Course Code: MMPC-016

Course Title: International Business Management

Assignment Code: MMPC-016/TMA/ JULY/2024

1. How does a political environment within a country impact the business and operation of firms? Explain.

Ans Impact of Political Environment on Business and Firms

Meaning of Political Environment

The political environment refers to the laws, government policies, political stability, and the nature of governance prevailing in a country. It includes factors like the ruling party’s ideology, regulatory framework, taxation system, trade policies, labor laws, and overall political stability. Since business operations are closely linked with government decisions, the political environment has a direct influence on corporate strategies, investments, and growth.

2. Ways Political Environment Impacts Business

1. Government Policies and Regulations
   • Policies related to taxation, industrial licensing, foreign direct investment (FDI), labor, and environment directly shape business costs and opportunities.
   • Example: Liberalization policies of 1991 in India opened doors for multinational companies.
2. Political Stability vs. Instability
   • Stable governments attract investments and create a favorable climate for business growth.
   • Political instability, frequent policy changes, or unrest discourage investment and increase risks.
3. Foreign Trade Policies
   • Import/export duties, tariffs, and trade agreements impact international operations of firms.
   • Example: Reduction in import tariffs benefits companies depending on global supply chains.
4. Taxation and Fiscal Policies
   • High corporate taxes can reduce profitability, while tax incentives can boost expansion.
   • Example: The corporate tax cut in India (2019) encouraged private sector investment.
5. Legal and Regulatory Framework
   • Laws related to consumer protection, competition, intellectual property rights, and environmental safety affect how firms operate.
6. Public Sector Role and Privatization
   • The extent of government control vs. privatization reforms shapes opportunities for private players.
7. Corruption and Bureaucracy
   • High corruption and red-tapism increase costs of doing business and discourage foreign investment.
8. International Relations and Geopolitics
   • Political ties and diplomatic relations affect cross-border trade and multinational firms.
   • Example: Trade tensions between countries impact global supply chains.

2. List and explain the Foreign Direct Investment (FDI) theories.

Ans  Theories of Foreign Direct Investment (FDI)

FDI refers to an investment made by a company or individual of one country into business interests located in another country, usually by acquiring ownership, establishing operations, or expanding business abroad. Over time, several theories have been developed to explain why firms invest abroad instead of exporting or licensing.

1. Market Imperfections Theory

• Proposed by Stephen Hymer (1960s).
• Suggests that FDI arises due to imperfections in markets such as barriers to trade, lack of perfect competition, or high transaction costs.
• Firms invest abroad to exploit firm-specific advantages (technology, brand, managerial expertise) and overcome barriers like tariffs and quotas.
• Example: A car manufacturer setting up plants abroad to avoid import tariffs.

2. Monopolistic Advantage Theory

• Extension of Hymer’s ideas.
• Firms engage in FDI when they possess unique advantages (patents, technology, economies of scale, brand reputation) that allow them to compete successfully in foreign markets despite local disadvantages.
• Example: Microsoft or Google investing globally due to their technological dominance.

3. Internalization Theory

• Proposed by Buckley and Casson (1976).
• Argues that firms prefer FDI when they can internalize transactions within the company instead of relying on external markets.
• Reduces transaction costs, protects proprietary knowledge, and ensures better control.
• Example: Pharmaceutical companies setting up subsidiaries abroad rather than licensing technology to local firms.

4. Eclectic Paradigm / OLI Framework

• Proposed by John Dunning (1980s).
• The most comprehensive theory, explaining FDI through three factors:
  • O (Ownership advantages): Firm-specific strengths (technology, brand, skills).
  • L (Location advantages): Benefits of the host country (resources, labor, markets, tax incentives).
  • I (Internalization advantages): Benefits of controlling operations directly rather than licensing.
• Example: Apple manufacturing in India due to skilled labor (L), strong brand/technology (O), and preference for internal production control (I).

5. Product Life Cycle Theory

• Proposed by Raymond Vernon (1966).
• Suggests that FDI occurs as a product passes through stages of its life cycle:
  • Innovation stage: Produced and sold in the home country.
  • Growth stage: Exported to other countries.
  • Maturity stage: Production shifts abroad through FDI to reduce costs.
• Example: Electronics or automobiles first developed in the US, later manufactured in Asia for cost efficiency.

