1. (a) Discuss the various factors that influence foreign investment decisions.

(b) State the various distinguishing features of Transaction Cost Approach of FDI.

2. There are three major rations used as performance indicators for international
business. Explain these rations bringing out their meaning and significance.

3. The decision of how much power should be delegated to a manager of a subsidiary is

crucial, and depends on several factors. Examine these factors with their importance in
Multinational Corporation,

4. (a) What are the main characteristics of a global firm?

(b) Discuss the major barriers in overcoming organizational biases.
(c) Identify three types of attitudes in the choice of organizational structure.
(d) Discuss any one innovative production technique used in international firms to face
intense competition.

5. Explain the following:

(a) How to use the Source-Market Matrix in production management.

(b) Needs and types of interventions in International business.

SECTION B

6. Please read the following case carefully and answer the questions given at the end.

Benefit from export competitiveness

Improving export competitiveness is important and challenging but it is not an end in

itself. It is only a means to an end: the promotion of development. This raises the
question of the benefits resulting from TNC associated trade, beginning with improving
the trade balance, and continuing with upgrading export operations and sustaining them
over time. In each case, the issue is how host developing countries can most benefit
from the assets that TNCs command. Much depends on the strategies pursued by
TNCs within their international production systems, on the one hand, and local
infrastructure and technological, institutional and supplier capabilities as well as the
policies purchased by Governments on the other.

A first approximation for assessing benefits and costs although not the most important
one --- involves the trade balance. Even though export-oriented FDI helps to increase
exports, foreign affiliates also import, and imports may increase significantly along with
exports. In such cases, net foreign exchange earnings may be negligible. Moreover,
high export values may co-exist with low levels of local value added. This is typically the
case, for example, when foreign affiliates mainly assemble imported components,
reflecting and relatively unimportant role assigned to them in production systems.
Measuring the trade balance of export-oriented foreign affiliates as well as their value
added, is fraught with difficulties. The data typically lump together export-oriented FDI
and domestically-oriented FDI, making it difficult to determine the trade balance of
export-oriented foreign affiliates separately. (personably, the trade balance of domestic
market-oriented FDI would be negative.) Furthermore, no systematic data exist on the
composition of imports by foreign affiliates, which is relevant for understanding the
implications for host economies. Scattered information suggests that the imports of
parts and components were high in certain industries, such as telecommunications,
electric machinery and vehicles especially in countries that hosted labour-intensive
activities of international production systems. Furthermore, in developing countries, one
would expert that newly established affiliates (or affiliates that intend to extend their
capacities) would typically need to import capital goods (just as many domestic firms
do) in order to expand local productive nature more likely to be indispensable for the
production of the goods or services in question to take place--- than imports of
components for assembly or other inputs (for which domestic alternatives may be
available or capable of being developed), yet both types of imports would be counted
simply as affiliate imports.

Moreover, imports would be particularly high when production facilities are being set up
and reliance on home-country or other foreign suppliers of inputs tends to be high, and
then personably decline (partly as a result of the growth of local linkages). The imports
of foreign affiliates China are an instructive example (although one that cannot
necessarily be generalized in this respect), in that the data show that a sustained part of
imports by foreign affiliates consists of capital goods. Although the trade balance effects
of foreign affiliates consists of capital goods. Although the trade balance effects of
foreign affiliates activities remain the same when the composition of imports is taken
into account, the overall economic implications for China are different as imports of
capital goods add significantly to the capital stock and productive capacity of the
country.

In any event, as far as the impact on a country's balance of payments position --- often
a major underlying concern for developing countries (although somewhat diminished in
importance as countries' exchange rate policies have become more flexible) --- is
concerned, focussing on the trade balance captures only a part of the impact of TNC
activities. Additional factors that need to be taken into account are capital inflows, the
repatriation of earnings and capital, and other long-term impacts on the foreign
exchange earnings affiliates and associated local companies. Such an analysis of the
balance of-payments impact, which would also have to be weighed against their other
(structural) effects on a country's development and welfare, falls outside the scope of
the present export.

The question of upgrading exports relates to the extent to which FDI involves higher
technological content and domestic value added in host country export production and a
restructuring of exports from those based on static comparative advantage to those
based on dynamic comparative advantage. The starting point is that specialization in
different segments of international production systems may imply different benefits and
competitive prospects. There is therefore some concern that specialization in labour-
intensive segments, even of high-technology exports, may in some ways be undesirable
as it may provide few benefits in training or technology and meagre spillovers to the
local economy. Besides the competitive edge of low-cost labour may disappear as
wages rise. Still, labour intensive exports are economically beneficial as long as local
value added is positive at world prices, even if it does not rise at the same pace as the
total value of exports. In fact, where surplus labour is unlikely to be used in more
remunerative or economically desirable activities, it is in the interest of the countries
concerned that it be used in production for export. Any theory of comparative advantage
would suggest that such countries should specialize in simple labour-intensive
processes at the beginning of their export drive; the question is whether they can
subsequently upgrade and sustain their exports.

TNCs can contribute to the upgrading of a country's competitiveness by either investing

in higher-value added activities in industries in which they have not invested before or
by shifting within an industry from low-productivity, low technology, labour intensive
activities to high-productivity, high-technology, knowledge-based ones. The first of these
processes is illustrated by a number of the winners discussed in this Part, especially
those that experienced a notable shift --- as a result of substantial new FDI inflows and
new roles in supplier networks --- from low to medium -- to high technology industries
and sectors. Also rising significance is the growth of FDI associated service exports
from developing countries. Intra-industry upgrading occurs in several ways. There is,
first of all, the situation in which TNCs locate production facilities aimed at serving highly
competitive national regional and global markets in a developing country, many of the
dynamic products identified in chapter VI fall into this category. TNCs need to upgrade
these production facilities continually just to survive, let alone capture higher-value
products within the same industry. The success of countries such as China, Ireland,
Malaysia, the Philippines and Singapore in upgrading the export competitiveness of
their electronic industries in a case in point. Thus for example, Motorola, in its own
interest substantially upgraded its facilities in China (box-VI.9); Ireland convinced Intel to
upgrade beyond assembling and testing to water fabrication; and Malaysia established
long-term relationships with Matsushita Electric and Sony working with them to upgrade
their export operations for colour televisions into regional manufacturing operations. But
even where strong corporate self-interest is involved government policy (often in close
cooperation with TNCs) can play a role in encouraging upgrading in particular by
ensuring that the production environment allows such upgrading and that it extends to
more value-added functions such as R&D. The case of Motorola in China, is case in
point.

