NAME: ROLL NUMBER: LEARNING CENTER: SEMESTER: SUBJECT NAME: MODULE NO. : DATE OF SUBMISSION AT THE LEARNING CENTRE: FACULTY SIGNATURE:
NEELAM ASWAL 521131210 02882 4
International Business Management
10 dec 2012
Master of Business Administration MBA Semester IV
MB0053– International Business Management
(Book ID: B1315)
ASSIGNMENT-1 Q.1 Ans. write a short note on ‘globalization’. The term "globalization" has acquired considerable emotive force. Some view it as a process that is beneficial – a key to future world economic development – and also inevitable and irreversible. Others regard it with hostility, even fear, believing that it increases inequality within and between nations, threatens employment and living standards and thwarts social progress. This brief offers an overview of some aspects of globalization and aims to identify ways in which countries can tap the gains of this process, while remaining realistic about its potential and its risks. Globalization offers extensive opportunities for truly worldwide development but it is not progressing evenly. Some countries are becoming integrated into the global economy more quickly than others. Countries that have been able to integrate are seeing faster growth and reduced poverty. Economic "globalization" is a historical process, the result of human innovation and technological progress. It refers to the increasing integration of economies around the world, particularly through trade and financial flows. The term sometimes also refers to the movement of people (labor) and knowledge (technology) across international borders. There are also broader cultural, political and environmental dimensions of globalization that are not covered here. At its most basic, there is nothing mysterious about globalization. The term has come into common usage since the 1980s, reflecting technological advances that have made it easier and quicker to complete international transactions – both trade and financial flows. It refers to an extension beyond national borders of the same market forces that have operated for centuries at all levels of human economic activity – village markets, urban industries, or financial centers. Globalization is not just a recent phenomenon. Some analysts have argued that the world economy was just as globalized 100 years ago as it is today. But today commerce and financial services are far more developed and deeply integrated than they were at that time. The most striking aspect of this has been the integration of financial markets made possible by modern electronic communication. There are four aspects of globalization:
1. Trade: Developing countries as a whole have increased their share of world trade – from 19 percent in 1971 to 29 percent in 1999. For instance, the newly industrialized economies (NIEs) of Asia have done well, while Africa as a whole has fared poorly. The composition of what countries export is also important. The strongest rise by far has been in the export of manufactured goods. The share of primary commodities in world exports – such as food and raw materials – that are often produced by the poorest countries, has declined. 2. Capital movements: Globalization sharply increased private capital flows to developing countries during much of the 1990s. It also shows that: the increase followed a particularly "dry" period in the 1980s; net official flows of "aid" or development assistance have fallen significantly since the early 1980s; and the composition of private flows has changed dramatically. Direct foreign investment has become the most important category. Both portfolio investment and bank credit rose but they have been more volatile, falling sharply in the wake of the financial crises of the late 1990s. 3. Movement of people: Workers move from one country to another partly to find better employment opportunities. The numbers involved are still quite small, but in the period 1965-90, the proportion of labor forces round the world that was foreign born increased by about one-half. Most migration occurs between developing countries. But the flow of migrants to advanced economies is likely to provide a means through which global wages converge. There is also the potential for skills to be transferred back to the developing countries and for wages in those countries to rise. 4. Spread of knowledge (and technology): Information exchange is an integral, often overlooked, aspect of globalization. For instance, direct foreign investment brings not only an expansion of the physical capital stock, but also technical innovation. More generally, knowledge about production methods, management techniques, export markets and economic policies is available at very low cost, and it represents a highly valuable resource for the developing countries.