6. Internationalization Theory of FDI (Transaction Cost Approach)

• Focuses on minimizing transaction and coordination costs.
• Firms prefer FDI when producing internally abroad is more efficient than outsourcing or trading.

7. Strategic Behavior Theory

• Based on industrial organization perspective.
• Firms undertake FDI as part of strategic rivalry to maintain or increase market share.
• Example: Coca-Cola and Pepsi investing in the same foreign markets to compete directly.

8. Resource-Seeking and Efficiency-Seeking Theories

• FDI happens when firms seek natural resources, cheap labor, or efficiency by relocating parts of production to countries with comparative advantages.
• Example: Textile and IT companies investing in India and Bangladesh for cheap skilled labor.

3. Suppose two countries sign Free Trade Agreement (FTA). Discuss the benefits which the both countries will have from this agreement.

Ans  Benefits of a Free Trade Agreement (FTA) for Both Countries

A Free Trade Agreement (FTA) is a pact between two or more countries to reduce or eliminate trade barriers such as tariffs, import quotas, and export restrictions on goods and services. By signing an FTA, both countries aim to promote trade, investment, and economic cooperation.

1. Benefits for Both Countries

1. Access to Larger Markets
   • Firms from both countries gain entry into each other’s markets with reduced tariffs.
   • Leads to higher sales, export growth, and business expansion.
2. Comparative Advantage Utilization
   • Each country can specialize in producing goods/services where it has a comparative cost advantage.
   • Increases overall efficiency and lowers production costs.
3. Increased Foreign Investment
   • Investors are attracted due to stable trade relations and reduced barriers.
   • Leads to technology transfer, job creation, and industrial growth.
4. Lower Prices for Consumers
   • Reduction in tariffs and import costs makes foreign goods cheaper.
   • Consumers get wider choices at competitive prices.
5. Economic Growth
   • Boost in exports, industrial development, and foreign investment raises GDP and national income.
6. Employment Opportunities
   • Expansion of industries and trade creates new jobs in manufacturing, services, and logistics.
7. Technology and Knowledge Transfer
   • Firms gain access to advanced technologies, management practices, and innovations from partner countries.
8. Improved Bilateral Relations
   • Strengthens political, cultural, and economic ties, leading to long-term cooperation.

2. Example (India’s FTAs)

• India–ASEAN FTA: Boosted trade in textiles, pharmaceuticals, and services.
• India–UAE CEPA (2022): Led to tariff reduction on 90% of Indian exports, benefiting gems, jewelry, and textiles, while UAE gains in petrochemicals and investment opportunities.

4. Describe the features of Global Functional Structure.

Ans The Global Functional Structure is one of the most widely used organizational designs by multinational corporations (MNCs), especially those that produce standardized products and operate in several countries. Under this structure, the organization is arranged on the basis of functions such as marketing, production, research and development, human resources, finance, and logistics, with each function being managed globally from a centralized headquarters. The primary feature of this structure is specialization, as employees are grouped according to their functional expertise. For instance, all finance-related activities, whether in India, the USA, or Europe, come under the control of the global finance department, ensuring a high degree of efficiency and accuracy. Another key feature is centralized decision-making, where strategic policies and major decisions are taken at the corporate headquarters, which helps maintain consistency across global operations. This ensures that the company maintains its brand identity, quality standards, and long-term vision in a uniform manner across different countries.

A second feature of the global functional structure is standardization of processes and policies. Since all functions are managed globally, firms can implement uniform policies in terms of quality control, employee management, and financial reporting, which reduces duplication of work and creates economies of scale. For example, a company like Apple maintains strict global standards in design, marketing, and customer service, making its brand highly consistent worldwide. This structure also enhances coordination within each function, as employees working in the same functional area across different countries can share knowledge, expertise, and best practices, thus leading to innovation and global integration. Furthermore, the structure allows for clear accountability, as each global function is headed by a senior executive who is responsible for the performance of that function across all regions, thereby reducing confusion and ensuring focused management.

