IBSA Short Notes

Absolute Advantage
The ability of a country, individual, company or region to produce a good or
service at a lower cost per unit than the cost at which any other entity produces
that good or service. Entities with absolute advantages can produce a product or
service using a smaller number of inputs and/or using a more efficient process
than another party producing the same product or service.
Absolute advantage means that an economy can produce a good for lower costs
than another. It means that less resources are needed to produce the same
amount of goods.
Absolute advantage can be hard to measure for many complicated goods,
because there are many different factor inputs.
Absolute advantage doesnt necessarily mean an economy should produce that
good. This requires a country to have a comparative advantage. For example,
one country may have an absolute advantage in many goods but it is not
advisable to try and produce everything. It is better to focus on on goods where
you have a relative advantage.
Acquisition
A corporate action in which a company buys most, if not all, of the target
company's ownership stakes in order to assume control of the target firm.
Acquisitions are often made as part of a company's growth strategy whereby it is
more beneficial to take over an existing firm's operations and niche compared to
expanding on its own. Acquisitions are often paid in cash, the acquiring
company's stock or a combination of both.
ASEAN
In January 1992, a set of six countries namely Singapore, Brunei, Malaysia,
Philippines, Thailand and Indonesia made and entered into an agreement to form
a Common Effective Preferential Tariffs (CEPT) plan. CEPT was used in developing
an Association of South East Asian Nations (ASEAN) which was a free trade area
in 15 years which commenced from January 1993. The CEPT reduced the tariffs
ranging from .50 percent starting with15 products.
The beginning and the successful functioning of EEC and NAFTA gave birth to the
formation of ASEAN. The member countries of ASEAN have been economically
developing at a faster pace throughout the world. Skilled and well-educated
personnel are the biggest strength of these member countries which allows them
to attain rapid industrialization. The ASEAN member countries are prosperous in
mineral resources, agricultural goods and new industrial products. There are
greater number of imports and exports which results in free flow of foreign
capital among these countries.
Common Market
Group formed by countries within a geographical area to promote duty free trade
and free movement of labour and capital among its members. European
community (as a legal entity within the framework of European Union) is the best
known example. Common markets impose common external tariff (CET) on
imports from non-member.

An economic market consisting of multiple nations or entities that have adopted

common regulations and policies to reduce internal trade barriers.
Comparative Advantage Theory
The theory of comparative advantage is an economic theory about the potential
gains from trade for individuals, firms, or nations that arise from differences in
their factor endowments or technological progress. In an economic model, an
agent has a comparative advantage over another in producing a particular good
if he can produce that good at a lower relative opportunity cost or autarky price,
i.e. at a lower relative marginal cost prior to trade. The closely related law or
principle of comparative advantage holds that under free trade, an agent will
produce more of and consume less of a good for which he has a comparative
advantage.
Competitive Advantage
When a firm gains major proportion of market share over its rivals through
effective utilization of its unique resources, competencies, skills etc., then it is
said to have gained a competitive advantage over its competitors. In this aspect,
Michel E. Porter has proposed a Porters diamond theory. According to this
theory, a firm can attain competitive advantage over its rivals from the following
four factors,
1.
2.
3.
4.

Demand Conditions
Factor Conditions
Related and supporting industries
Structure, strategy and competitiveness of the firm

Competitive Strategy
According to Porter ME, 1980 competitive strategy can be defined as the "plan
for how a firm will compete, formulated after evaluating how its strengths and
weaknesses compare to those of its competitors. For example, a small
meatpacking firm may decide to concentrate on a special niche product offered
in limited areas after determining it cannot compete on price with major
competitors."
Competitive Strategy can be defined as a "framework for making decisions which
priorities actions that create results in a competitive market."
Cultural Environment
The term cultural means the complex whole which involves belief, knowledge art,
morals, customs and various other habits which a person acquires as a member
of society. According to the Elbert W Steward and James A Glym, Cultural
consists of the thought and the behavioural patterns that the members of a
society learn through language and other forms of symbolic interaction which
includes their customs, beliefs, habits and values which are the common view
points that bind them together as a social entity.
Contract Mfg:
Few companies outsource some portion or completed manufacturing task to
outsiders and focus on marketing activities. This custom or outsourcing is known
as contract manufacturing. In other words contract manufacturing refers to the
practise of outsourcing some portion or complete manufacturing task to
outsiders and focusing on marketing activities.