Sometimes similar tends to take place in the case of foreign affiliates hitherto protected
by import barriers. Under pressure from trade liberalization and competition, many
TNCs restructure --- in their own interest --- import substitution activities into export-
oriented operations, at least in countries in which a competitive base exists, or can be
created. Some outstanding examples are the automotive industry in Maxico and the
colour television industry in Malaysia and Thailand. Here, policies played an important
role, In Mexico, it was the launch of the maquiladora scheme, combined with the need
of the automobile industry to find low-cost production sites and the further liberalization
of NAFTA with its rules of origin for the automobile industry that had a profound effect
on the country's export competitiveness. The rules of origin were initially established to
help United States automobile TNCs to complete better in their home market against
Asian, specifically Japanese, TNCs. This worked very much in Mexico's favour as Ford,
General Motors and Chrysler (now Daimler Chrysler) and their suppliers set up world-
class plants there to export to the United Stated market. Then, Volkswagen, a German
automobile TNC, established an export in Mexico and was obliged to bring its global
suppliers into Mexico to meet the NAFTA rules of origin. The overall result was a
complete restructuring of the Mexican automobile industry from a protected and
inefficient import substitution activity to highly competitive export platform.

These are examples from some of the most dynamic export products of how the self-
interest of TNCs combined with appropriate government policy, can produce major
improvements in the export competitiveness of fast countries. In other situations,
however, considerably stronger government efforts are required to capitalize the assets
of TNCs and what, in the absence of such efforts, may only be temporary advantages.
The garment industry exemplifies why simply attracting export-oriented activities in and
itself might not be enough to move up the value - added ladder and increase national
benefits.

Branded manufacturers of garments like Sara Lee and Fruit of the Loom made use of
the United States' production sharing mechanism to gain competitive advantage vis--
vis Asian producers by establishing assembly operations in the Caribbean basin. In the
context of the Multifibre Arrangement quotas, this mechanism allowed these assemblers
to remain competitive in the United States market in spite of the fact that wage levels in
the Caribbean basin were higher than many other garment production sites. Contrary to
the experience of Mexico in respect of the rules of origin of NAFTA, this mechanism did
not allow host countries to progress by increasing local content, raising value added or
upgrading the industry. This is because the tariffs applied to value added outside the
United Stated discourage the use of local inputs For that reason, Costa Rica, for
example, chose to focus on electronics and other industries. With the impending
implementation of theWTO Clothing and Textile Agreement, many host countries
specializing in garment exports will have great difficulties in facing competition from
Asia, especially from China. In anticipation of this, some of these branded
manufacturers are cutting back on their international production systems and relying
more on full-package suppliers and contract manufacturers. The nature of the
production-sharing mechanism that restricted the upgrading of the local operations
beyond low-wage assembly has left these export platforms in difficult circumstances.
Corrective national policy action is urgent in cases like this.

This underline the importance of ensuring the sustainability of export-oriented foreign

affiliates. For such affiliates not to be ephemeral, they need not only to upgrade, but to
be progressively embedded in host economies through strong backward linkages. This
requires policies aimed at fastening local capabilities, and, in particular technological
capabilities, human resources and a competitive domestic enterprise sector. Where
these policies are successful, they are likely not only to make the export involved more
sustainable and beneficial for the host countries involved, but also to increase the
competitiveness, but also to increase the competitiveness of the domestic enterprise
sector, the bedrock of economic development. In the end, some of these domestic
enterprises may become TNCs in their own right and contribute to the development of
their home countries through their own global activities. The success of a number of
(mainly Asian) countries in attracting export-oriented TNC activities as part of a broader
national industrialization strategy offers a model for others.

TNCs play an important role in the exports of many developing countries and
economies in transition. Indeed for the most dynamic products in world trade. TNCs are
central for enabling these countries to reach world markets, and they provide some of
the 'missing elements'' that developing countries need to upgrade their competitiveness
in export markets. The potential benefits in TNCs export activity are still far from fully
exploited and they are growing. Technologies are changing. Processes and functions
are increasingly divisible, and the boundaries of what is internal and external to firms
are shifting. The 'death' of distance -or its diminishing cost --- is stretching location
maps. New activities are likely to join the globalization surge, including many from
developing economies, The challenge for countries that would like to improve their
export competitiveness in association with TNCs is how to link up with the international
production systems of these firms and how to benefit from them.

The spread of TNC activity offers host countries oppurtunities to expand and move into
higher value-added activities. Capitalizing fully on static benefits and transforming them
into dynamic and sustainable advantages requires pro-active government support. To
benefit most from TNC associated export competitiveness developing countries must
make continuous efforts to root TNC activities in host economies raise the level of local
content, increase the value added by these activities, upgrade them into more
sophisticated areas and make them sustainable. TNCs, in a number of circumstances,
will take initiatives of their own, in their own self-interest. But national policy efforts and
the policy pace to pursue them ---- are critical for both attracting export oriented FDI and
ensuring its sustainability in order to advance development.

Questions:

(a) What are the areas of concern for low exports from developing countries?
(b) Do you agree that the flow of FDI to developing countries can augment their export
potential? How?
(c) What is the role of transnational corporations in upgrading a country's
competitiveness?
(d) Suggest measures to increase the competitiveness of the domestic enterprise sector
in a developing country.
1. (a) What are basic differences between domestic and international business?
(b) While some see globalization as the avenue to the development of poor nations,
others see it intensifying misery and inequalities. Critically examine the above statement
in today's context.

2. Explain the following:

(a) Localisation of global strategy

(b) Technology contracting (licensing) as an alternative to FDI or ownership strategy.
(c) Major factors contributing to the success of international strategic alliances.

