INTERNATIONAL ENVIRONMENT
MULTINATIONAL CORPORATIONS
A multinational corporation is a company that operates in its home country, as well as in other countries around the world.
It maintains a central office located in one country, which coordinates the management of all other offices such as administrative branches or factories.
It isn’t enough to call a company that exports its products to more than one country a multinational company. They need to maintain an
operation in other countries and must make a foreign direct investment there.
Characteristics of a Multinational Corporation
Not all businesses can be called a multinational corporation. There are certain features that must be met for them to be named as such. The following are the characteristics of multinational corporations:
1) Very high assets and turnover
To become a multinational corporation, the business must be large and must own a huge amount of assets, both physical and financial. The
company’s targets are so high that they are also able to make substantial profits.
2) Network of branches
Multinational companies keep production and marketing operations in different countries. In each country, the business oversees more than one office that functions through several branches and subsidiaries.
3) Control
In relation to the previous point, the management of the offices in other countries is controlled by one head office located in the home country. Therefore, the source of command is found in the home
country.
4) Continued growth
Multinational corporations keep growing. Even as they operate in other countries, they strive to grow their economic size by constantly
upgrading and even doing mergers and acquisitions.
5) Sophisticated technology
When a company goes global, they need to make sure that their
investment will grow substantially. In order to do achieve substantial growth, they need to make use of capital-intensive technology,
especially in their production and marketing.
6) Right skills
Multinational companies employ only the best managers who are
capable of handling huge funds, using advanced technology, managing workers, and running a huge business entity.
7) Forceful marketing and advertising
One of the most effective survival strategies of multinational
corporations is spending a huge amount of money on marketing and advertising. It is how they are able to sell every product or brand they make.
8) Good quality products
Because they use capital-intensive technology, they are able to produce top-of-the-line products.
Reasons for Being a Multinational Corporation
There is a reason why many companies want to become multinational corporations. Here are some of them:
1. Access to lower production costs
It is a very common reason for companies to go global because if they set up production in other countries, especially in developing
economies, they spend less on production costs.
Though outsourcing is a way of doing this, setting up manufacturing plants in other countries may be even cheaper.
2. Proximity to target international markets
It is beneficial to set up business in countries where the target market of a company is. It helps reduce transport costs, and it gives
multinational corporations easier access to consumer feedback and information, as well as to consumer intelligence.
3. Avoidance of tariffs
When a company produces or manufactures its products in another country where they sell them, they are exempted from import quotas and tariffs.
Models of Multinational Corporations
The following are the different models of multinational corporations:
1. Centralized
In the centralized model, companies put up an executive headquarters in its home country and then build various manufacturing plants and production facilities in other countries.
Its most important advantage is being able to avoid tariffs and import quotas and take advantage of lower production costs.
2. Regional
The regionalized model states that a company keeps its headquarters in one country that supervises a collection of offices that are located in
various countries. Unlike the centralized model, the regionalized model includes subsidiaries and affiliates that all report to the headquarters.
3. Multinational
In the multinational model, a parent company operates in the home country and puts up subsidiaries in different countries. The difference is that the subsidiaries and affiliates are more independent in their
operations.
FOREIGN COLLABRATIONS AND INDIAN BUSINESS
In general, the definition of foreign collaboration can be stated as follows.
“Foreign collaboration is an alliance incorporated to carry on the agreed task collectively with the participation (role) of resident and non-resident entities.”
Alliance is a union or association formed for mutual benefit of parties.
Foreign collaboration is such an alliance of domestic (native) and abroad (non- native) entities like individuals, firms, companies, organizations, governments, etc., that come together with an intention to finalize a contract on some tasks or jobs or projects.
In finance, the definition of foreign collaboration can be specified as follows.
“Foreign collaboration includes ongoing business activities of sharing information related to financing, technology, engineering, management consultancy,
logistics, marketing, etc., which are generally, offered by a non-resident (foreign) entity to a resident (domestic or native) entity in exchange of cheap skilled and semi-skilled labour, inexpensive high-quality raw-materials, and so on, with an approval (permission) from a governmental authority like the ministry of finance of a resident country.”
Foreign collaboration is thus an alliance (a union or an association) formed for mutual benefit of collaborating parties.
