quality and productivity: experienced service providers can improve quality, speed and efficiency.
5. Flexibility and scalability: capacity can be raised or reduced as demand changes, and fixed costs become variable costs.
6. Round-the-clock operation: time-zone differences enable 24-hour service and faster delivery.
7. Entry to foreign markets: local partners provide knowledge of market, culture and law and ease market entry.
8. Risk sharing: investment, technology and operational risks are shared with the vendor.
9. Benefits to host countries: it creates employment, foreign exchange income and technology transfer, for example the BPO and IT outsourcing industry in Nepal and India.

Limitations: loss of control, dependence on vendors, data security and quality risks, and possible job loss in the home country.

Countries are classified by their level of economic development, usually using income per capita (for example the World Bank's classification), industrial structure and living standards.

1. Developed (high-income) countries

• High per capita income and standard of living, with a strong service and industrial base.
• Advanced technology, infrastructure, education and health, and stable institutions.
• Examples: USA, Japan, Germany, UK, Australia.
• They are large markets for sophisticated goods and the main source of foreign investment.

2. Developing countries These are divided into the following groups.

• Newly industrialised countries (NICs) / upper-middle income: fast industrial growth and exports, rising income. Examples: South Korea, Taiwan, Singapore, Malaysia, Brazil, China.
• Lower-middle income countries: growing industry and services, but still limited infrastructure, for example India, Bangladesh, Vietnam.
• Emerging markets such as China, India and Brazil attract investors because of large populations and rapid growth.

3. Less developed / low-income countries (LDCs)

• Low income, dependence on agriculture and primary exports, weak infrastructure, high poverty and illiteracy, and low savings and investment.
• Examples: Nepal (classified as an LDC, graduating towards developing status), Afghanistan, Ethiopia, Chad.

Stages of growth (Rostow): traditional society, preconditions for take-off, take-off, drive to maturity and age of high mass consumption describe the same progress from the lowest to the highest level.

Importance for business: the level of development affects market size, purchasing power, infrastructure, labour skills and risk, and so affects entry mode, product design and pricing.