3. Explain the role of " Power Distance" in understanding Hofsted's work on cross-
cultural prospective. How does this help in managing international environment?

4. Discuss the relationship between an MNE and its subsidiaries in the context of the
"make or buy" decision. What are the implications so far as the organization
structure/design is concerned?

5. (a) Explain the role of bargaining power" in managing negotiations in international

business. (b) Briefly discuss the direct and indirect impacts of FDI on LDCs.

SECTION B

6. Please read the following case study carefully and answer the questions given at the
end.

SEN-SCHWITZ

To the Florid-faced German at Frankfurt Airport's immigration-counter, he appeared to

be just another business traveller. True, but a bit of an understatement. The man under
scrutiny was Binoy Sen, whom the Indian media referred to as the Boom-Box king.

At 14, he had assembled, from parts scavenged from the local dump, a spool-recorder
that had fitted nicely into a suitcase. By the time he time he was 37, in 1979, Sen & Sen
(S&S), a company he had promoted with his elder brother, Sanjoy --- who made up for
his lack of technical expertise with a razor sharp business brain --- was Asia's largest
manufacturer of radios and cassette-recorders. Now, at 56, he presided over India's
largest audio-Products Company. Sen-Schwitz, a joint venture with the Frankfurt-based
consumer electronics giant, Schwitz GMBH.

S&S association with Schwitz had actually begun in 1984. Music had become a
movement in Europe at that time, with immigrant labour of all colour and teenagers of all
sizes constituting market-segments that no company could afford to ignore. But their
means were slender, and intensity of output, rather than nuances of pitch and tone, was
what they were concerned about. Since assembling was a labour and cost intensive
process, at least in Europe, Schwitz could not manufacture low-end boom-boxes
cheaply.

So, the company turned to Asia, where it was certain some Chinese or Taiwanese
company could meet its requirements. None could. However, on a reach of Taiwan, one
of the company's managers had spotted a couple of S&S products at a retail outlet.
While this Indo-German relationship had begun as a vendor-buyer one, Helmut Schwitz,
51, the CEO of Schwitz --- no relation of Adolf Schwitz, who had founded the company
just after the end of World War II --- took an instant liking to the Sen brothers. Two years
after S&S started supplying it products, in 1986, the German company acquired a 10
per cent stake in its Indian supplier.

IN 1992, when Schwitz released that he could no longer ignore the Indian market and
the Sens accepted the fact that they couldn't survive the threat from global competition
without technology and marketing support from their German Partner, they formed a
formal joint venture. The Sens and the German company both held 26 per cent stakes
in Sen-Schwitz, with the rest being divided between the financial institutions and the
investing.

The joint venture did well right from its inception. The transnational's superior quality
standards and S&S strong distribution network worked wonders. Within 2 years, the
company had managed to carve out a 45 per cent share of the Rs. 795-crore market.
The Sens were happy and so was Schwitz. By 1998, Sen Schwitz's share had
increased to 65 per cent in a market that had grown to Rs. 1,150 crore, And when Sen
reached Frankfurt for the annual review of the joint venture that Schwitz GMBH insisted
on --- the company had 7 joint ventures across Asia and Latin America --- he could not
but help feeling that all was well with the world of music and money.

Sen's feelings were only amplified during the review. After the preliminary greetings,
Helmut Schwiz took the oais. The room darkened, and a series of PowerPoint images
flashed on the screen behind Schwiz as he spoke. Sen caught only fragments of the
German's heavily accented voice, his attention was focused on the images and the
bullets of text they contained. Sen scrawled a few of them on his notepad

A turnover of $ 100 billion by 2005

AQ growth - rate of 20 per cent a year.
35 per cent of the growth coming from India and China Then. Schwiz started
speaking about India and Sen's attention moved from the screen to the man.
What he heard pleased him. "Sen-Schwiz has a marketshare of 65 per cent in a
market that is growing at the rate of 30 per cent a year. As far as our targets for
2005 go, we believe that it is our most promising joint venture."

The blow fell later, during the break for lunch. Sen and Chris Liu who headed the
company's joint venture in Taiwan, were exchanging notes when Schwiz butted in and,
in his characteristic overbearing fashion, quickly monoeuvrec Sen to one corner of the
room.
"India is, clearly, the market of the future, Binoy," he said, biting into a roll. "You're doing
a great job, and can expect support from me for all your endeavours. But I'm worried
about your margins." Here it comes, thought Sen, the twist in the tall. "A post tax margin
of 8 per cent doesn't look too good," continued Schwiz, "especially when seen in the
light of rising volumes. We should take a fresh look at our Indian operations, Why don't
you meet with Andrew?"

Suddenly, Sen was on guard. The 55 year old Andrew Fotheringay was Schwiz's
President (International Operations). Sen liked him; they had worked together when the
joint venture was being set up, and had been impressed by his eye for detail. But he
also knew that Fotheringay was Schwiz's hatchetman. "What's on your mind, Helmut ?"
he asked point-blank "oh, nothing yet," replied Schwiz, "but we have to find a way to
introduce more products into the Indian market without stretching Sen-Schwitz, Talk to
Andrew."

That wasn't to be Fotheringay, whose wife was 9 months pregnant, had to suddenly
leave for London, but promised to fly down to Calcutta, where Sen-Schwitz was based
as soon as the baby was born. Now, Sen was sure that something was up : Fotheringay
wasn't the kind of manager to do something like that for nothing. Sen voiced his fears at
a meeting of the Sen-Schwitz board, which had been scheduled on the day of his
return. One of the board members, R. Raghavan, 53 a professor of corporate strategy
at the Indian Institute of Management, Gauhati, felt that Sen was over reaching I don't
think it is quite what you think, Sanjoy he started although Sen hadn't put any specifics
to his fears. "Sen-Schwitz is, as BUSINESS TODAY keeps reminding us, evidence that
there is, indeed, scope for a win-win joint venture even in the Indian context."