Examples of Foreign Collaboration
Some prominent examples of foreign collaboration are as under:-
The examples of foreign collaboration between an Indian and abroad entity:
1. ICICI Lombard GIC (General Insurance Company) Limited is a financial foreign collaboration between ICICI Bank Ltd., India and Fairfax Financial Holdings Ltd., Canada.
2. ING Vysya Bank Ltd. is a financial foreign collaboration formed between ING Group from Netherlands and Vysya Bank from India.
3. Tata DOCOMO is a technical foreign collaboration between Tata Teleservices from India and NTT Docomo, Inc. from Japan.
4. Sikkim Manipal University (SMU) from India runs some academic programs through an educational foreign collaboration with abroad universities like Liverpool School of Tropical Medicine from UK, Loma Linda and Louisiana State Universities from USA, Kuopio University from Finland, and University of Adelaide from Australia.
Objectives of Foreign Collaboration
The main intention or prime goal or objective of foreign collaboration is to:
1. Improve the financial growth of the collaborating entities.
2. Occupy a major market share for the collaborating entities.
3. Reduce the higher operating cost of a non-resident entity.
4. Make an optimum and effective use of resources available in the resident entity's country.
5. Generate employment in the resident entity's country
In India there are basically two forms of foreign collaboration. The collaboration may be either financial collaboration or it may be
technical. In case of financial collaboration the approving authority is the Reserve Bank of India and in the case of technical collaboration the approving authority is department of Industrial Development in the
Ministry of Industry, Government of India.
The approach of the Government has been roughly the same since the year 1949 that is to allow foreign direct investment on preferential
basis in sectors that will be beneficial for the country. The foreign or Indian undertakings will have to conform to the Industrial policy of the country. Foreign investors are in all cases considered equal to their
Indian partners.
The Government has enforced The Foreign Exchange
Management Act 1999 (FEMA) in place of the Foreign Exchange
Regulation Act,1973 (FERA). The Old act aimed at controlling foreign exchange whereas the new Act seeks to regulate foreign exchange.
A breach of the provisions of the old act resulted in a criminal offence with the burden of proof lying on the guilty. However the new Act provides for only a civil remedy and for an offence the accused
cannot be arrested unless he defaults in payment of penalty for contravention.
For setting up a foreign collaboration, approval from the
government under the relevant foreign exchange laws in force and the requisite Government policy is required.
Under the Act now a foreign collaboration may be formed by a foreign company without the necessity of forming a company with an Indian counterpart. Any Foreign collaboration which exceeds the
minimum limited set out in the automatic route requires approval from the government.
The Government has set up a foreign investment promotion board to encourage foreign investment in India. Some of the functions of the Board include :
• speed up clearance of proposals
• to review the collaborations cleared
• Earmarking and ascertaining of contacts to invest in India.
ECONOMIC UNION
Under an economic union members harmonized monetary policies, taxation and government spending.
In addition, a common currency is used by members and this could involve a system of fixed exchange rates.
Clearly the formation of a economic union requires the surrender of a large measure of national sovereignty to a supranational body. Such a union is the previous and last step to political unification.
European Union
European Union (EU), international organization comprising 28 European countries and governing common economic, social, and
security policies. Originally confined to western Europe, the EU
undertook a robust expansion into central and eastern Europe in the early 21st century.
The EU’s members are Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary , Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the
Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Swe den, and the United Kingdom.
The EU was created by the Maastricht Treaty, which entered into force on November 1, 1993.
The treaty was designed to enhance European political and economic integration by creating a single currency (the euro), a unified foreign and security policy, and common citizenship rights and by advancing cooperation in the areas of immigration, asylum, and judicial affairs.
The EU was awarded the Nobel Prize for Peace in 2012, in recognition of the organization’s efforts to promote peace and democracy in
Europe.
How It Is Governed
Three bodies run the EU. The EU Council represents national governments. The Parliament is elected by the people. The European
Commission is the EU staff. They make sure all members act consistently in regional, agricultural, and social policies. Contributions of 120 billion euros a year from member states fund the EU.