Under contract manufacturing, a company arranges to have its products

manufactured by an independent local company on a contractual basis. Usually
contract manufacturing is employed where the production technology involved is
widely available and where the marketing effort is of crucial importance in the
success of the product.
Ethnocentrism
The host countries strategies are to produce that kind of goods suitable to
national markets, customers and competitors. If the production exceeds the
demand on account of changing customer preferences or heavy competition,
leads the firms to export their products globally. The firm which exported their
products globally considered export business as an extension or a new region.
The role played by the executive at the head office toward exports is taking
decisions regarding how much export etc. The marketing personnel belonging to
the domestic country supervises export operations with the assistance given by
export department.
European Union
European Union was originated from European Coal and Steel Community
(ECSC), which was established by the West Germany, France, Italy, Belgium,
Netherlands and Luxemburg in 1952. The main purpose of ECSE was to remove
the import duties and quotas on coal, iron ore, steel and scrap with regard to the
international trade between the member countries.
EFTA
EFTA stands for European Free Trade Association. The Member countries of EFTA
are Iceland, Liechtenstein, Norway and Switzerland
Exporting
Since many countries do not offer a large enough opportunity to justify local
production, exporting allows a company to centrally manufacture its products for
several markets and obtain economies of scale.
Since, exports represents incremental volume out of an existing production
operation located elsewhere, the marginal profitability of such exports tends to
be high. A firm has two basic options in carrying out its export operations,
indirect exporting and direct exporting.
Franchising
The term franchising has been organinated from a French term francorum rex
meaning freedom from servitude'. Franchising is a special type of licensing in
which two parties are involved i.e., a franchiser and a franchisee.
In franchising, franchiser is an international company which provides licences to
a franchisee for performing business and other property rights like trademarks,
know-how, patent so on in a precise form by charging some amount as
franchising fee. Franchising is commonly used for service industries/service
sector.
Less risk is involved in franchising and it is low cost business expansion method,
which helps a firm to expand its business units in many countries with less
financial commitments. Franchising is classified into two types:

a) Direct Franchising: Under direct franchising, franchiser frame the polices to

control and guide the activities performed by each host country from
home country.
b) Indirect Franchising: Under indirect franchising, there is a mediator
between the franchiser (international company) and the franchisee (host
country units) who is termed as sub franchiser. Sub franchiser enjoys the
right to use the business package of the original franchiser in a specified
geographic area.
GATT
The General Agreement on Tariffs and Trade (GATT), the predecessor of WTO was
born in 1947 as a result of the international desire to liberalize trade. The Bretton
Woods conference of 1944, which had recommended the IMF and World Bank,
had also recommended the establishment of an International Trade organization
(ITO). Although the IMF and World Bank were established in 1946 the ITO charter
was never ratified, because of the objections that its enforcement provisions
would interfere with the autonomy of domestic policy making.