He was wrong. Sure, the joint venture has benefited from the German parent's technical
expertise. In turn Schwitz GMBH had profited substantially from Sen Schwitz's dividend
pay-outs : more than 25 per cent every year. Werner Kohl, 48 Sen Schwitz's Technical
Director, seemed to agree with the professor. Kohl was a Schwitz nominee on the
board, and had been a Vice-president (Operations) at the transnational's Hamburg plant
before being seconded to Sen-Schwitz for a 5 year period. But Kohl Sen knew was not
likely to know what was happening back home.

The one person who agred with Sen was Rajesh Jain 44, the IDBI nominee on the
board, who expressed the opinion that Schwiz GMBH could possiibly, be planning
another joint venture with some other company. That sounded far-fetched even to Sen.
Sen-Schwitz's closest per cent. Besides, no company could match Sen-Schwitz;'s
distribution network. So, he decided to let his fears abate till Fotneringay could either
dispet them --- or make them come alive.

True to his word, Fotheringay, now the proud father of his first daughter landed up in
Calcutta a week later. He first met the company's functional heads, and gave them a
pep talk: " Sen-Schwitz's volumes-thrust should be backed by a profitability focus. Once
we ensure margins of 13 to 15 per cent, we will be on our way."
Alone with Sen, though, Fotheringay quickly laid his cards on the table. Schwitz, he
informed Sen, wished to set up a 100 per cent subsidiary in the country. Sen's mind
was, suddenly, clear. He had been a fool not to see it coming. All that talk about
restructuring the joint venture, introducing newer models, and the need for higher
margins led up to just one thing: a fully-owned Schwiz subsidiary." So what does this
mean for us, Andrew," he asked, "Is this advance warning about a parting of ways?"

Fotheringay was quick to dispel this notion. "The subsidiary will not compromise the
interests of the joint venture. Schwitz has a long-term commitment to the India market,
and this subsidiary is just a step in that director."

All this talk-about commitment, realized Sen, was taking them nowhere. He sounded
just a little imitated when he spoke: "I just can't understand why you people are even
considering a subsidiary when the joint venture has been so successful. We have a
great brand, good products, the finest distribution network in the business, and an
excellent supply chain Together, we have created a matrix that has delivered. Why does
Schwitz want to reinvent the wheel?"

Fotheringay's answers didn't satisfy him. He made some noises about the subsidiary
taking upon itself a large portion of the expenses involved in building the Sen-Schwitz
brand, thereby reducing its operational expenses, and improving its margins. Sen was
quick to point out that the Government of India did not view proposals for fully-owned
marketing subsidiaries favourably. "Besides, does this mean that we transfer our
marketing and distribution network to the subsidiary?" he asked incredulously.

Fotheringay side-stepped the issue: "No, no, the subsidiary will only manufacturer
products." Reading the look on Sen's face, he hastened to enumerate Schwitz's
gameplan: 'Of course, none of our offerings will complete directly with Sen-Schwitz As
you are aware,the audio systems market is fairly segmented, so there is a great deal of
potential for new offerings. We want to set up a committee from Sen-Schwitz and
Schwitz to decide on the respective roadmaps of the joint venture and the subsidiary so
as to avoid any conflict."

"That apart," he smiled, here comes the carrot, thought Sen and he wasn't wrong,"the
Sens will have the option to buy upto 49 per cent of the subsidiary's equity when it goes
in for an IPO." The subsidiary is not even off the ground, thought Sen and Andrew is
already speaking in terms of US and THEM

Fotheringay took Sen's silence to mean acceptance."The other reason," he continued,

"is that we cam use the subsidiary to introduce our premium brands into the country.
There is evidence that the market for premium audio-systems is all set to boom. Think
about it, Binoy. The subsidiary will only strengthen the strategic relationship between
the Sens and Schwitz GMBH."

The Sens aren't involved, thought Sen; this is an issue that concern Sen-Schwiz
andSchqitz. But he didn't want to split hairs, and promised, instead, to think about it.
Sen-Schwitz's Executive Committee thought about it for 3 months. And it still didn't
make sense to them. Schwitz GMBH operated through joint ventures in every part of the
developing world. Only in the US, UK, and France did it have fully-owned subsidiaries,
using the subsidiary as a sink that would absorb the joint venture's marketing expenses
didn't make sense too.

"It sounds altruistic," said V.K. Kapur, 44, the company's head of marketing. "If
launching more products is the only behind the subsidiary, there is no reason why the
joint venture cannot serve that purpose." Sen and the rest of the Committee had to
agree. "There's also no reason why we cannot improve our margins by focusing on our
operational efficiencies," argued Ajay Singh, 46, Sen Schwitz Director, operations, and
Sen had to agree.

He decided to discuss the matter with Sanjoy, who had retired from the business, and
was involved in managing a charity. But Sen didn't get a chance. News-agency had
picked up a report that had appeared in the Financial Times Schwitz's decision to set up
a 100 per cent subsidiary in India. The report created a major stir in the Bombay stock
Exchange, with the price of Sen-Schwitz's stock falling by 30 per cent a day.

It was evident to Sen that no matter what Fotheringay and Schwitz thought, the stock-
market perceived the subsidiary as a threat to the joint venture. It was also evident that
the stock-market viewed Schwitz as the more valuable brand."I understand,"Sanjoy told
Binoy, when the situation had been explained to him. The technology is Schwitz's. The
brand, at least the more powerful one, is theirs. And they have access to our distribution
network. Face it, we don't have a plank to fight on."
Questions:

(a) Identify the sequence of events that has led to the current problem.
(b) Analyse the problem in the context of the process of globalization that has been
increasingly witnesses over the past decade or so.
(c) Examine the "fairness" of establishing a 100% subsidiary by Schwitz GMBH when
the alliance is on.
(d) What future course of action would you suggest to S&S? Give reasons for your
answer.

1. (a) What are the dimensions of international business?

(b) Discuss the factors that have led to the gloabalisation of business.

