Session 2

International Business
Globalization:
Globalization in the age of Trump:

 Law of semi-globalization: Although companies feel that they are completely

globalized, the world is still regionalized to a large extent. 60% of the business of
major MNC’s comes from 4 markets, which are their home markets. Companies are
very strong in their own region -> This is the law of semi-globalization.
 Law of distances: International interactions are dampened by distances along
geographic, cultural, administrative and economic dimensions. For example,
Germany might be very important to US, but when you apply the law of distances,
Mexico becomes important. CAGE framework is used for this.
 Globaloney gap: People feel that the world is more global than it actually is.
 Countries where exports are big percentages of their GDP: Singapore, Ireland,
Luxembourg, Netherlands -> These are smaller countries, generally a big port ->
Changes in globalization will affect these countries more.
 This already happened in 1930: Trade war led to a reversal of globalization during
that time, could history repeat itself?
 GE says they are moving from globalization to localization: Video -> Jeff Immelt says
that the eradication of globalization began long before Trump and Brexit. GE doesn’t
need trade deals to be effective -> They have a “multi-local” franchise. $22 billion
exports from the company -> They believe they can navigate all systems -> When
everyone loves each other and also when there are trade wars -> Multilateral
organizations like WTO and World Bank were supposedly breaking down long back
 For developed countries, predominant mode of business is aggregation: Due to
economies of scale, they need to globalize to recover the high R&D costs. It can be of
two types -> Front end (sales and marketing -> you can adapt based on the market)
or back end (R&D, sourcing -> This can be centralized)
Infosys:

 80% business in North America, 3% in India

 But 80% employees are in India
 Now they are committed to hiring more Americans due to Trump’s policies and also
because customer requirements have changed -> Pehle it was possible to send
someone onshore to gather requirements, then engineers like us in India would do
all the grunt work -> Now it may no longer be possible to do so
 Therefore, the cost structure will change
 In return, they are asking for tax benefits and subsidies -> This may not compensate
the entire cost differential
 Same productivity may not be possible from the American counterparts
  With Tesla, biggest market for electric car was China -> Then trade wars happened ->
China put tariffs on Tesla products -> So he negotiated hard with China -> Chinese
offered citizenship to Elon Musk -> So now what does he do?
 GE’s products were too expensive for emerging markets -> So they used reverse
engineering to create low-cost models for such markets
 Indian companies -> Model is arbitrage -> They exploit differences in the wage rates
between India and US
 Doing business in the US involves a lot of litigation -> Therefore you need a good
team of lawyers -> Karamchand
 The medical system in the UK has a lot of Indians -> So nationalization will not
happen overnight
 Top exports: China, USA, Germany, Japan, Netherlands, India (20th) -> For products
 Top imports: USA, China, Germany, Japan, UK, India (11th) -> For products
 Top exports: USA, UK, Germany, France, China, India (8th) -> For services -> China is
still bigger
 Top imports: US, China, Germany, France, Netherlands, India (10th) -> For services
India’s Foreign Trade and Investment:

 India has a massive trade deficit of $156 billion for goods

 Biggest imports -> Crude oil, smartphones
 For services, we have surplus of $70 billion
 We fund this deficit by remittances worth $68 billion -> Biggest in the world -> Lot of
this comes from Middle East -> Now if crude oil prices come down or if there are
geopolitical tensions, then you’re screwed
 India has $400 billion Foreign Exchange Reserve -> 12 months of imports (1 week of
reserves in 1999) -> But China has $3 trillion worth of reserves
UAE:

 Not such a big market by itself

 But Dubai is a big port for WANA (West Asia and North Africa)
 So trade passing through Dubai adds to “exports” of UAE
India’s exports:

 Petroleum -> Due to Reliance, Jamnagar -> They buy crude oil, process it, and export
it -> In domestic sector there are a lot of subsidies
 Gems and jewellery -> We also export jewellers like Nirav Modi
 Pharmaceutical products -> Nowadays they also have controversies due to FDA -> We
export generic drugs -> The volumes are very high but the values aren’t
India’s imports:

 Petroleum crude and others

Global FDI:

 Growth of state-owned companies like ONGC

 Also, digital MNE’s are also on the rise
 Big data enabled production and 3D printing has led to lower large investments in
centralized production and warehousing -> India should focus on this
 For India, maximum FDI is from Mauritius (shell companies), Singapore
Globalization:
1. Countries -> East India Company was one of the pioneers
2. Companies -> Toyota, Chevy, etc.
3. Individuals -> Individuals like us -> Services
From a book by Thomas Friedman -> The World is Flat -> Talks about 10 flateners -> Like
Berlin Wall breaking, Eastern and Western Europe coming together, Y2K led to digital
outsourcing, supply-chaining, insourcing, outsourcing, offshoring, informing, steroids, etc.
The top 10 most connected countries: Netherlands, Singapore, Ireland, Switzerland,
Luxembourg
Negative aspects of globalization:

 Threat to national sovereignty -> African countries

 Economic and environmental stress -> Parts in iPhone -> The phone moves in
different parts of the world, same part is travelling to 20 different countries in the
world -> Higher cost and carbon footprint
 Growing income inequality -> If India loses out due to cheap labour in Bangladesh
Globalists and Nationalists:

 Donald Trump, USA, UK, Italy, Hungary, Turkey, Thailand, South Africa, India,
Indonesia
 Session 3

 China is three times the size of India, but a lot of the land is not arable
 Western coast is mostly desert or mountainous
 Southern part near Hong Kong -> Industrially developed
 Shenzhen near Hong Kong -> Electronics capital of the world
 Eastern coast is also pretty developed -> Shanghai is also there
 Xinjiang has disturbances and terrorism
 Literacy rates in China are very high (~90-95%)
 Although English is part of curriculum, they are as well-versed with it as we are with
Sanskrit
 They can read and write, but not speak and listen English
Business Trends in China:

 Urbanization is the single most fundamental change that can and will happen to
China -> Several hundred people move out of villages and farming into cities -> By
2030 there will be 1 billion city dwellers in China
 Huge scale manufacturing -> Especially electronics
 Chinese manufacturers will be global -> Both sourcing and exporting
 Spending of consumers has increased in the last five years
 Chinese need more pigs -> We should send Chimpi there
 There’s a lot of money in China -> It has over 105 trillion RMB in bank deposits
 It is the brainpower behemoth -> Last year it had 7.5 million graduates
 Internet is becoming more and more Chinese -> TenCent owns WeChat, which is
going head-to-head with Facebook’s WhatsApp
Environmental Analysis Framework:

 External forces -> 4 categories of environmental factors:

1. Economic
2. Political
3. Cultural
4. Demographic
 Also, business environment has 4 levels:
1. International level
2. National level
3. Industry level
4. Company level
Economic Factors:

 Natural Resources: China has limited natural resources. Example: Manhole covers in
London were stolen to feed scrap to Chinese industries
 Technology: Is the country a net importer or exporter of technology
Political Factors:
  Structure of political scenario in the country
 Stability -> Coalition governments in the world aren’t so stable (Example: Present-day
Germany)
 Relations with India
 What are the major political institutions in the country? Formal hierarchy vs real
hierarchy (Example: Pakistan -> Army Chief is the most powerful, Iran -> Ayatollah is
the most powerful)
Cultural Factors:

 Religion: Example: During Ramzan month, everything slows down. During February,
biggest changes happen due to large sales and travel in the Chinese New Year. In
Bangladesh, March is free due to Bangladesh New Year
 Time and space orientation: In some places, if you miss a deadline, it’s gone
 Gender Roles: Who makes the decisions?
Demographics:

 Duh
International Level:

 Market Transactions: Free or controlled market

 Bilateral Linkages
 Multilateral Mechanisms
 Global Industries: China has a major share of the value chain in electronics
National Level:

 Government Strategy and Policies: How much involvement does the government
have in the industry? Government can be regulator and competitor in some
countries
Industry Level:

 Structure (Porter’s Model) and Dynamics

Company Level:

 Strategy and Operations

China:

 Trade war needs to be resolved by March 1 -> Otherwise there will be massive layoffs
-> Tariff will be 25% on both sides
 Session 4
Political system in China

 Political system in China is one-party-led Communist regime

 Autocratic rule
 Because of the economic growth, the people are okay with this regime
 Therefore, if the economic growth stops, the Communist regime will end
 Recruit people in Communist party from schools and colleges
 All toppers included in the political system
 Most are engineers
Banking:

 4 banks which own 90% of the revenue

Problems:

 Due to the excessive lending, there were problems of NPA’s

 Housing bubbles -> Led to the formation of ghost cities
Will China overtake US:

 US today is $18 trillion, China is $12.5 trillion

 Eventually China might overtake US in terms of absolute GDP
 By PPP they are already ahead
 But per-capita income of US is much higher
 HDI -> More balanced indicator of growth -> Components of life expectancy,
pollution, quality of life -> May not be able to catch up here
 Soft power
 China has produced the maximum patents in the last 3 years
 In Fortune 500 lists, Chinese companies are increasing -> But top 100 brands in the
world -> Only US brands
 China had 97 unicorns last year
India overtaking China?