Geocentrism
The companies treat the whole world as single country under this approach. The
company selects its employees from across the world and carry out the process
by establishing many subsidiaries. The subsidiaries activities are directed by the
managing director (head quarters). Each subsidiary has given the power the
operate the business independently and can also participate in framing policies,
regarding HR, strategic and HR, product-design and making decisions etc.
Global Company / International Company
Few domestic firms which expand their production capacities or domestic
marketing usually decide to penetrate into the international markets. The firm
decide to internationalize their operations come under their stage. These firms
feel that the practices, people and the products of the domestic business are
better than the practices followed by other nations. Though the firms
concentrate on national boundaries, it spreads its branches to foreign nations.
The firm makes use strategies for developing the branches in the international
markets and expands its operations in foreign markets. They try to expand their
domestic product, price etc in foreign markets.
Many firms opt this strategy because of limited amount of resources and for
gaining knowledge about the international markets before going globally. The
international firms expand the marketing mix domestic company, its business
models and products to foreign countries.
Global Competitiveness
The Global Competitiveness Report of the World Economic Forum defines
competitiveness as "the set of institutions, policies, and factors that determine
the level of productivity of a country". The term is also used to refer in a broader
sense to the economic competitiveness of countries, regions or cities.
The existence of competing organizations that serve international customers.
Access to global customers has increased through enhanced communications,
improved shipping channels, reduction of barriers, and centralized finance
authorities.
Globalization/Internationalization
According to International Monetary Fund, Globalization is the growing
economic interdependence of countries worldwide through increase volume and
variety of cross border transactions in goods and services and of international
capital flows and also through the more rapid and widespread diffusion of
technology.
According to Charles U.L. Hill, Globalization is the shift towards a more
integrated and independent world economy. Globalization has two main
components the globalization of markets and the globalization of production.
International Business / Global Business
The business activities which are carried out across countries/national
boundaries is called as international business. The business activities any
comprise of transaction of economic resources such as goods, capital services
and commercial transactions such as sales, investments (FDI), production of

physical goods or provision of services which include banking, finance, insurance,

construction, trading etc. Thus, international business is a wider term as it
includes international trade and Foreign Direct Investment (FDI).

International Trade
International trade is the exchange of capital, goods, and services across
international borders or territories. In most countries, such trade represents a
significant share of gross domestic product (GDP). While international trade has
been present throughout much of history, its economic, social, and political
importance has been on the rise in recent centuries. It is the presupposition of
international trade that a sufficient level of geopolitical peace and stability are
prevailing in order to allow for the peaceful exchange of trade and commerce to
take place between nations.
Joint Venture
Two or more independent companies which plans to work jointly, by contributing
equal amount of equity capital to start a new company in the form of business
venture is called as Joint Venture. Basically joint ventures are formed on a longterm basis for an indefinite period of time but, some ventures are also formed on
contractual basis. Joint ventures are formed between two or more companies in
the same industry (or) across different industries (or) across different countries.
Joint Venture - Divorce

Leontief's paradox
Leontief's paradox in economics is that the country with the world's highest
capital-per worker has a lower capital/labor ratio in exports than in imports.
This econometric find was the result of Wassily W. Leontief's attempt to test the
HeckscherOhlin theory empirically. In 1954, Leontief found that the United
Statesthe most capital-abundant country in the worldexported laborintensive commodities and imported capital-intensive commodities, in
contradiction with HeckscherOhlin theory ("HO theory").
Levels of Economic Integration
Levels of Economic Integration: There are about five additive levels of economic
integration impacting the global landscape:

Free trade. Tariffs (a tax imposed on imported goods) between member

countries are abolished or significantly reduced. Each member country
keeps its own tariffs in regard to third countries. The general goal is to
develop economies of scale and comparative advantages, which promotes
economic efficiency.

Custom union. Sets common external tariffs among member countries,

implying that the same tariffs are applied to third countries. Custom
unions are particularly useful to level the competitiveness playing field
and address the problem of re-exports (using preferential tariffs in one
country to enter another country).

Common market. Factors of production, such a labor and capital, are free
to move within member countries, expanding scale economies and
comparative advantages. Thus, a worker in a member country is able to
move and work in another member country.

Economic union. Monetary and fiscal policies between member countries

are harmonized, which implies a level of political integration. A further
step concerns a monetary union where a common currency is used, such
as with the European Union (Euro).

Political union. Represents the potentially most advanced form of

integration with a common government and were the sovereignty of
member country is significantly reduced. Only found within nation states,
such as federations where there is a central government and regions
having a level of autonomy.