2. Explain any two of the following:

(a) Factors on which ownership strategy depends in the context of international
business.
(b) Barriers to overcoming organisational biases in the context of managing a multi-focal
strategy.
(c) What are the different mechanisms adopted for coordinating subsidiaries by different
MNEs? What is the need for flexibility?
3. (a) Explain the different approaches to control in multi-national enterprises.
(b) It has been said that MNCs often introduce new efficiency oriented management
practices. What can developing host country learn from the MNCs in this respect?

4. (a) What factors influence hybrid/mixed strategies involving partial rationalisation of

production and marketing facilities and partial local manufacturing?
(b) Briefly explain the stages in cross-cultural negotiation process.

5. Explain the following:

(a) MNEs and New International Economic Order

(b) Dynamics of regional trade groupings
(c) WTO and the promotion and regulation of world trade

SECTION B

6. Please read the following case study carefully and answer the questions given at the
end.

Sunlight Chemicals

Starting at the vast expanse of the Arabian Sea from his comer office at Bombay's
Nariman Point, Ramcharan Shukla the 53-year old executive vice-chairman and
managing Director of the 500-crore Sunlight Chemicals. (Sunlight felt both adventurous
and apprehensive. He knew he had to quicken the global strides Sunlight had made in
the last four years if the company was to benefit from its early gains in the world
markets. However, he was also shaken by a doubt: would his strategy of prising open
international markets by leveraging the talents of a breed of managers with
transnational competencies succeed?

Globalisation had been an integral part of Sunlight's business plans ever since Shukla
took over as managing director in 1990 with the aim of making it the country's first
international chemicals major Since then Sunlight --- the country's third-largest
chemicals maker --- had developed export markets in as many as 40 markets, with
international revenues contributing 40 per cent of its Rs. 500 crore turnover in 1994-95.
The company also set up manufacturing bases in eight countries --- most recently in
China's Shenzhen free trade zone --- manned by a mix of local and Indian employees.

These efforts at going global first took shape in December 1991 when Shukla, after
months of deliberations with his senior management team, outlined Sunlight's Vision
2001 statement. It read " "We will achieve a turnover of $ 1 billion by 2001 by tapping
global markets and developing new products." The statement was well-received both
within and outside the company. The former CEO of a competitor had said in a
newspaper report: "Shukla has nearly sensed the pressures of operating in a new trade
with a tough patents regime."
But Shukla also realised that global expertise could not be developed overnight.
Accordingly, to force the company out of an India-centric mindset, he started a process
of business restructuring. So, the company's business earlier divided into domestic and
export divisions, was now split into five areas: Are I (India and China), Area 2 (Europe
and Russia), Area 3 (Asia Pacific), Area 4 (US) and Area 5 (Africa and South America).
Initially managers were incredulous, with one senior manager saying: "This is crazy. It
lacks a sense of proportion."

The Cynicism was not misplaced. After all, the domestic market --- which then
contributed over 90 per cent of the company's turnover --- had not only been dubbed
with the Chinese market, but had also been brought at par with the areas whose
collective contributions to the turnover was below 10 per cent Shukla's explanation,
presented in an interview to a business magazine: "Actually, the rationale is quite simple
and logical. We took a look at how the market mix would evolve a decade from now and
then created a matrix to suit that mix. Of course, we will also set up manufacturing
facilities in each of these areas to change the sales-mix altogether."

He wasn't wrong. Two years later, even as the first manufacturing facility in Vietnam
was about to go on stream, the overseas areas' contribution to revenues rose to 20 per
cent. And the mood of the management changed with the growing conviction that export
income would spoon surpass domestic turnover. Almost simultaneously, Shukla told his
senior managers that the process of building global markets could materialise only if the
organisation became fat flexible, and fleet-footed. Avinash Dwivedi, am management
consultant brought in to oversee Sunlight's restructuring exercise, told the board of
directors: "Hierachies built up over the years have blunted the company's reflexes, and
this is a disadvantage while working in the competitive global markets."

The selection of vice-president for the newly-constituted regions posed no immediate

problem. For Sunlight had several general managers --- from both arms of marketing
and manufacturing -- whose thinking had been shaped by the company's long exposure
to the export markets. For obvicus reasons, the ability to build markets was the primary
criterion for selection. The second criterion was a broad business perspective with a
multi-functional, multi-market exposure. That was because Shukla felt it did not make
good business sense to send a battalion of functional managers to foreign markets
when two or three business managers could suffice.

But Specific markets also needed specific competencies. That was how Sunlight chose
to appoint a South African national to head Area 5. The logic" only a local CEO could
keep track of changes in regulations and gauge the potential of the booming chemicals
market in the US. However, the effort was always focused on using in-house talent.
Shukla put it to his management team: "We should groom managerial talent --- whether
local or expatriate --- for all our overseas operations from within the company and
should rotate this expertise worldwide. In essence, we should develop global managers
within the company."
While doing the personnel planning for each area and fixing the compensation
packages for overseas Assignment. Sunlight realised the importance of human
resource (HR) initiatives. The HR division headed by vice president Hoseph Negi, had
been hobbled for years with industrial relations problems caused by the unionisation of
the salesforce, " You have to move in step with the company's global strategy." Shukla
had told his HR managers at a training session organised by Dwivedi who was
spearheading the task of grooming global managers.

Four years down the line, Shukla felt that Sunlight was still finding its way around the
task Sure, a system was in place. Depending on the requirements of each of the four
areas, Sunlight had started recruiting between 25 and 30 MBAs every year from the
country's leading management institutes. During the first six months, these young
managers were given cross-functional training, including classroom and on-the-job
inputs. The training was then followed by a placement dialogue to determine the
manager -area fit. If a candidate were to land, for instance, on the Asia-Pacific desk at
the head office, he would be assigned a small region, say, Singapore, and would be
responsible for the entire gamut of brand-building for a period of one year in
coordination with the regional vice-president.

The success with which he would complete his task would decide his next job: the first
full-time overseas posting. He could be appointed as the area head of, say, Vietnam,
which was equivalent to an area sales manager in the home market. After a couple of
years, he would return to base for a placement in brand management or finance. A
couple of years later, the same manager could well be in charge of a region in a
particular area. Over the past four years. Sunlight had developed 30 odd potential
global managers in the company spanning various regions using this system.