Describe the positives of trade liberalization. Policies that make an economy open to trade and investment with the rest of the world are needed for sustained economic growth. The evidence on this is clear. No country in recent decades has achieved economic success, in terms of substantial increases in living standards for its people, without being open to the rest of the world. In contrast, trade opening (along with opening to foreign direct investment) has been an important element in the economic success of East Asia. Opening up their economies to the global economy has been essential in enabling many developing countries to develop competitive advantages in the manufacture of certain products. In these countries, defined by the World Bank as the "new globalizers," the number of people in absolute poverty declined by over 120 million (14 percent) between 1993 and 1998. There is considerable evidence that more outward-oriented countries tend consistently to grow faster than ones that are inward-looking. Indeed, one finding is that the benefits of trade liberalization can exceed the costs by more than a factor of 10. Countries that have opened their economies in recent years, including India, Vietnam, and Uganda, have experienced faster growth and more poverty reduction. On average, those developing countries that lowered tariffs sharply in the 1980s grew more quickly in the 1990s than those that did not. Freeing trade frequently benefits the poor especially. Developing countries can ill-afford the large implicit subsidies, often channeled to narrow privileged interests that trade protection provides. Moreover, the increased growth that results from free trade itself tends to increase the incomes of the poor in roughly the same proportion as those of the population as a whole. New jobs are created for unskilled workers, raising them into the middle class. Overall, inequality among countries has been on the decline since 1990, reflecting more rapid economic growth in developing countries, in part the result of trade liberalization. Although there are benefits from improved access to other countries’ markets, countries benefit most from liberalizing their own markets. The main benefits for industrial countries would come from the liberalization of their agricultural markets. Developing countries would gain about equally from liberalization of manufacturing and agriculture. The group of lowincome countries, however, would gain most from agricultural liberalization in industrial countries because of the greater relative importance of agriculture in their economies. Further liberalization – by both industrial and developing countries – will be needed to realize trade’s potential as a driving force for economic growth and development. Greater efforts by industrial countries and the international community more broadly, are called for to remove the trade barriers facing developing countries, particularly the poorest countries. Although quotas under the so-called Multi-fibre Agreement are due to be phased out by 2005, speedier
liberalization of textiles and clothing and of agriculture is particularly important. Similarly, the elimination of tariff peaks and escalation in agriculture and manufacturing also needs to be pursued. In turn, developing countries would strengthen their own economies (and their trading partners’) if they made a sustained effort to reduce their own trade barriers further. Enhanced market access for the poorest developing countries would provide them with the means to harness trade for development and poverty reduction. Offering the poorest countries duty – and quota – free access to world markets would greatly benefit these countries at little cost to the rest of the world. The recent market-opening initiatives of the EU and some other countries are important steps in this regard. To be completely effective, such access should be made permanent, extended to all goods, and accompanied by simple, transparent rules of origin. This would give the poorest countries the confidence to persist with difficult domestic reforms and ensure effective use of debt relief and aid flows.
Write a short note on GATT and WTO, highlighting the difference between the two.
General Agreement on Tariff and Trade( GATT): The GATT, was established on a provisional basis after the Second World War in the wake of other new multilateral institutions dedicated to international economic cooperation – notably the "Britton Woods" institutions now known as the World Bank and the International Monetary Fund. The original 23 GATT countries were among over 50 which agreed a draft Charter for an International Trade Organization (ITO) – a new specialized agency of the United Nations. The Charter was intended to provide not only world trade disciplines but also contained rules relating to employment, commodity agreements, restrictive business practices, international investment and services. In an effort to give an early boost to trade liberalization after the Second World War and to begin to correct the large overhang of protectionist measures which remained in place from the early 1930s-tariff negotiations were opened among the 23 founding GATT "contracting parties" in 1946. This first round of negotiations resulted in 45,000 tariff concessions affecting $10 billion or about one-fifth – of world trade. It was also agreed that the value of these concessions should be protected by early and largely "provisional" acceptance of some of the trade rules in the draft ITO Charter. The tariff concessions and rules together became known as the General Agreement on Tariffs and Trade and entered into force in January 1948. Although the ITO Charter was finally agreed at a UN Conference on Trade and Employment in Havana in March 1948, ratification in national legislatures proved impossible in some cases. When the United States’ government announced, in 1950, that it would not seek Congressional ratification of the Havana Charter, the ITO was effectively dead. Despite its provisional nature, the GATT remained the only multilateral instrument governing international trade from 1948 until the establishment of the WTO. Although, in its 47 years, the basic legal text of the GATT remained much as it was in 1948, there were additions in the form of "plural-lateral” voluntary membership agreements and continual efforts to reduce tariffs. Much of this was achieved through a series of "trade rounds". The biggest leaps forward in international trade liberalization have come through multilateral trade negotiations, or "trade rounds", under the auspices of GATT – the Uruguay Round was the latest and most extensive.