 India’s manufacturing is much weaker than China

 Political system in China is much more adept to changes
Shadow Banking:

 This is peer-to-peer lending

 Huge amount of shadow banking in China -> Nobody knows how big it is
China in 2019:

 Trade wars will lead to issues for US firms alone

 GDP growth rate slowing to 6.7% from 9% -> Over-capacity -> Dump their products in
India -> Battle between Alibaba and Amazon in India
 Working age population is increasing along with wage raes
 Outward FDI greater than inward FDI -> Restrictions in 2017 led to FER dip by $1
trillion -> Most through Baidu, Alibaba, TenCent investing in start-ups and unicorns
 Big consumer market
 AIIB, BRICS Bank -> Funding overseas infrastructure project
 Session 7
New Market Selection Process
Market Selection:

 Market development starts with new market selection process -> It is used when
formulating the corporate strategy
 Once you select the market, you carry out the other steps in the corporate strategy
 The same process can also be extended for strategizing new product in existing
markets
Market Assessment:

 Deep dive into market -> secondary research from internet

 Primary research, product-fit analysis, competition analysis
 Finally arrive at what you can do in the market
Business Case Preparation:

 This is prepared on the basis on the market assessment done by you

 This includes the kind of prices, kind of volumes, kind of costs you will incur
Financial Evaluation of Business Case

 Whether the business case is profitable and viable

 Else you will have to change the model, the product mix, the pricing, the costs
 The objective can be financial (Positive NPV by the third year) or strategic (be present
in the market this year, even if profits are not there)
Approval and Signing of Distribution Agreement:

 Distribute your products and services with the distributor in the market
 Followed by ordering and shipping

International Market Selection (IMS) Framework

 Developed by Tata Motors

 Used largely for automobiles, but can be extended to other products as well
Steps:
1. Is the market attractive?
a. Factors of attractiveness:
 Industry size, segment size and growth
 Size and growth of economy – GDP, GDP per capita (this is important)
-> In most countries, an increase in per capita GDP PPP leads to a
corresponding increase in penetration of automobiles -> Also have a
look at affordability index (how many months of per capita household
income is required to buy the cheapest car) -> Lowest is Vietnam
  Demography
 Current penetration
o No -> Do not enter ew market
o Yes -> Look below
2. Is the market accessible:
a. Regulatory requirements and duty structure (example, in Brazil, very high cost
of selling cars, however, in Chile and Europe, duty is just 6%, so easier to sell a
car)
b. FTA’s (example of Mercosur) and non-tariff barriers (some manufacturers are
very influential in regulations of the country -> Algeria is influenced by French
manufacturers, so the Chinese are kept away)
c. Product Suitability
d. Mode of operation – Local manufacturing or globally sourced
o No -> Do not enter market
o Yes -> Look below
3. Are we likely to be competitive and profitable?
a. Benchmark with competition -> For example, Maruti will benchmark will
Amaze, Xcent, etc.
b. Volume potential -> Gauge how much you will be able to sell
c. Profitability
4. Is the risk assessment favourable to enter the market?
a. Risk factors
b. Competition exports from India
c. Perception study of country of origin and brand
 Session 8
CAGE Framework:

 Framework that helps managers identify and assess the impact of distance on
various industries
 New market ke liye yeh use karo -> Which countries should your business target
 Four dimensions -> Cultural, Administrative or Political, Geographic, Economic
 Cultural:
o Consumer product preferences
o Language, ethnicities, height in Japan (elevated parking becomes an issue for
short people or Japanese people prefer small cars), social norm (IPR is not
cared for in China), etc.
o Food, media, etc.
 Administrative:
o Laws, politics, institutions
o Absence of colonial ties creates administrative distance
o Example, all British colonies have Victorian laws and speak English
o Oil, gas, drugs, national security
o Important in sectors which are nationalized
o For example, some defence companies have orders in Turkey, but the Ministry
of External Affairs rejected it because Turkish can get screwed if it lands in the
wrong hands
o Even spices and food products may have some regulations or FTA’s -> FDA in
US
 Geographic:
o Important for goods that need to be transported -> heavy, bulky products like
cement
o Not just distance, but accessibility and infrastructure also become important
o This increases costs of communication and transport
o This is important for operations that require a high degree of co-ordination
 Economic:
o Per capita income
o Developed country like Germany who develops premium cars can sell those in
countries with a high PCI
 Do the table in the article
Example of movies:

 Cultural: 3 Idiots succeeded in China because they also have 2 make or break exams
 Administrative: Uri will be banned in Pakistan, taxation
 Geographical: Not so important
 Economic: Slightly important -> Whether they have enough theatres, technology,
internet

Tesla case:
  Challenges for EV:
o Mileage per charge, number of charging stations, nascent technology, high
costs, charging time, trade-off between design and performance -> Cannot
have high acceleration
 Government support and subsidies creates a huge push for demand
 Although Tesla created interest in US, production was a bottleneck
 They were interested in going to markets -> Canada, Australia
 Now they want to go to Singapore and China
 Singapore:
o Government support, high per capita income, small country so charging
distance is not such a big issue
o Singapore has a limit on the number of cars that can be on the road
o However, this failed because -> They did not get the government support ->
Other manufacturers like Nissan and Mitsubishi got through -> Total four got
in
 China:
o High population -> so large market size -> World’s biggest market for electric
vehicles, already number 2 for Tesla
o Government support for pollution reduction
o However, lack of parking space for super-chargers
o High income groups want social recognition -> So they want brands like Tesla
o Government support also in the form of subsidies -> 1.2 million electric cars
sold in China
o Competitors like BYD, Neo or something which are already present in China
means Tesla has no early mover advantage -> Local competition is heavily
subsidized and have policies in their favour
o Tariff issues due to trade wars could be possible
o Car manufacturers in China can only enter the market through JV
o IP is also apparently an issue if you don’t read recent news, so JV is not
preferable because you give away your patents to the company you are JV’ing
with
o They negotiated hard, so Tesla got allowed 100% FDI in China -> On a per-case
basis -> They got new rules they count ‘em
o However, due to this, because they are going alone, they have more control,
but they do not really know the market
o Auto sales in China declined for the first time in over a decade last year

Porter’s Diamond Model:

 Talks about competitiveness of nations in a particular sector

 Applicable for the home market -> Not for the destination market
 Came up with four factors based on which the countries competitiveness is
determined
 Trade Theory:
o Helps managers and government to decide:
1. What products should we import and export?
 2. How much should we trade?
3. With whom should we trade?
 India exports raw materials and agricultural products, while China exports finished
goods -> China is more competitive at manufacturing -> Bilateral trade with China
 India imports natural resources and exports electrical and manufactured items from
Latin America in its bilateral trade with LA -> India is more competitive at
manufacturing
 Porter’s model:
o Factor conditions:
1. Land
2. Labour
3. Resources
4. Capital
5. Infrastructure
o Demand conditions:
1. Size of home demand
2. But more important is the nature of demand -> How sophisticated it is
-> Companies are forced to innovate
3. Growth Rate
4. Technology
o Related and supporting industries:
1. Upstream or downstream
2. Suppliers
3. Basic industries
4. No. of players
5. Complementary industries -> Automobile will need steel and power
6. A country cannot be made competitive by one industry alone -> There
is a creation of clusters of related industries -> Example: Silicon Valley
is a hub for startups because of a mixture of students, infrastructure,
culture, R&D and defence research (Bell Labs as well), presence of
venture capitalists
7. There is a cluster in Taiwan for semi-conductors, London -> Financial
cluster, India -> Dairy cluster near Anand, Flower cluster in
Netherlands
o Firm strategy, structure and rivalry
1. Management style
2. Competition -> More the better
3. Investment
4. Innovation
5. Risk
o There is also a role of government -> It can indirectly influence each of the
four factors -> California has Euro-VII(I) norms -> Ensures that companies
produce better cars -> Germany has no speed limits -> They produce faster
cars
o They can influence specialized training institutes that can deliver labour
o They can spur competition -> can enact Anti-Trust laws
 Chance -> Some happening that influences a country’s competitiveness
o Y2K influenced Indian IT industry
o South Africa -> Apartheid -> A company in SA developed a technology to
convert coal to liquid -> Now they are world-beater in C2L and fielding
 Limitations:
o Domestic existence of all conditions is assumed
1. India does not have home demand for IT, but it is still globally
competitive
o Presence of all conditions does not guarantee an industry will develop
1. If other countries have first mover advantage, then the country may
not be globally competitive
 Session 9
Risks in international business