But, considering that the grooming programme was only three years old, Shukla felt that
it would take some time for the company's homespun managers to handle larger
markets like China on their own. The real problem in this programme was in matching
the manager to the market. Dwivedi suggested a triangular approach to get the right fit:
define the business target for a market in an area. Look at the candidiate's past
Performance in the market, And identify the key individual characteristics for that
market. Dwivedi also identified another criterion: a good performance rating at home
during the previous two years. Once selected for an overseas posting, the candidate
would be given cross-cultural training: a course in foreign languages, interactive
programmes with repatriated managers on the nature of the assignment and, often,
personality development programmes on the nuances of country business etiquette.

Further, an overseas manager would be appraised on two factors: the degree to which
he had met his business plan targets for the market, and the extent to which he had
developed his team. After all, he had to cachet the posting within three years to make
place for his replacement. Achievements were weighed quarterly and annually against
sales targets set at the beginning of the year by the vice-president of the region. The
appraisal would then be sent to the corporate headquarters in Bombay for review by the
senior management committee. Shukla had often heard his senior managers talk
appreciatively of the benefits of transrepatriation. "The first batch of returnees are more
patient tolerant and manure than when they left home," said Manohar Vishwas, vice-
president (finance),"and they handle people better."

But the litmus test for the company, Shukla felt would be in managing a foreign
workforce --- across diverse cultures --- at the manufacturing facilities in six countries
outside India. The Shenzhen unit, for instance had 220 employees, out of which only 10
were expatriate Indians. Further, the six-member top management team had only two
Indians. Of course, the mix had been dictated by the country's laws and language
considerations.

Some of the African markets had their own peculiarities. The entire team of medical
representatives, for example, comprised fully-quilifies, professional doctors. Sharad
Saxena, vice-president, Area 5, told Shukla: "As there is heavy unemployment in Africa
doctors are attracted to field sales work for higher earnings." There were other problems
too: as both Chinese and Russian had been brought up on a diet of socialism, they
were not used to displaying initiative at the workplace. Dwivedi had suggested that
regular training was one of the ways of transforming the workforce. So, Shukla hired a
training group from Delhi's Institute of Human Resource Management training to spend
a month at Shenzhen. This was later incorporated as an annual exercise.

Observing that interpersonal conflicts were common in situation where with single-
country background were working together, a new organisational structure was
introduced. Here, Sunlight positioned local managers was introduced. Here, Sunlight
positioned local managers between an Indian boss and subordinate. Similarly, some
Indian managers were positioned between a local boss and subordinate. Says Avishek
Acharya vice-president, Area 3: "There were some uncomfortable moments, but it led to
a better integration or management principles, work practices, and ethics."

Obviously, reflected Shukla, Dwivedi was doing a great job. As he watched the setting
sun, however, he found his thoughts turning to a more fundamental question. However
immaculate his HR planning had been, had he made a mistake by not developing his
strategies first? Was he mixing up his priorities by putting people management" ahead
of issues like marketing, technology, and global trade? Even the HR strategy he had
chosen worried Shukla. Should he have opted for more locals in each country? If
expatriate managers failed more often than they succeeded in India wasn't the same
true for other countries?

Questions:

1. Is Sunlight on the right track in going global without trying to consolidate its position
further in the home market?
2. Can Sunlight realise its global vision with its current mix of strategies? However fine
the company's HR planning had been, had Shukla made a mistake by not developing
his strategies first?
3. Are there any gaps in Shukla's game plan to conquer the globe?
4. What are the learnings that you can derive from the "Sunlight" case so far as the
internationalization of business is concerned?

What are the principle factors that explain the sustained growth in globalizationin the past
decades? What indications can one use to demonstrate the increase inglobalization?
2 macro factors:1. Declining trade and investment barriers: decline in barriers to the free flow
ofgoods, services and capital that has occurred since the end of WWIIBarriers to international
trade: high tariffs on imports.Trade barriers contributed to the Great Depression. Learning from
this experience,nations of the West committed themselves to removing barriers- This goal is seen
inGATT (General Agreement of Tariffs and Trade). International trade: a firm exports goods
and services to consumers in another
country.
FDI: Foreign Direct Investment: a firm invests resources in business activitiesoutside its home
country.
Stock of FDI: the total cumulative value of foreign investmentsAverage tariff rates for most
countries have fallen significantly since 1950, at about 4%.While reducing trade barriers, many
countries have also been removing restrictions toFDI. Such trends facilitate both the
globalization of markets and of production2. Technological change, particularly in
communication, information processing andtransportation. Results in a shrinking
globe. Microprocessors and telecommunications: enabled growth of high-power, low-
cost computing. Development of satellite, wireless technologies, internet, WorldWide Wed. Cost
of microprocessors continues to fall: an international phone callnow only costs a few dollars, in
1930s it was a few hundred dollars.
Internet and Web: they are the information backbone of tomorrows global
economy and are creating electronic global marketplaces. 1 million users in 1990,50 million
users in 1995, 1.97 billion users by 2010. Facilities e-commerce andmakes it easy for buyers and
sellers to find each other. Web is emerging as an
equalizer: diminishes constraints of location, scale and time zones.
Transportation tech: reducing the time needed to get from one location toanother and to move
goods across the world, has effectively shrunk the globe.Commercial jet aircrafts,
containerization. Low-cost travel has resulted in themass movement of people between
countries. Communication tech: worldwide communications network has become essential
for many international businesses. Ex: Hewlett-Packard (HP) uses satellitecommunications and
info processing techs to link its worldwide operations. Ateam can be dispersed around the world
and communicate via webconferencing,webcasting, telephone, skype, email, fax.Indicators of
globalization: convergence of consumer tastes and preferences(mcdonalds everywhere, existence
of MNEs)