The limited achievement of the Tokyo Round, outside the tariff reduction results, was a sign of difficult times to come. GATT’s success in reducing tariffs to such a low level, combined with a series of economic recessions in the 1970s and early 1980s, drove governments to devise other forms of protection for sectors facing increased overseas competition. High rates of unemployment and constant factory closures led governments in Europe and North America to seek bilateral market-sharing arrangements with competitors and to embark on a subsidies race to maintain their holds on agricultural trade. Both these changes undermined the credibility and effectiveness of GATT. WTO World Trade Organization came into existence in 1995 after the desolation of General Agreement on Tariff and Trade (GATT). The WTO’s overriding objective is to help trade flow smoothly, freely, fairly and predictably. It does this by: Administering trade agreements Acting as a forum for trade negotiations Settling trade disputes Reviewing national trade policies Assisting developing countries in trade policy issues, through technical assistance and training programs Cooperating with other international organizations
The WTO has nearly 150 members, accounting for over 97% of world trade. Around 30 others are negotiating membership. Decisions are made by the entire membership. This is typically by consensus. A majority vote is also possible but it has never been used in the WTO, and was extremely rare under the WTO’s predecessor, GATT. The WTO’s agreements have been ratified in all members’ parliaments. The WTO’s top level decision-making body is the Ministerial Conference which meets at least once every two years. Below this is the General Council which meets several times a year in the Geneva headquarters. The General Council also meets as the Trade Policy Review Body and the Dispute Settlement Body. At the next level, the Goods Council, Services Council and Intellectual Property (TRIPS) Council report to the General Council. Numerous specialized committees, working groups and working parties deal with the individual agreements and other areas such as the environment, development, membership applications and regional trade agreements. The WTO Secretariat, based in Geneva, has around 600 staff and is headed by a director-
general. Its annual budget is roughly 160 million Swiss francs. It does not have branch offices outside Geneva. Since decisions are taken by the members themselves, the Secretariat does not have the decision-making role that other international bureaucracies are given with. The WTO is run by its member governments. All major decisions are made by the membership as a whole, either by ministers (who meet at least once every two years) or by their ambassadors or delegates (who meet regularly in Geneva). Decisions are normally taken by consensus. Difference between WTO and GATT:The World Trade Organization is not a simple extension of GATT; on the contrary, it completely replaces its predecessor and has a very different character. Among the principal differences are the following: a. The GATT was a set of rules, a multilateral agreement, with no institutional foundation, only a small associated secretariat which had its origins in the attempt to establish an International Trade Organization in the 1940s. The WTO is a permanent institution with its own secretariat. b. The GATT was applied on a "provisional basis" even if, after more than forty years, governments chose to treat it as a permanent commitment. The WTO commitments are full and permanent. c. The GATT rules applied to trade in merchandise goods. In addition to goods, the WTO covers trade in services and trade-related aspects of intellectual property. d. While GATT was a multilateral instrument, by the 1980s many new agreements had been added of a plural-lateral, and therefore selective, nature. The agreements which constitute the WTO are almost all multilateral and, thus, involve commitments for the entire membership. e. The WTO dispute settlement system is faster, more automatic, and thus much less susceptible to blockages, than the old GATT system. The implementation of WTO dispute findings will also be more easily assured.
