International Business Management

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International Business Management
1. Explain the different international trade theories?
Ans: a) Mercantilism: This theory stated that a country’s wealth was
determined by the amount of its gold and silver holdings. In simplest sense,
mercantilists believed that a country should increase its holdings of gold and
silver by promoting exports and discouraging imports. The objective of each
country was to have a trade surplus, or a situation where the value of
exports are greater than the value of imports, and to avoid a trade deficit, or
a situation where the value of imports is greater than the value of exports.
b) Absolute advantage theory: This theory focused on the ability of a
country to produce a good more efficiently than another nation. It also
mentioned that the trade between countries shouldn’t be regulated or
restricted by government policy or intervention. By specialization, countries
would generate efficiencies, because their labor force would become more
skilled by doing the same tasks. Production would also become more
efficient, because there would be an incentive to create faster and better
production methods to increase the specialization.
c) Comparative advantage theory: Comparative advantage occurs when
a country cannot produce a product more efficiently than the other country;
however, it can produce that product better and more efficiently than it does
other goods. The difference between these two theories is subtle.
Comparative advantage focuses on the relative productivity differences,
whereas absolute advantage looks at the absolute productivity. Barriers to
trade may exist, and goods must be transported, stored, and distributed.

However, this simplistic example demonstrates the basis of the comparative
advantage theory.
d) Product lifecycle theory: This theory stated that a product life cycle
has three distinct stages: (1) new product, (2) maturing product, and (3)
standardized product. The theory assumed that production of the new
product will occur completely in the home country of its innovation. The
product life cycle theory has been less able to explain current trade patterns
where innovation and manufacturing occur around the world.
e) Porter’s diamond model: This model attempts to explain the competitive
advantage some nations or groups have due to certain factors available to
them. The Porter Diamond is a model that helps analyze and improve a nation's
role in a globally competitive field. Michael E. Porter argued that a nation can
create new advanced factor endowments such as skilled labor, a strong
technology and knowledge base, government support, and culture. Porter used
a diamond shaped diagram as the basis of a framework to illustrate the
determinants of national advantage.
2. Hofstede said “Culture is more often a source of conflict than of

synergy”. Discuss this statement and explain the five cultural
Ans: According to Dr. Geert Hofstede, ‘Culture is more often a source of
conflict than of synergy. Cultural differences are a nuisance at best and often
a disaster.”
Professor Hofstede carried out a detailed study of how values in the
workplace are influenced by culture. He gathered and analyzed data from
many people from several countries. Professor Hofstede established a model
using the results of the study which identifies four dimensions to differentiate
cultures. Later, a fifth dimension called ‘long-term outlook’ was added.
The following are the five cultural dimensions:

a) Individualism: This dimension focuses on the extent to which the
society reinforces individual or collective achievement and
interpersonal relationships. A high individualism ranking depicts that
individuality and individual rights are dominant within the society.
Individuals in these societies form a larger number of looser
relationships. A low individualism ranking characterizes societies of a
more collective nature with close links between individuals.
b) Power distance index (PDI): This refers to the extent to which a
society accepts that power in institutions and organizations is
distributed unequally. Countries where PDI is low generally favor
decentralized organizations, whereas those with a high level of PDI are
more accepting of centralized authority.
c) Masculinity: This focuses on the extent to which the society supports
or discourages the traditional masculine work role model of male
achievement, power, and control. A country with high masculinity
ranking shows the country experiences high level of gender
differentiation. In these cultures, men dominate a major part of the
society and power structure, with women being controlled and
dominated by men.
d) Uncertainty Avoidance Index (UAI): This focuses on the degree of
tolerance for uncertainty and ambiguity within the society that is
unstructured situations. A country with high uncertainty avoidance
ranking shows that the country has low tolerance for uncertainty and
ambiguity. A rule-oriented society that incorporates rules, regulations,
laws, and controls is created to minimize the amount of uncertainty. A
country with low uncertainty avoidance ranking shows that the country
has less concern about ambiguity and uncertainty and has high
tolerance for a variety of opinions.
e) Long-Term Orientation (LTO): Describes the range at which a
society illustrates a pragmatic future oriented perspective instead of a
conventional historic or short term point of view. The Asian countries
are scoring high on this dimension. These countries have a long term
orientation, believe in many truths, accept change easily, and have
thrift for investment. Cultures recording little on this dimension, trust in
absolute truth is conventional and traditional.
3. Regional integration is helping the countries in growing their
trade. Discuss this statement. Describe in brief the various types
of regional integrations.
Ans. Regional integration: Regional integration is the process by which two
or more nation-states agree to co-operate and work closely together to