Here's how the three bodies uphold the laws governing the EU. These are spelled out in a series of treaties and supporting regulations:
1. The EU Council sets the policies and proposes new legislation. The political leadership, or Presidency of the EU, is held by a different leader every six
months.
2. The European Parliament debates and approves the laws proposed by the Council. Its members are elected every five years.
3. The European Commission staffs and executes the laws. Jean-Claude Juncker is the president until October 2019.
Currency
• The euro is the common currency for the EU area. It is the second most commonly held currency in the world, after the U.S. dollar.
It replaced the Italian lira, the French franc, and the German deutschmark, among others.
The value of the euro is free-floating instead of a fixed exchange rate. As a
result, foreign exchange traders determine its value each day. The most widely- watched value is how much the euro's value is compared to the U.S. dollar. The dollar is the unofficial world currency.
ASEAN
The Association of Southeast Asian Nations (more commonly known as ASEAN) is an intergovernmental organization aimed primarily at promoting economic
growth and regional stability among its members.
There are currently 10 member states: Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Laos, Myanmar, Cambodia and Vietnam.
ASEAN was founded half a century ago in 1967 by the five
Southeast Asian nations of Indonesia, Malaysia, Philippines, Singapore and Thailand. This was during the polarized atmosphere of the Cold War, and the alliance aimed to promote stability in the region. Over time, the group expanded to include its current 10 members.
Regional cooperation was further extended with the creation of the ASEAN Plus Three forum in 1997, which included China, South
Korea and Japan. And then the East Asia Summit, which began taking place in 2005 and has expanded to include India, Australia, New
Zealand, Russia and the United States.
ASEAN aims to promote collaboration and cooperation among member states, as well as to advance the interests of the region as a whole, including economic and trade growth.
It has negotiated a free trade agreement among member states and with other countries such as China, as well as eased travel in the region for citizens of member countries.
In 2015, it established the ASEAN Economic Community (AEC), a major milestone in the organization’s regional economic integration agenda.
One of the organization’s aims is to promote technical and research cooperation among its members. The ASEAN Outstanding Scientist and Technologist Award is presented every three years to
recognize nationally and internationally acclaimed achievements in the field.
The association’s Center for Biodiversity was established to promote cooperation on conservation and sustainability throughout the region and serves as secretariat of ASEAN Heritage Parks, which oversees 37 protected sites.
In the field of education, the ASEAN University Network was founded in 1995 to promote academic and youth cooperation between member states. As part of this initiative, the University Games have been held every two years since 1981.
NAFTA
The North American Free Trade Agreement is a treaty between Canada, Mexico and the United States.
That makes NAFTA the world’s largest free trade agreement.
The gross domestic product of its three members is more than
$20 trillion. NAFTA is the first time two developed nations signed a trade agreement with an emerging market country.
The three signatories agreed to remove trade barriers between them. By eliminating tariffs, NAFTA increases investment
opportunities. The NAFTA agreement is 2,000 pages, with eight sections and 22 chapters.
On September 30, 2018, the United States, Mexico, and Canada renegotiated the North American Free Trade Agreement. The new deal is called the United States- Mexico-Canada Agreement. It must be ratified by each country's legislature. As a result, it wouldn't go into effect before 2020.
Functions of NAFTA
1. NAFTA grants the most-favored-nation status to all co-signers. That means countries must give all parties equal treatment. That includes foreign direct investment.
They cannot give better treatment to domestic investors than foreign ones. They can't offer a better deal to investors from non-NAFTA countries. Governments must also offer federal contracts to businesses in all three NAFTA countries.
2. NAFTA eliminates tariffs on imports and exports between the three countries. Tariffs are taxes used to make foreign goods more expensive.
NAFTA created specific rules to regulate trade in farm products,
automobiles and clothing. These also apply to some services, such as telecommunications and finance.
3. Exporters must get Certificates of Origin to waive tariffs. That means the export must originate in the United States, Canada or Mexico. A
product made in Peru but shipped from Mexico will still pay a duty when it enters the United States or Canada.
4. NAFTA establishes procedures to resolve trade disputes. Chapter 52 protects businesses from unfair practices.
5. All NAFTA countries must respect patents, trademarks, and copyrights. At the same time, the agreement ensures that these intellectual property rights don’t interfere with trade.