Think of any MNC and analyze its business strategy orientation. Multinational companies (MNC) may pursue business strategies that are home country – oriented or host country – oriented or world – oriented. Perlmutter uses such terms as ethnocentric, polycentric and geocentric. However, "ethnocentric" is misleading because it focuses on race or ethnicity, especially when the home country itself is populated by many different races, whereas "polycentric" loses its meaning when the MNCs operate only in one or two foreign countries. According to Franklin Root (1994), an MNC is a parent company that a. b. c. engages in foreign production through its affiliates located in several countries, exercises direct control over the policies of its affiliates, implements business strategies in production, marketing, finance and staffing that transcend national boundaries. Business strategy of a MNC can be analyzed with the help of Three Stages of Evolution 1. Export stage initial inquiries - firms rely on export agents expansion of export sales further expansion - foreign sales branch or assembly operations (to save transport cost)
2. Foreign Production Stage There is a limit to foreign sales (tariffs, NTBs).Once the firm chooses foreign production as a method of delivering goods to foreign markets, it must decide whether to establish a foreign production subsidiary or license the technology to a foreign firm. Licensing is usually first experience (because it is easy) it does not require any capital expenditure it is not risky payment = a fixed % of sales
Problem that may arise while following a particular business strategy: The mother firm may find it difficult in exercise of any managerial control over the licensee (as it is independent). Secondly, the licensee may transfer industrial secrets to another independent firm, thereby creating a rival.
The next stage for supplementing any particular business strategy is Investments involved. It requires the decision of top management because it is a critical step. it is risky (lack of information) (for example-US firms tend to establish subsidiaries in Canada first. Singer Manufacturing Company established its foreign plants in Scotland and Australia in the 1850s) plants are established in several countries licensing is switched from independent producers to its subsidiaries. export continues 3. Multinational Stage: The company becomes a multinational enterprise when it begins to plan, organize and coordinate production, marketing, R&D, financing, and staffing. For each of these operations, the firm must find the best location. This is how a MNC decides its business strategy orientation.
What does FDI stand for? Why do MNCs opt for FDI to enter international market?
FDI stands for Foreign Direct Investment. New MNCs do not pop up randomly in foreign nations. It is the result of conscious planning by corporate managers. Investment flows from regions of low anticipated profits to those of high returns. When MNC incorporated in one country, invests in another country, it is said that the FDI has flowed into the other country from some foreign origin. The main reasons for MNCs to opt for FDI to enter international market is stated as follows: 1. Growth motive: A company may have reached a plateau satisfying domestic demand, which is not growing. Looking for new markets. 2. Protection in the importing countries : Foreign direct investment is one way to expand. FDI is a means to bypassing protective instruments in the importing country. European Community imposed common external tariff against outsiders. US companies circumvented these barriers by setting up subsidiaries. Japanese corporations located auto assembly plants in the US, to bypass VERs. 3. High Transportation Costs : Transportation costs are like tariffs in that they are barriers which raise consumer prices. When transportation costs are high, multinational firms want to build production plants close to the market in order to save transportation costs. Multinational firms that invested and built production plants in the United States are better off than the exporting firms that utilized New Orleans port to ship and distribute products through New Orleans, provided that they built plants in a safe area. 4. Exchange Rate Fluctuations: Japanese firms invest here to produce heavy construction machines to avoid excessive exchange rate fluctuations. Also, Japanese automobile firms have plants to produce automobile parts. For instance, Toyota imports engines and transmissions from Japanese plants, and produce the rest in the U.S. 5. Market competition: The most certain method of preventing actual or potential competition is to acquire foreign businesses. GM purchased Monarch (GM Canada) and Opel (GM Germany). It did not buy Toyota, Datsun (Nissan) and Volkswagen. They later became competitors. 6. Cost reduction: United Fruit has established banana-producing facilities in Honduras. Cheap foreign labour. Labour costs tend to differ among nations. MNCs can hold down costs by locating part of all their productive facilities abroad. (Maquildoras)
Viewing culture as a multi-level construct, describe various levels it consists of.