achieve peace, stability and wealth. It results in the creation and diversion of
trade. It supports overall growth of the region, coupled with efficient trading
practices. Trade creation increases production and income and also leads to
new entrants in the market and, therefore, results in tougher competition.
The transfer of technology is also faster.
It includes reduction on traffic and prohibitions. It spread goodwill among
member countries and also helps in reducing the chances of conflict.
Types of Regional Integration:
a) Preferential Trading Agreement: It gives preferential access to
certain products from the participating countries. This can be called as
a limited or sector based free trade area. It is a trade pact between
countries. It is the weakest type of economic integration and aims to
reduce taxes on few products to the countries who sign the pact.
b) Free Trade Area: It includes the reciprocal removal of tariffs on
member countries’ goods. In an FTA, each member is free within the
limits specified by the
GATT/WTO system on deciding the level of external tariffs that will be
applied to nonmembers. As there is flexibility on the interactions with
the third countries, the
members in an FTA are free to establish or join other FTAs.
c) Custom Union: It is a type of agreement that include determination of
the common external tariff (CET), in addition to the elimination of the
internal tariff rates. Generally, determination of the CET is done
through taking an average of all partners’ before union tariff levels.
d) Common Market: It is where there is free factor mobility–capital,
investment and labor– in addition to the customs union requirements
that determine free flows of goods and services. This integration
requires governments to employ coordinated actions in order to ensure
the equal treatment for all factors in the member countries of the CM.

e) Economic Union: It results from the enlargement of a common
market with the additional requirement of the harmonization of
economic policies, both monetary and fiscal. It further involves the
creation of an independent regional central bank that has control over
exchange rate policy and inflation rates.
f) Political Union: It is a type of agreement which includes the
harmonization of economic and political policies, and so as to become
a single state. This kind of integration necessitates the loss of
sovereignty and the creation of domestic institutions on the
international level.
4. Write short note on:
a) Foreign Currency Derivatives

b) Bases of International Tax

Ans: a) Meaning and role of foreign currency derivatives: Currency
derivative is defined as a financial contract in order to swap two currencies
at a predestined rate. It can also be termed as the agreement where the
value can be determined from the rate of exchange of two currencies at the
spot. The currency derivative trades in markets correspond to the spot (cash)
market. Hence, the spot market exposures can be enclosed with the currency
derivatives. The main advantage from derivative hedging is the basket of
currency available.
The derivatives can be hedged with other derivatives. In the foreign
exchange market, currency derivatives like the currency features, currency
options and currency swaps are usually traded. The standard agreement
made in order to buy or sell foreign currencies in future is termed as currency
futures. These are usually traded through organized exchanges. The
authority to buy or sell the foreign currencies in future at a specified rate is
provided by currency option. These will help the businessmen to enhance
their foreign exchange dealings. The agreement undertaken to exchange
cash flow streams in one currency for cash flow streams in another currency
in future is provided by currency swaps. These will help to increase the funds
of foreign currency from the cheapest sources.

b) Bases of International Tax Systems: Taxation has become the core of
various financing decisions which includes international investment
decisions, international working capital decisions, fund raising decisions and
the decisions related to dividend and other payments. The tax decision is
also relevant in domestic firms also.
Countries that tax income generally use one of two systems: territorial or
residential. In the territorial system, only local income is taxed. In the
residential system, residents of the country are taxed on their worldwide
(local and foreign) income, while nonresidents are taxed only on their local
The bases of international tax system are:
a) Tax neutrality: The neutrality of international tax system is important
because it must not affect the economic efficiency. If the tax is neutral
then it will not influence the locality of the investment or nationality of
the investor.
b) Tax equity: The principle of tax equity states that all equally
positioned taxpayers contribute in the cost of operating the
government according to the equal rules. The input of each tax player
must be consistent with the amount of public services as received. The
contribution of each tax player must be in terms of their ability to pay.
c) Avoidance of double taxation: The avoidance of double income
states that one must not be taxed twice for the same income.
However, if the post-tax income is sent to the foreign countries then in
that case the receiver of such income is taxed again.
5. Strategic planning involves allocation of resources to firms to
fulfil their long term goals. What are the types of strategic
planning? Compare Top-down Vs Bottom-up planning.
Ans: Types of strategic planning:
a) Strategic: Strategic plans are designed with the entire organization in
mind and begin with an organization's mission. Top-level managers,