 Types of risks include finance, currency, geopolitical risks

 In international businesses, government is one of the biggest consumers -> You have
to sell to the government more than the final consumer
Types of risks:

 Commercial risks:
o Any risk which happens when you’re making transactions -> For example if
you give a purchase order -> You can’t meet your suppliers from whom you’re
purchasing -> It is critical to mitigate this risk
o How to mitigate:
 Take some reports on the customer’s credit history -> DND report
 Who are the shareholders, bankers, kinds of loans that are still
pending on the customers?
 In some countries this report may not be available
 In such a case talk to bankers or auditors
 EC-GC cover (Export Credit Guarantee Corporation) -> Rate countries
in terms of risk -> Based on that they determine insurance premium
for countries -> And then you take insurance cover for that particular
country -> Also advise you on how much exposure to give each
customer in a country
 Ex-In Bank? -> Promote exports -> One of the products they have is
called line of credit -> An Indian goes to some other country to
promote bilateral relations -> Then this bank announces a $10 billion
line of credit to that country to improve trade -> Then any company
wishing to export this country gets a discounted loan from this bank
 Political risk:
o Whichever country we are doing business with, understand the political
system in that country
o This includes set of institutions, political organizations and interest groups
o Example -> Iran mein Ayatollah is the most important guy, not the elected
President
o Amitav Kant -> Niti Aayog CEO is important for businesses
o Manmohan Singh era -> Montek Singh Ahluwalia? Was the most important
for businesses
o Relationships amongst institutions also important -> Judiciary and
government -> Checks and balances
o In India, this relationship is very important
o Generally, a bilateral contract will have an arbiter in a third-party country
o Product liability -> What kind of consequential damage your goods can suffer
in supplying your products
Necessary for business:

 Market entry
 Impact of regime change -> Will lead to policy change
o For example, Tata Motors was looking for markets for pickup trucks -> They
identified Thailand -> Second biggest market after US -> Did a JV -> When
they did assessment Thailand was a democracy in the ASEAN, but now
military groups are taking over, so it created issues
 Some government policies create hurdles, others create opportunities
 Countries where laws are predictable -> Example, in Singapore, the PAP keeps ruling,
so country is stable
 Is the power with central government or state government -> China mein central hai
 What is more dominant -> Public sector or private sector -> If public sector -> Then
government is both the producer and the regulator -> Example -> Russia Gazprom
 Sovereign wealth funds -> AIDA, CIC, Abu Dhabi
 Example -> Saudi Arabia’s issues after the king killed the journalist -> SoftBank has
links to Saudi Arabia -> So start-ups are screwed if they are seen to be sitting on
tainted money
Political risks:

 Political events or decisions in a country that can affect your profitability positively or
negatively
 Types:
o Systemic: Lesser in intensity and predictable
o Procedural:
o Distributive:
o Catastrophic: War, what is good for, absolutely nothing!
 Factors contributing to political risk:
o Expropriation or Nationalization
o War or civil strife -> Iraq wars -> All about WoMD -> Actually, all about oil ->
Some Indian companies had huge businesses in Iraq -> Like ACC -> Owned by
Tata’s -> Overnight vaat lag gaya
o Unilateral breach of contract -> GMR built an airport in Maldives in record
time -> But a new government came which was pro-China -> So it said that
the contract was null and void
o Destructive government actions -> China crushed pro-people movements, or
stopped Google from serving in China
o Harmful action against people
o Restriction on Repatriation of profit -> Profits cannot be taken back to home
country in form of dividends -> Example, Tata invested in Ethiopia -> Wanted
to take it back -> But no foreign exchange -> So they could not take it back
o Differing points of view
o Discriminatory taxation policies: Different tax for local, and different for MNC,
or taxation policies change over time -> Example retrospective tax levied on
Vodafone
  Types of political risk -> Ten types from the article
Managing Political Risk Framework:
1. Understanding risks:
2. Analysing risks: These days there is a lot of big data, from social media trends
you can analyse if a war is coming
3. Mitigating risks that cannot be eliminated: For Japanese companies, they
cannot just depend on Chinese suppliers in case of political risk, look for
alternative suppliers
4. Putting in place a response capability that enables effective crisis
management and continuous learning: Big disasters hua toh keep a crisis
management ready
Managing Government Relations:

 Understand your competitive advantage so that the governments will listen to you ->
Tesla got 100% FDI approved for China
 It is a significant investment of management time (what isn’t?)
 Identify key government actors and needs and power centres
 Tools:
o Political mapping
o Public policy impact chain

4 A’s Framework: Read up