There are two kinds of approach construct of culture. One is a multi-level approach, viewing culture as a multi-level construct that consists of various levels nested within each other from the most macro-level of a global culture, through national cultures, organizational cultures, group cultures, and cultural values that are represented in the self at the individual level. The second is based on Schein’s (1992) model viewing culture as a multi – layer construct consisting of the most external layer of observed artifacts and behaviours, the deeper level of values, which is testable by social consensus, and the deepest level of basic assumption, which is invisible and taken for granted. The present model proposes that culture as a multi – layer construct exists at all levels – from the global to the individual – and that at each level change first occurs at the most external layer of behaviour, and then, when shared by individuals who belong to the same cultural context, it becomes a shared value that characterizes the aggregated unit (group, organizations, or nations). In the model, the most macro-level is that of a global culture being created by global networks and global institutions that cross national and cultural borders.
Figure-1: The dynamic of top-down–bottom-up processes across levels of culture.
Given the dominance of Western MNCs, the values that dominate the global context are often based on a free market economy, democracy, acceptance and tolerance of diversity, respect of freedom of choice, individual rights, and openness to change. Below the global level are nested organizations and networks at the national level with their
local cultures varying from one nation or network to another. Further down are local organizations, and although all of them share some common values of their national culture, they vary in their local organizational cultures, which are also shaped by the type of industry that they represent, the type of ownership, the values of the founders, etc. Within each organization are sub-units and groups that share the common national and organizational culture, but that differ from each other in their unit culture on the basis of the differences in their functions (e.g., R&D vs manufacturing), their leaders’ values, and the professional and educational level of their members. At the bottom of this structure are individuals who through the process of socialization acquire the cultural values transmitted to them from higher levels of culture. Individuals who belong to the same group share the same values that differentiate them from other groups and create a group – level culture through a bottom-up process of aggregation of shared values. For example, employees of an R&D unit are selected into the unit because of their creative cognitive style and professional expertise. Their leader also typically facilitates the display of these personal characteristics because they are crucial for developing innovative products. Thus, all members of this unit share similar core values, which differentiate them from other organizational units. Groups that share similar values create the organizational culture through a process of aggregation, and local organizations that share similar values create the national culture that is different from other national cultures. Both top-down and bottom-up processes reflect the dynamic nature of culture, and explain how culture at different levels is being shaped and reshaped by changes that occur at other levels, either above it through top-down processes or below it through bottom-up processes. Similarly, changes at each level affect lower levels through a top-down process, and upper levels through a bottom-up process of aggregation. Global organizations and networks are being formed by having local-level organizations join the global arena. That means that there is a continuous reciprocal process of shaping and reshaping organizations at both levels. For example, multinational companies that operate in the global market develop common rules and cultural values that enable them to create a synergy between the various regions, and different parts of the multinational company. These global rules and values filter down to the local organizations that constitute the global company, and, over time, they shape the local organizations. Reciprocally, having local organizations join a global company may introduce changes into the global company because of its need to function effectively across different cultural boarders.