What are the essential features of the different levels of economic integrationpossible between 2
or more countries?
1. FTA2. FTA+ tariff customs= Customs Union (CU)3. CU+ labor and capital mobility=
Common Market (CM)4. CM+ Common currency= Economic Union (EU)5. EU+ one
government= Political Union
Q. ch9 How are exchange rates determined?
3 factors
Price inflation:
Inflation is a monetary phenomenon. It occurs when the quantity of money in circulationrises
faster than the stock of goods and services, that is when the money supply increasesfaster than
output increases. When money supply suddenly goes up, providers of goodsand services would
respond to this upsurge in demand by raising prices. The result wouldbe price inflation.
Government policy determines whether the rate of growth in acountrys money supply is greater
than the rate of growth in output.
Interest Rates:
Economic theory tells us that interest rates reflect expectations about likely futureinflation rates.
In countries where inflation is expected to be high, interest rates also willbe high. This is the
International Fisher Effect. Like PPP, not a good indicator of shortterm XR.
Market Psychology:
Psychological factors play an important role in determining the expectations of markettraders as
to likely future exchange rates. In turn, expectations have a tendency to becomeself-fulfilling
prophecies. This plays an important role in determining short-run exchangerate movements.
Investor psychology can be influenced by political factors, and bymicroeconomic events (such as
investment decisions of large firms). Bandwagon effectcan increase the effect of investor
psychology on XR.
Q: Existing exchange rates do not reflect PPP Theory of XR. Why not?
PPP states that the price of a basket of particular goods should be roughly equivalent ineach
country.By comparing exchange the prices of identical products in different currencies it
wouldbe possible to determine the real or PPP XR that would exist if markets were efficient.
Inessence, PPP theory predicts that changes in relative prices will result in a change inexchange
rates. The theory tells us that a country with a high inflation rate will see adepreciation in its
currency XRWhile PPP seems to yield relatively accurate predictions in the long run, it does
notappear to be a strong predictor of short-run movements in exchange rates (less then
5years).The failure to find a strong link between relative inflation rates and exchange
ratemovements has been referred to as the purchasing power parity puzzle.Factors that explain
the failure of PPP theory to predict current XR:

PPP assumes away transportation costs and barriers to trade. In reality, thesecreate significant
price differences between countries. Governments routinely intervene in international trade
(tariff, quotas). This meansthe law of one price does not hold. Violating the assumption of
efficient markets,weakens the link between relative price changes and changes in XR predicted
byPPP. PPP may not hold if national markets are dominated by a few MNEs(monopolies) that
have sufficient market power to influence prices, controldistribution channels, etc. ex P&G,
Caterpillar Inc, Apple Governments intervene in the foreign exchange market to attempt to
influence thevalue of their currencies. Impact of investor psychologyQ. What are the merits
and demerits of the different exchange rate systems? Fixed: The values of a set of currencies are
fixed against each other at some mutually-agreed upon exchange rate.The merits: stability in
the exchange rate (you know exactly what the exchange rate will be 6
months ahead of time) Fixed XR are seen as a mechanism for controlling inflation and
imposingeconomic discipline on countries. By eliminating uncertainty, fixed XR promotes the
growth of international tradeand investmentDemerits: no flexibility which means it would
probably end up breaking down like thegold standard did. This system collapsed in
1973.Pegged: the value of the currency is fixed relative to a reference currency, such as the
USdollar and then the XR between that currency and other currencies is determined by
thereference currency XR. Ex: as the US dollar rises in value, its own currency rises
too.Advantage: imposes monetary discipline and leads to low inflation rates. Disadvantage: itcan
be difficult for a smaller country to maintain a peg against another currency if capitalis flowing
out and foreign traders are speculating against the currency.Flexible/floating: foreign exchange
market determines the relative value of a currency.US, Euro, Yen and Pound are all free to float
against each other.Advantages: it gives countries autonomy regarding their monetary
policy floating exchange rates facilitate smooth adjustments of trade imbalances. reflects the
world market More flexible to changing conditions.Disadvantage: difficult to predict,
especially short term. More volatility. You loosecontrolDirty-float: Countries try to hold the
value of their currency within some range againstan important reference currency. It is dirty
because the central bank of a country willintervene in the foreign XR market to maintain the
value of its currency if it depreciates

too rapidly against an important reference currency. keep your currency artificially low tofavor
FDI and exports (China) provides stability.
Q How do we choose a country to manufacture?
Country Factors Economic, political, legal, cultural differences (see ch 2) Presence of global
concentrations of activities/industries in a certain location.Large pool of knowledge, knowledge
and labour flows between companies in the
same location. Ex Tech hubs Location externalities, cost and availability of basic and advanced
factors ofproduction and ressources, trade barriers, expected future movement of exchangerate in
the country you want to manufacture in. Cost of manufacturing, labourproductivity.Tech
Factors Fixed costs high or low (transportation costs) Minimum efficient scale high or
low Flexible manufacturing technology available or not Mass customization available or
notProduct Factors Value to weight ratio Universal needsStrategic role of foreign
factories Many foreign factories upgrade their own capabilities, which can benefit you
significantly. Ex products being designed by engineers who were close to the Asian market
andhad a good understanding of the needs to that market, as opposed to engineerslocated in the
US. Increased abundance of advanced factors of production Foreign factories viewed as
globally dispersed centers of excellence Global learning
Q. Should you make or buy it?Advantages of MAKE:
Lower costs if you are more efficient then anyone else Better to make yourself if there is a
need for substantial investments in specialized
assets. Manufacturers dont want to risk making such big investments unless they
have a long contract that guarantees certain amount of product. Protect proprietary product
technology (patents). Avoid the risk of yourintellectual property being stolen if its critical to your
competitive advantage. ExCoca Cola. Improve scheduling: you have complete control over
manufacturing. So nextmonth you can produce just half of what you did the month before. When
youhave a contract with another company, this is not easy to do. Controllinginventory is very
important in an industry where demand is not very predictable.
Disadvantages of MAKE: Internal suppliers have a captive customer in the firm so they lack an
incentive toreduce costs. Unlike a company in a competitive environment that has to
constantly improve and reduce costs. Complexity of transfer pricing decisions due to different
tax regimes, exchangerate movements, ignorance about local conditions, etc.
Advantages of BUY
Strategic flexibility: ability to change suppliers due to changes circumstances, incosts, political
instability, changes in trade policies, etc. Move production as a
countrys attractiveness as a supply source changes. Lower costs: not every company can
invest so much money in setting up factories(fixed costs). Also, another company might be more
efficient and knowledgeableat manufacturing then you. Decreases costs related to bureaucracy
andmanagement of a large plant. Offsets: help the firm capture more orders from that country.
US urged Japan topurchase more component parts from US suppliers since US imports so many
carsfrom Japan.
Disadvantages of BUY
Duration of the contract is a crucial issue. Both parties need to negotiate and make
certain sacrifices/accept certain risks.
Difficult to decide when product attributes change very fast, especially in
technology industry. Must negotiate on price, unitsStrategic Alliances with Suppliers
Reap some benefits of vertical integration without the associated organizational
problems by having strategic alliances with essential suppliers. Builds trust between the firm
and its long term suppliers. Good for just in time inventory systems Companies can save
millions thanks to sharing advertising costs, manufacturingcosts, distribution costs, more
effective and cheaper R&D.
Q ch 6 A country can use many approaches to ensure protectionism. Describe them,giving
specific examples of their uses.
Tariffs-increase the cost of goods to the consumer and provide revenue to governments(Smoot
Hawley Tariff Act increased many tariffs on products coming to the US and is aspecific example
of tariff uses)
Import quotas- reduce the quantity of goods a company is allowed to import for sale andthus due
to the law of supply and demand raises the price of the goods. For example theUSA put an
import quota on Japanese motorcycles to protect American producers.
Anti-dumping legislation- prevents the dumping or cheaper less expensive foreign
goods into a market which can drive domestic firms out of business. An example is when