6. The agreement allows business travelers easy access throughout all three countries.
BRICS
Brazil, Russia, India, China and South Africa (BRICS) is an acronym for the combined economies of Brazil, Russia, India, China and South
Africa.
Coordination between Brazil, Russia, India and China (BRIC) began
informally in 2006, with a working meeting of the foreign ministers of the four countries on the sidelines of the United Nations General
Assembly.
Since then, the acronym, created a few years earlier by the financial market, no longer confined itself to identifying four emerging
economies. BRIC became a mechanism for cooperation in areas that have the potential to generate concrete results for Brazilians and the peoples of the other member countries.
Since 2009, the Heads of State and Government of the group meet annually. In 2011, at the Sanya Summit, South Africa became part of the grouping, adding the "S" to the acronym, now BRICS.
In the last 10 years, 10 Summit meetings have taken place, with the presence of all the leaders of the mechanism:
1st Summit: Yekaterinburg, Russia, June 2009;
2nd Summit: Brasília, Brazil, April 2010;
3rd Summit: Sanya, China, April 2011;
4th Summit: New Delhi, India, March 2012;
5th Summit: Durban, South Africa, March 2013;
6th Summit: Fortaleza, Brazil, July 2014;
7th Summit: Ufa, Russia, July 2015;
8th Summit: Benaulim (Goa), India, October 2016;
9th Summit: Xiamen, China, September 2017;
10th Summit: Johannesburg, South Africa, July 2018; and 11th Summit: Brasília, Brazil, November 2019
Since the first summit in 2009, BRICS has significantly expanded its
activities in several fields, but it was the financial field that guaranteed greater group visibility from the outset.
As a result of the 2008 crisis, the four member countries started to work in concert with the G20, the IMF and the World Bank, with
concrete proposals for reform of global financial governance structures, in line with the increase in the relative weight of emerging countries in the world economy.
The role played by BRICS was instrumental in the reform of the IMF quotas approved in Seoul in 2010.
SAARC
South Asian Association for Regional Co-operation (SAARC), organization of South Asian nations, founded in 1985 and dedicated to economic,
technological, social, and cultural development emphasizing collective self- reliance.
The South Asian Association for Regional Cooperation (SAARC) was
established with the signing of the SAARC Charter in Dhaka on 8 December 1985.
The idea of regional cooperation in South Asia was first raised in November 1980. After consultations, the foreign secretaries of the
seven founding countries—Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka—met for the first time in Colombo in April
1981.
Afghanistan became the newest member of SAARC at the 13th annual summit in 2005.
Principles
Cooperation within the framework of the SAARC shall be based on:
• Respect for the principles of sovereign equality, territorial integrity, political independence, non-interference in the internal affairs of other States and mutual benefit.
• Such cooperation shall not be a substitute for bilateral and multilateral cooperation but shall complement them.
• Such cooperation shall not be inconsistent with bilateral and multilateral obligations.
The Objectives of the SAARC
• To promote the welfare of the people of South Asia and to improve their quality of life.
• To accelerate economic growth, social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realize their full potentials.
• To promote and strengthen collective self-reliance among the countries of South Asia.
• To contribute to mutual trust, understanding and appreciation of one another’s problems..
• To promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields.
• To strengthen cooperation with other developing countries.
• To strengthen cooperation among themselves in international forums on matters of common interests; and
• To cooperate with international and regional organizations with similar aims and purposes.
FOREIGN TRADE POLICIES
Policies enacted by the government sector of a domestic economy to discourage imports from, and encourage exports to, the foreign sector. The three most
common foreign trade policies are tariffs, import quotas, and export subsidies.
Tariffs and import quotas are designed to discourage imports and export subsidies are designed to encourage exports.
The general goal of these foreign trade policies is to create or increase a country's balance of trade surplus, that is, to increase net exports.
Foreign trade policies are government actions, especially tariffs, import quotas, and export subsidies, designed to increase net
exports by promoting exports or restricting imports.
By increasing net exports (and creating a more "favorable" balance of trade), the domestic production of a nation increases, which then
increases domestic income and employment.