NAME: ROLL NUMBER: LEARNING CENTER: SEMESTER: SUBJECT NAME: MODULE NO. : DATE OF SUBMISSION AT THE LEARNING CENTRE: FACULTY SIGNATURE:
NEELAM ASWAL 521131210 02882 4
International Business Management
10 dec 2012
Master of Business Administration MBA Semester IV
MB0053– International Business Management
(Book ID: B1315)
ASSIGNMENT-2 Q.1 Ans. Write a short note on Bill of Lading. A Bill of Lading is a type of document that is used to acknowledge the receipt of a shipment of goods and is an essential document in transporting goods overland to the exporter’s international carrier. A through Bill of Lading involves the use of at least two different modes of transport from road, rail, air and sea. The term derives from the noun "bill", a schedule of costs for services supplied or to be supplied, and from the verb "to lade" which means to load a cargo onto a ship or other form of transport. In addition to acknowledging the receipt of goods, a Bill of Lading indicates the particular vessel on which the goods have been placed, their intended destination, and the terms for transporting the shipment to its final destination. Inland, ocean, through, and airway bill are the names given to bills of lading. Q.2 In terms of product design, most products fall in between the spectrum of two extremes. What are these two extremes? Describe on these extremes in brief. Ans. Most products decisions lie between two extremes. One of the extreme is to sell globally standardized products and the other extreme is to sell adapted products. Changes in design are largely dictated by whether they would improve the prospects of greater sales, and this, over the accompanying costs. Changes in design are also subject to cultural pressures. The more culture-bound the product is, for example food, the more adaptation is necessary. Most products fall in between the spectrum of "standardization" to "adaptation" extremes. The application the product is put to also affect the design. In the UK, railway engines were designed from the outset to be sophisticated because of the degree of competition, but in the US this was not the case. In order to burn the abundant wood and move the prairie debris, large smoke stacks and cowcatchers were necessary. In agricultural implements a mechanized cultivator may be a convenience item in a UK garden, but in India and Africa it may be essential equipment. As stated earlier "perceptions" of the product’s benefits may also dictate the design. A refrigerator in Africa is a very necessary and functional item, kept in the kitchen or the bar. In Mexico, the same item is a status symbol and, therefore, kept in the living room.
Factors encouraging standardization are: a. economies of scale in production and marketing b. consumer mobility – the more consumers travel the more is the demand c. technology d. image, for example "Japanese", "made in". The latter can be a factor both to aid or to hinder global marketing development. Nagashima1 (1977) found the "made in USA" image has lost ground to the "made in Japan" image. In some cases "foreign made" gives advantage over domestic products. In Zimbabwe one sees many advertisements for "imported", which gives the product, advertised a perceived advantage over domestic products. Often a price premium is charged to reinforce the "imported means quality" image. If the foreign source is negative in effect, attempts are made to disguise or hide the fact through, say, packaging or labelling. Mexicans are loathing taking products from Brazil. By putting a "made in elsewhere" label on the product this can be overcome, provided the products are manufactured elsewhere even though its company maybe Brazilian. Factors encouraging adaptation are: a. Differing usage conditions – These may be due to climate, skills, level of literacy, culture or physical conditions. Maize, for example, would never sell in Europe rolled and milled as in Africa. It is only eaten whole, on or off the cob. In Zimbabwe, kapenta fish can be used as a relish, but wilt always be eaten as a "starter" to a meal in the developed countries. b. General market factors – incomes, tastes etc. Canned asparagus may be very affordable in the developed world, but may not sell well in the developing world. c. Government – taxation, import quotas, non tariff barriers, labelling, health requirements. Non tariff barriers are an attempt, despite their supposed impartiality, at restricting or eliminating competition. A good example of this is the Florida tomato growers, cited earlier, who successfully got the US Department of Agriculture to issue regulations establishing a minimum size of tomatoes marketed in the United States. The effect of this was to eliminate the Mexican tomato industry which grew a tomato that fell under the minimum size specified. Some non-tariff barriers may be legitimate attempts to protect the consumer, for example the ever stricter restrictions on horticultural produce insecticides and pesticides use may cause African growers a headache, but they are deemed to be for the public good. d. History. Sometimes, as a result of colonialism, production facilities have been established overseas. Eastern and Southern Africa is littered with examples. In Kenya, the tea industry is a colonial legacy, as are the sugar industry of Zimbabwe and the coffee industry of Malawi. These facilities have long been adapted to local conditions.