McCains begin an investigation because they believed foreign pizza firms were dumping
pizzas to take market share from them.
Subsidies- provide monetary or tax incentives to domestic industries to allow them togain first
mover or to do business in competitive industry that the nation wants to dobusiness in or support.
US auto manufacturers/Technology or medical companies thatmay fail without government
support, but the government believes they are important toprotect.
Immigration restrictions- can limit the amount of immigrants coming to a nation andreduce the
competition on domestic jobs. The USA and Canada both have set limits onthe annual number of
immigrants.
Local content requirement: demands that some specific fraction of a good be
produceddomestically. Either in physical terms (75% of content parts must be made here) or
invalue terms (75% of the value of this product must be produced locally)
Administrative policies: bureaucratic rules designed o make it difficult for imports toenter a
country.
Preferential spending marketing- the buy American ads from WWI and WWII
Currency manipulation- a country may lower the value of its currency by selling it on theon the
foreign exchange market this will raise the cost of imports and lower the cost ofexports leading
to an improvement in its trade balance. Only effective in the short run asit will lead to inflation
which will raise the costs of imports and reduce the relative priceof imports.
Q: The case for government intervention in trade policy?
Political arguments for intervention are concerned with protecting the interests of certaingroups
within a nation (normally producers) often at the expense of other groups(normally consumers).
Economic arguments for intervention are typically concerned withboosting the overall wealth of
a nation (to the benefit of all, both producers andconsumers).Political arguments: Protecting
jobs and industries: protecting Canadian textile industry from indian
imports National security: if a certain industry is high risk, crucial to your nationalsecurity like
army, defence Retaliation: use the threat to intervene in trade policy as a bargaining tool t
helpopen foreign markets and force trading partners to adhere to your rules. Ex USforcing China
to adopt intellectual property rights.
Protecting consumers: from unsafe products. Like baby walkers, GMO products
banned in Europe. Furthering foreign policy objectives: a gov may grant preferential trade
terms to acountry it wants to build strong relations with. Ex US and China. Alternatively

US and Cuba: impoverish Cuba in the hope that they will abolish their
communistgovernment Protecting Human Rights: using trade policy to improve the human
rights policiesof trading partners.Economic arguments: Infant industry argument: to allow
manufacturing to get a toehold, the argument isthat government should temporarily support new
industries until they have grown
enough to meet international competition Strategic trade policy: help ensure that a firm gains
first-mover advantage throughsubsidies in newly emerging industries.
Q Price purchasing parity (PPP) theory states that everything that is the sameproduct or services
should cost the same around the world. This is not the case,why?
Transportation costs Import and export tariffs Cost of factors of production MNEs that
monopolize industries have control over price. If demand is high, theycan raise the prices. This is
known as price discrimination.
Q Explain why a firm would choose foreign direct investment over other types of
selling their products. The alternatives to FDI: exporting and licensing.So why go through the
trouble of FDI?o Viability of exporting is limited by transportation cost and trade
barrierso Licensing has three major drawbacks1. May result in the loss of valuable technological
processes2. Does not give firm tight control over manufacturing, marketing, etc.3. Competitive
advantage not so much based on product.o Strategic Behaviour- FDI flows are a reflection of
strategic rivalry between firms
in the global marketplace (firms following each other)o Multi point competition: arises when two
or more enterprises encounter eachother in different regional markets, national markets of
industries. Firms try tomatch each others moves in different markets to try to hold each other in
check.o Product life cycle approach: invest in other advanced countries when localdemand is low
and move on when market saturation gives rise to pricecompetition and cost pressure (Xerox
loves this)o Eclectic paradigm Location specific advantages are also important for rationale
and directionof foreign direct investment. Advantages arise from utilizing resourceendowments
or assets that are tired to a particular foreign location and that afirm can combine with its own
unique assets (tech, marketing,
management).

Firms should set up facilities where foreign assets or resources endowmentsare

located Relies on a hefty knowledge base area to obtain location specific advantage
Q. What are the determinants of economic development?
Political, economic and legal systems all affect economic development Geography: by virtue
of favorable geography, certain societies were more likelyto engage in trade than others and were
thus more likely to be open to and todevelop market-based economic systems, which in turn
would promote economic
growth
Education: nations that invest more in education will have higher growth ratesbecause an
educated population is a more productive population. Gets people outof the poverty cycle Child
labor: always holds a country back from its economic growth potentialbecause kids get stuck in
the poverty cycle and rarely receive much education.