While foreign trade policies can be beneficial to the aggregate domestic economy they tend to be most beneficial, and thus most commonly
promoted by, domestic firms facing competition from foreign imports.
Domestic firms benefit with higher sales, greater profits, and more income to resource owners.
However, by increasing domestic prices and restricting accessing to imports, foreign trade policies also tend to be harmful to domestic consumers.
Tariffs
The first of three foreign trade policies designed to restrict imports and promote exports is tariffs on imports. Tariffs are simply taxes placed on imports. They work like any other taxes. A tariff is added to the price of the imported good.
The resulting price of the import is thus higher, which tends to
decrease the quantity purchased. And if fewer imports are purchased, then more domestic production is sold.
While domestic producers benefit from tariffs, domestic consumers tend to suffer. They pay higher prices for both imports and domestic production.
Import Quotas
The second of three foreign trade policies designed to restrict imports and promote exports is quotas on imports.
In general, a quota is simply a quantity restriction placed on a good, service, or activity.
For example, employers often face hiring quotas for different
demographic groups and sales representatives often have quotas for sales activities.
Import quotas are then merely legal restrictions on the quantities of imports that are imposed by the domestic government.
Export Subsidies
The third of three common foreign trade policies is export
subsidies. In general, a subsidy is a payment made by the government sector, either to a business or consumer, with no expectations of
receiving any production in exchange. That is, subsidies are merely gifts.
They are also commonly thought of as negative taxes. Whereas taxes a payments flowing from businesses and consumers to government,
subsidies are payments flowing from government to businesses and consumers.
Subsidies are usually paid to encourage or promote specific
activity. For example, government might subsidize job training or school lunch programs to encourage these activities.
An export subsidy is then a subsidy paid to domestic producers to encourage exports of production to the foreign sector. This export
subsidization effectively increases the overall revenue received by the domestic firms when exporting production, which is bound to
encourage exports.
International Business Strategy
International business strategy refers to plans that guide commercial transactions taking place between entities in
different countries.
Typically, international business strategy refers to the plans and actions of private companies rather than governments; as such, the goal is increased profit.
Most companies of any appreciable size deal with at least one international partner at some point in their supply chain, and in most well-established fields competition is international.
Because methods of doing business vary appreciably in different countries, an understanding of cultural and linguistic
barriers, political and legal systems, and the many complexities of international trade is essential to commercial success.
As historically developing countries become increasingly
prominent, new markets open up and new sources of goods become available, making it increasingly important even for long-established firms to have a viable international business strategy.
Philosophy
The three most prevalent philosophies of international business strategy are:
• Industry-based, which argues that conditions within a particular industry determine strategy;
• Resource-based, which argues that firm-specific differences determine strategy;
• Institution-based, which argues that the industry- and resource- based views need to be supplemented by accounting for relevant societal differences of the types mentioned above.
Development Market Economies
A developed economy is typically characteristic of a developed country with a relatively high level of economic growth and security.
Standard criteria for evaluating a country's level of development are income per capita or per capita gross domestic product, the level of industrialization, the general standard of living, and the amount of
technological infrastructure.
Noneconomic factors, such as the human development
index (HDI), which quantifies a country's levels of education, literacy, and health into a single figure, can also be used to evaluate an
economy or the degree of development.
GDP and Developed Economy Criteria
The most common metric used to determine if an economy is developed or developing is per capita gross domestic product (GDP), although no strict level exists for an economy to be considered either developing or developed.
Some economists consider $12,000 to $15,000 per capita GDP to be sufficient for developed status while others do not consider a country developed unless its per capita GDP is above $25,000 or
$30,000. As reported by The World Bank, the United States' per capita GDP in 2018 was $62,641.
For countries that are difficult to categorize, economists turn to other factors to determine development status.
Standard-of-living measures, such as the infant mortality rate and life expectancy, are useful although there are no set boundaries for these measures either.
A high per capita GDP alone does not confer developed economy status without other factors.
For example, the United Nations still considers Qatar, with one of the world's highest per capita GDP in 2018 at $69,026, a developing
economy because the nation has extreme income inequality, a lack of infrastructure, and limited educational opportunities for no affluent citizens.
The Human Development Index
The HDI looks at three standards of living criteria—literacy rates, access to education and access to health care—and quantifies this data into a standardized figure between 0 and 1.