e. Financial considerations. In order to maximize sales or profits the organization may have no choice but to adapt its products to local conditions. f. Pressure. Sometimes, as in the case of the EU, suppliers are forced to adapt to the rules and regulations imposed on them if they wish to enter into the market. Q.3 A Europe based MNC wants to introduce its fruit juice drink in India. What product strategy of international marketing do you think will be suitable for its product? Ans. a. Product communications extension-This strategy is very low cost and merely takes the same product and communication strategy into other markets. However, it can be risky if mis-judgements are made. For example, CPC International believed the US consumer would take to dry soups, which dominate the European market. It did not work. b. Extended product – communications adaptation-If the product basically fits the different needs or segments of a market it may need an adjustment in marketing communications only. Again this is a low cost strategy, but different product functions have to be identified and a suitable communications mix developed. c. Product adaptation – communications extension: The product is adapted to fit usage conditions but the communication stays the same. The assumption is that the product will serve the same function in foreign markets under different usage conditions. d. Product adaptation–communications adaptation-: Both product and communication strategies need attention to fit the peculiar need of the market. e. Product invention-This needs a totally new idea to fit the exclusive conditions of the market. This is very much a strategy which could be ideal in a Third World situation. The development costs may be high, but the advantages are also very high. The choice of strategy will depend on the most appropriate product/market analysis and is a function of the product itself defined in terms of the function or need it serves, the market defined in terms of the conditions under which the product is used, the preferences of the potential customers and the ability to buy the product in question, and the costs of adaptation and manufacture to the company considering these product – communications approaches. In this case the Euopean MNC should undertake the Product adaptation – communications adaptation strategy. This is because the fruit drink is entering a totally a new market, India, whose preferences are quite dissimilar from Europe. At the same time as culturally India is different from Europe there is need for adaptation in communications also as the product will get exposed to a whole new market segment.
describe ‘hard data’ vis-à-vis ‘soft data’. "Hard" data refers to relatively quantifiable measures such as a country’s GDP, number of telephones per thousand residents, and birth rates (although even these supposedly "objective" factors may be subject to some controversy due to differing definitions and measurement approaches across countries). In contrast, "soft" data refers to more subjective issues such as country history or culture. It should be noted that while the "hard" data is often more convenient and seemingly objective, the "soft" data is frequently as important, if not more so, in understanding a market.
what is ‘protectionism’? how can protectionism be justified? Protectionism is levying of additional tariffs or other protectionist measures by other countries in retaliation, reduced competition (which results in inflation and less choice for consumers), a weakening of the trade balance (due in part to diminished export abilities resulting from foreign retaliations and in part because of the domestic currency loses power as there is less demand for it). This may lead to a vicious cycle of trade wars as each country responds to the other with a "tit for tat." Although trade generally benefits a country as a whole, powerful interests within countries frequently put obstacles – i.e., they seek to inhibit free trade. There are several ‘protectionism’ can be done: a. Tariff barriers: A duty, or tax or fee, is put on products imported. This is usually a percentage of the cost of the good. b. Quotas: A country can export only a certain number of goods to the importing country. For example, Mexico can export only a certain quantity of tomatoes to the United States, and Asian countries can send only a certain quota of textiles here. c. "Voluntary" export restraints: These are not official quotas, but involve agreements made by countries to limit the amount of goods they export to an importing country. Such restraints are typically motivated by the desire to avoid more stringent restrictions if the exporters do not agree to limit themselves. For example, Japanese car manufacturers have
agreed to limit the number of automobiles they export to the United States. d. Subsidies to domestic products: If the government supports domestic producers of a product, these may end up with a cost advantage relative to foreign producers who do not get this subsidy. U.S. honey manufacturers receive such subsidies. e. Non-tariff barriers, such as differential standards in testing foreign and domestic products for safety, disclosure of less information to foreign manufacturers needed to get products approved, slow processing of imports at ports of entry, or arbitrary laws which favour domestic manufacturers. Justifications for protectionism: Several justifications have been made for the practice of protectionism. Some appear to hold more merit than others: a. Protection of an "infant" industry: Costs are often higher, and quality lower, when an industry first gets started in a country, and it thus be very difficult for that country to compete. However, as the industry in the country matures, it may be better able to compute. Thus, for example, some countries have attempted to protect their domestic computer markets while they gained strength. The U.S. attempted to protect its market for small autos. American manufacturers were caught unprepared for the switch in demand away from the larger cars. This is generally an accepted reason in trade agreements, but the duration of this protection must be limited (e.g., a maximum of five to ten years). b. Resistance to unfair foreign competition: The U.S. sugar industry contends that most foreign manufacturers subsidize their sugar production, so the U.S. must follow to remain competitive. This argument will hold little merit with the dispute resolution mechanism available through the World Trade Organization. c. Preservation of a vital domestic industry: The U.S. wants to be able to produce its own defence products, even if foreign imports would be cheaper, since the U.S. does not want to be dependent on foreign manufacturers with whose countries conflicts may arise. Similarly, Japan would prefer to be able to produce its own food supply despite its exorbitant costs. For an industry essential to national security, this may be a compelling argument, but it is often used for less compelling ones (e.g., manufactures of funeral caskets or honey). d. Intervention into a temporary trade balance: A country may want to try to reverse a temporary decline in trade balances by limiting imports. In practice, this does not work since such moves are typically met by retaliation.