Licensing
Under licensing, a company assigns the right to a patent or a trademark to
another company for a fee or royalty. In licensing as a method of market entry, a
company can gain market presence without an equity investment. The foreign
company, or license, gains the right to commercially exploit the patent or
trademark either on an exclusive or unrestricted basis.
Licenses are signed for a variety of time periods. Depending on the investment
needed to enter the market, the foreign licenses may insist on a longer licensing
period to pay of the initial investment. The license will make all necessary,
capital investment such as machinery inventory and so on and market the
products in the assigned sales territories, which may consist of one or several
countries. Licensing arrangements are subject to negotiation and tend to vary
considerably from company to company and from industry to industry.
Management Contract
Management contract refers to an agreement between two companies wherein
one company agrees to provide another company managerial help, technical
proficiency and specific services for a predetermined period of time by taking
some consideration in return. This consideration will be in the form of money.
The companies which lack sufficient technology and managerial proficiency look
for help from foreign countrys company. If foreign company agrees to provide
technical help and managerial expertise, then agreement builds up between
them. This agreement is known as management contract.
Multinational / Multidomestic Company / Multinational Corporation /
MNC
MNCs are huge industrial organizations which extend their industrial and
marketing operations through the works through a network of their branches or
their majority owned foreign affiliates. MNCs are also known as Transnational
Corporations
NAFTA
The North American Free Trade Agreement (NAFTA) started its operations from 1 st
January1994. The wealthy and prosperous nations of the world such as USA and
Canada along with developing country Mexico created a trade block. In 1989,
USA and Canada have signed a free trade agreement which was also extended to
Mexico in 1994. It is expected that NAFTA will remove the tariffs and trade barrier
which exists between these countries by 2009. But, the internal tariffs on wide
range of products were already eliminated. NAFTA has provided several benefits
to various companies such as automotive industry, large agribusiness,

telecommunications, high technology manufacturing and big grain import

industries.
Natural Advantage
The ability for an economic actor to produce a good or service because the
resources to do so are physically available. For example, the economy of
Nebraska has a natural advantage relative to the economy of Bahrain because it
is easier to grow corn in Nebraska. On the other hand, Bahrain has a natural
advantage over Nebraska because there are more fish located around Bahrain.
OPEC
Organization of the Petroleum Exporting Countries, a permanent, international
organization headquartered in Vienna, Austria, was established in Baghdad, Iraq
on 1014 September 1960. Its mandate is to "coordinate and unify the petroleum
policies" of its members and to "ensure the stabilization of oil markets in order to
secure an efficient, economic and regular supply of petroleum to consumers, a
steady income to producers and a fair return on capital for those investing in the
petroleum industry." In 2014 OPEC comprised twelve members: Algeria, Angola,
Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab
Emirates and Venezuela. According to the United States Energy Information
Administration (EIA), OPEC crude oil production is an important factor affecting
global oil prices. OPEC sets production targets for its member nations and
generally, when OPEC production targets are reduced, oil prices increase.
Projections of changes in Saudi production result in changes in the price of
benchmark crude oils.
Political Environment
The impact of the government and judiciary system in a country on the
international business is known as political environment. In a nation, the
government significantly influenced the business. A countrys business will be
decided, promoted, enhanced, encouraged and controlled by the type and
structure of the government. One of the fundamental factors for the economic
development of a country is the stable, honest and effective political system.
Polycentric Approach / Polycentrism
In this approach, the key positions of the management as well as the key
positions of the subsidiaries are occupied by the host country nationals.
Product Life Cycle
The product life cycle has 4 very clearly defined stages, each with its own
characteristics that mean different things for business that are trying to manage
the life cycle of their particular products.
Introduction Stage This stage of the cycle could be the most
expensive for a company launching a new product.
Growth Stage The growth stage is typically characterized by a strong
growth in sales and profits, and because the company can start to benefit
from economies of scale in production, the profit margins, as well as the
overall amount of profit, will increase.
Maturity Stage During the maturity stage, the product is established
and the aim for the manufacturer is now to maintain the market share
they have built up.

Decline Stage Eventually, the market for a product will start to shrink,
and this is whats known as the decline stage.
Product Technology
A system for scheduling the manufacture of products and managing stock
inventory that aims to optimize costs, minimize inventory and maintain a steady
work flow. The modern production technology that might be used by a
manufacturing business can identify production blockages and sense capacity
constraints, and it does not usually operate at full capacity if sufficient inventory
to meet demand already exists.
Regiocentric Approach
The companys strategy towards Regiocentric approach is that having a
companys operations of exporting in Foreign companies successfully, it wants to
expand its exporting business in the neighbouring countries of the domestic
country. While framing polices and strategies the foreign subsidiary considers
regional environment.
Regiocentric approach uses the polycentric approach for the existing products
but uses different marketing strategies for introducing the products in other
countries of the region.