Another important feature is efficiency through functional expertise. Since similar tasks are grouped together, employees can develop deep expertise in their areas, resulting in greater productivity and high-quality outputs. It also facilitates career specialization, as employees move upward within their functional domain. Additionally, the global functional structure promotes economies of scale, because decisions such as procurement of raw materials, investment in technology, and employee training can be undertaken at the global level, leading to cost savings and uniform benefits across the company. However, this structure also comes with challenges, such as limited flexibility and responsiveness to local markets. Because decisions are centralized, subsidiaries may face delays in responding to cultural differences, customer preferences, or regulatory changes in their respective countries.

Finally, the global functional structure is particularly suitable for companies that operate in industries where products and services are highly standardized and do not require much adaptation to local markets. Examples include technology companies, fast-moving consumer goods manufacturers, and pharmaceutical firms, which benefit from uniform processes and centralized strategies. In summary, the features of the global functional structure include specialization, centralized decision-making, standardization of policies, economies of scale, efficiency through functional expertise, and global coordination. While it offers the advantage of control and consistency across international operations, it requires careful balancing with local responsiveness to remain effective in a competitive global environment.

5. Explain the sources of Value-creation in an alliance.

Ans Strategic alliances have become an essential tool for modern businesses to expand globally, improve competitiveness, and leverage resources that would otherwise be difficult to acquire independently. The concept of value-creation in an alliance refers to the benefits and advantages that partner firms derive through collaboration, which enhance their performance and competitive positioning beyond what they could achieve alone. One of the most significant sources of value creation is access to complementary resources and capabilities. Firms often enter alliances because each possesses unique strengths—such as technology, distribution networks, or brand reputation—that when combined, create synergies. For instance, a firm with strong research and development capabilities may ally with another firm that has extensive marketing and distribution channels, resulting in innovative products that reach wider markets more efficiently. Another major source of value is cost reduction and economies of scale, as alliances enable companies to pool resources, share infrastructure, and avoid duplication of efforts. Joint procurement, shared manufacturing facilities, or collaborative logistics can substantially lower production costs and improve profitability.

A second critical source of value in alliances is market access and expansion. By partnering with local firms in foreign markets, companies can overcome entry barriers such as cultural differences, government regulations, and lack of distribution knowledge. Such alliances not only provide immediate access to new customer bases but also reduce risks associated with international expansion. For example, global car manufacturers often partner with local firms in emerging markets to access established dealer networks and customer relationships. Additionally, alliances foster risk sharing, which is another source of value creation. Large-scale projects such as infrastructure development, pharmaceutical research, or exploration in energy sectors involve high risks and massive capital investments. When two or more firms form an alliance, they share these risks as well as the costs, making it easier to undertake ventures that would otherwise be unmanageable individually.

Another key source of value is innovation and knowledge transfer. In an alliance, firms gain exposure to new ideas, technologies, and managerial practices, which can accelerate learning and enhance competitive advantage. Cross-border alliances in particular allow firms to tap into diverse knowledge pools, leading to creative problem-solving and innovation. The collaborative environment also encourages mutual learning, where firms adopt best practices from each other, thereby enhancing organizational efficiency. Moreover, alliances can create strategic flexibility by allowing firms to respond more effectively to changing market conditions. For example, technological disruptions or shifts in consumer preferences can be addressed more rapidly through a strong network of partners who bring varied expertise and perspectives.

Value creation also emerges through enhanced competitiveness. When firms ally, they can combine strengths to create offerings that are more attractive than those of their rivals. Joint branding, co-marketing campaigns, and collaborative product development make the alliance stronger in the eyes of consumers and competitors alike. In addition, alliances often strengthen a company’s bargaining power with suppliers, distributors, and even governments, as larger networks carry more influence than isolated firms. Finally, alliances contribute to long-term relationship building and trust, which itself becomes a valuable intangible asset. Partnerships developed through alliances often pave the way for future collaborations, mergers, or acquisitions, ensuring sustained value creation over time.