such as CEOs or presidents, will design and execute strategic plans to
paint a picture of the desired future and long-term goals of the
organization. Essentially, strategic plans look ahead to where the
organization wants to be in three, five, even ten years. Strategic plans,
provided by top-level managers, serve as the framework for lower-level
b) Operational: Operational plans sit at the bottom of the totem pole;
they are the plans that are made by front-line, or low-level, managers.
All operational plans are focused on the specific procedures and
processes that occur within the lowest levels of the organization.
Managers must plan the routine tasks of the department using a high
level of detail. Operational plans can be either single-use or ongoing
plans. Single-use plans are those plans that are intended to be used
only once. They include activities that would not be repeated and often
have an expiration.
c) Tactical: Tactical plans support strategic plans by translating them into
specific plans relevant to a distinct area of the organization. Tactical
plans are concerned with the responsibility and functionality of lowerlevel departments to fulfill their parts of the strategic plan. As a tactical
planner, a person needs to create a set of calculated actions that take
a shorter amount of time and are narrower in scope than the strategic
plan is but still help to bring the organization closer to the long-term
Top-down vs bottom-up planning:
Top-down planning is a common strategy that is used for project planning. It
helps maintain the decision making process at the senior level. Goals and
allowances are established at the highest level. Senior-level managers have
to be very specific when laying out expectations because the people
following the plan are not involved in the planning process. It is very
important to keep the morale of the employees high and motivate them to
perform the job. Since employees are not included in any of the decision
making processes, they are motivated only through fear or incentives.
Bottom-up planning is commonly referred to as tactics. With bottom-up
planning, an organization gives its project deeper focus because each
organization has a huge number of employees involved, and each employee
is an expert in their own area. Team members work side-by-side and
contribute during each stage of the process. Plans are developed at the
lowest levels, and then passed on to each of the subsequent higher levels.
Finally, it then reaches the senior management for approval.

6. Explain the function of human resource planning. Discuss the
scope of International Human Resource Management.
Ans: Function of human resource planning:
a) Staff Levels: Human resource professionals gather all of the
personnel projections from each department, compare them to present
staff levels and then design a plan to make sure that the company is
adequately staffed for the coming year. The needs of a business can
change quickly, so the human resources group should review the
staffing levels with departmental managers on no less than a quarterly
basis to make sure that accelerated company growth has not affected
the need for personnel.
b) Qualifications: The function of the human resources group in respect
to qualified employees is a two-fold proposition. The first part of it is to
make sure that there is always an updated file of resumes on hand of
qualified individuals who already have been interviewed by human
resources staff. The second part of the qualifications function of a
human resources group is to go over the growth patterns of the
company with departmental managers to see what new qualifications
should be part of future candidate searches.
c) Budgets: A company stays profitable by working within its
predetermined budget. When human resources personnel set out to fill
job openings, they need to understand the departmental personnel
budgets they are working with and stay within those numbers when
negotiating with candidates. This requires close work with executives
and managers to make sure the company gets the talent it needs to
move forward but without going over the prescribed annual budget.
d) Recruitment: The resumes that human resources professionals use to
keep candidates available for future staffing needs to come from
perpetual recruiting efforts done by the human resources group. The
human resources professionals spend time at recruiting trade shows,
visiting college campuses and getting involved in any other activity
that will help them come into contact with talented candidates.
Scope of International Human Resource Management:
Rapid growth of internalization and global competition has increased the
numbers and significances of MNCs – resulting in the increased mobility of
human resources. Increasing no. of strategic alliances and cross border
mergers and acquisitions has increased the strategic implementation of
IHRM as Global business. Worldwide recognition of management of human
resources in international business and cross cultural management. Business

Networks and Horizontal communication and HR plays a vital role. The
performance of expatriates, growing Importance of Expatriates in
International Business, Global Strategy Implementation, Success or failure of
international business based on effectiveness of management of HR etc. are
also a part of it. Learning, knowledge acquisitions have been identified as
important potential sources of comp. advantages for MNCs. This has also
enhanced the role of IHRM to meet the key strategic challenge of objectives.
Knowledge management is an important source of comp. advantage for
MNCs, where IHRM is the key partner and plays a central role.

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