Most developed countries have HDI figures above 0.8. The United
Nations Development Programme, Human Development Reports that in 2017, Norway had the world's highest HDI at 0.953. The United
States ranked 13th at 0.924.
Nondeveloped Economies
Terms such as "emerging countries," "least-developed countries" and
"developing countries" are commonly used to refer to countries that do not enjoy the same level of economic security, industrialization, and
growth as developed countries.
The term "third-world country" to describe a state is today considered archaic and offensive.
Real World Example of a Developed Economy
The United Nations Conference on Trade and Development notes that the world's least-developed countries are "deemed highly
disadvantaged in their development process—many of them for
geographical reasons—and (face) more than other countries the risk of failing to come out of poverty.“
Examples of countries with developed economies include the United States, Canada and most of western Europe, including the United
Kingdom and France.
Five Emerging Market Economies
Emerging markets used to be a somewhat obscure niche of the
international investing world. Not anymore. These rapidly developing countries are playing an increasingly important role in the global
economic system. In fact, more than half of global economic growth is now driven by emerging markets.
For investors, these countries have also offered some of the most spectacular returns over the long-term.
In general, investors may want to consider building these markets into their portfolios in order to maximize their long-term returns and diversify their risk.
(1)Brazil
Brazil has been a significant growth driver in Latin America as the largest economy in the South America.
Currently, the country is struggling with slowing growth and inflation but investors should keep an eye on it moving forward. Investors interested in betting on a rebound in Brazil have a wide range of options, ranging
from exchange-traded funds to several large companies like oil producer Petro bras, which has a New York Stock Exchange-listed ADR.
The largest Brazil Exchange traded fund (ETFs) include:
• iShares MSCI Brazil Capped ETF (EWZ)
• Direxion Daily Brazil Bull 3X Shares (BRZU)
• First Trust Brazil AlphaDEX Fund (FBZ) (2) China
With a population of 1.3 billion, China is the world's most populous nation and its economy isn't far behind.
China's economy has been slowing down over the past couple of years, but it remains a major global growth driver. The iShares
FTSE/Xinhua China 25 is one exchange-traded fund that invests in Chinese stocks.
Investors can participate in China through mutual funds, ETFs,
and Chinese companies with listings on Nasdaq and the New York Stock Exchange.
The largest China ETFs include:
• iShares China Large Cap ETF (FXI)
• iShares MSCI China ETF (MCHI)
• KraneShares CSI China Internet ETF (KWEB) (3) India
While India's economic growth rate recently surpassed China's as a key emerging market, investors in India have also seen some upside over the past several years.
India's large English-speaking population and technology-savvy outsourcing firms like Infosys Technologies, have helped make this
country of 1 billion an emerging market economy to watch.
The largest India ETFs include:
• iShares MSCI India ETF (INDA)
• WisdomTree India Earnings Fund (EPI)
• iShares India 50 ETF (INDY)
(4) Russia
Russia's transformation from communism to a Wild West-like embrace of capitalism has had a staggering impact on its economy.
The global boom in commodities also helped Russia's stock market
become one of the world's top performers until the downturn in 2015.
While there are some Russian ADRs available, most investors are better off sticking with a mutual fund that invests in Russia, such as the Third Millennium Russia Fund.
The largest Russia ETFs include:
• Van Eck Vectors Russia ETF (RSX)
• iShares MSCI Russia Capped ETF (ERUS)
• Direxion Daily Russia Bull 3x ETF (RUSL) (5) Mexico
Mexico has quickly become one of the most popular emerging markets among investors. It is the second largest economy in Latin America, and the 13th largest in the world.
Although Mexico’s growth did slow during the global recession, its year-over-year GDP picked up in 2016 and continued to increase in 2018 – rising from $1.07 trillion in 2016 to almost $1.2 trillion in 2018.
Mexico’s economy is heavily reliant on exports to the US, which means that the price of the domestic stock market and currency – the peso – are closely linked to the US dollar. But despite falls in the price of raw materials and volatility across global markets, the predictions for the country are positive. In fact, the country’s GDP is expected to continue growing at an average of 2.5% in 2019.