SAARC
SAARC was established in August 1983. The member countries of SAARC are
India, Bangladesh, Bhutan, Pakistan, Maldives and Sri Lanka. The charter of the
SAARC was formally adopted in December 1985 by the heads of the member
countries.
The Stages of Internationalization
Stage 1: Domestic Operations The firms market is exclusively domestic.
Stage 2: Export Operations The firm expands its market to include other
countries, but retains production facilities within domestic borders.
Stage 3: Subsidiaries or Joint Ventures The firm physically moves some of its
operations out of the home country.
Stage 4: Multinational Operations The firm becomes a full-fledged
multinational corp. (MNC) with assembly and production facilities in several
countries and regions of the world.
Some decentralization of decision making is common, but many personnel
decisions are still made at corp. headquarters.
Stage 5: Transnational Operations Firms that reach this stage are often
called transna-tional because they owe little allegiance to their country of
origin. Operations are highly decentralized, with each busi-ness unit free to
make personnel decisions with very loose control from corp. headquarters.
Strategic Alliance
When a company decides to cooperate with two or more companies for
performing business operations by making their contributions either in the form
of resources, skills (or) capabilities for attaining a common goal or for mutual
benefit is termed as strategic alliance.
International Strategic Alliance is cooperation between one or more multinational
companies to perform business operations by contributing their effects and
capabilities for mutual benefit or for attaining objective by building long-term
formal relationships between the large partners. The global strategic alliance
between the large or small companies all over the world is growing rapidly and
denotes the importance of global strategic alliance.
Strategic Alliance/Agreements is commonly used in international business but, it
is an expensicive process.
Examples of International Strategic Alliance, IBM and Apple Computer entered
into an alliance to develop hardware and software technology for a new
generation of desktop computers, Indian and foreign based companies formed
several alliances in the telecommunication sector such as, Crompton, Greaves
and Illi, Usha Maten and Telekom Malaysia, SPIC group and Telstra and many
more.
Strategy implementation
Strategy implementation is the translation of chosen strategy into organizational
action so as to achieve strategic goals and objectives. Strategy implementation
is also defined as the manner in which an organization should develop, utilize,

and amalgamate organizational structure, control systems, and culture to follow

strategies that lead to competitive advantage and a better performance.
Organizational structure allocates special value developing tasks and roles to the
employees and states how these tasks and roles can be correlated so as
maximize efficiency, quality, and customer satisfaction-the pillars of competitive
advantage. But, organizational structure is not sufficient in itself to motivate the
employees.
Transnational Company / Transnational Corporation
Transnational companies refer to those companies which produce markets, made
investments all over the world. It is connected with global enterprise and
associates global resources with Global markets to generate huge profits.
Transnational company fulfils the essential features of a global corporation.
Trade diversion
Trade diversion is an economic term related to international economics in which
trade is diverted from a more efficient exporter towards a less efficient one by
the formation of a free trade agreement or a customs union.
TRIMs
TRIMs stands for Trade Related Investment Measures. The Dunkul proposal is also
related with the TRIMs which aim to remove various controls which were levied
on the inflow of foreign capital/funds into third world countries.
This proposal helped the multinational companies because they were treated as
the national companies, the TRIMs also helped in removing discrimination
between the foreign capital and domestic capital. This inferred that the foreign
capital would be equally considered and treated as domestic capital.
TRIPs
In 1986-94, the WTO agreement on the Trade Related Aspects of Intellectual
Property rights (TRIPs) was negotiated. This was the first time that the rule of
intellectual property was introduced by the Uruguay round into the multilateral
trading system. The TRIPs agreement of WTO helps in reducing the gap, for
protecting the rights all over the world and for placing them under the common
international rule.