e. Maintenance of domestic living standards and preservation of jobs. Import restrictions can temporarily protect domestic jobs, and can in the long run protect specific jobs (e.g., those of auto makers, farmers, or steel workers). This is less of an accepted argument – these workers should instead by retrain to work in jobs where their country has a relative advantage. f. Retaliation: The proper way to address trade disputes is now through the World Trade Organization. In the past, where enforcement was less available, this might have been a reasonable argument. Note that while protectionism generally hurts a country overall, it may be beneficial to specific industries or other interest groups. Thus, while sugar price supports are bad for consumers in general, producers are an organized group that can exert a great deal of influence. In contrast, the individual consumer does not have much of an incentive to take action to save. Q.6 Describe various entry strategies available to a firm when it wants to enter a foreign market. Ans. The various strategies available to a firm when it enters a foreign market are as follows:1. Supplying Products to Foreign Buyers : Foreign production is not always an answer. Foreign markets can be better served by exporting, rather than by creating a foreign subsidiary if there are economies of scale. If large scale production reduces unit cost, it is better to concentrate production in one place. MES is the minimum rate of output at which Average Cost (AC) is minimized. If minimum efficient scale (MES) is not achieved, then export. In other words, if there is excess capacity, why not utilize that and export outputs to other countries? There is no point in creating another plant overseas when domestic capacity is not fully utilized. If the foreign demand exceeds the minimum efficient scale, then FDI.
Figure -2 : Minimum efficient scale and FDI.
2. International Joint Ventures: JV is a business organization established by two or more companies that combines their skills and assets. A JV is formed by two businesses that conduct business in a third country. (US firm + British firm jointly operate in the Middle East) Joint venture with a local firm (GM + Shanghai Automobile Company) Joint venture may include local government (Bechtel Company-US; Messerschmitt – Boelkow – Blom, Germany; Iran Oil Investment Company; National Iranian Oil Company) International JV has certain benefits. These are Large capital costs – costs are too large for a single company Protection – LDC governments close their borders to foreign companies Bypass protectionism. e.g.: US workers assemble Japanese parts. The finished goods are sold to the US consumers. The new venture increases production, lowers price to consumers. The new business is able to enter the market that neither parent could have entered singly. Cost reductions (otherwise, no joint ventures will be formed) increased market power 3. Tax Policy towards MNCs: Operating in many countries, MNCs are subject to multiple tax jurisdictions, i.e., they must pay taxes to several countries. National tax systems are exceedingly complex and differ between countries. Differences among national income tax systems affect the decisions of managers of MNCs, regarding the location of subsidiaries, financing, and the transfer prices (the prices of products and assets transferred between various units of MNCs). Multiple Tax Jurisdictions creates two problems, overlapping and under lapping jurisdictions. When overlapping occurs, two or more governments claim tax jurisdictions over the same income of an MNC. The overlapping may result in double taxation. Conversely, when under lapping occurs, an MNC falls between tax jurisdictions and escape taxation. Under lapping encourages tax avoidance. National governments may choose a territorial jurisdiction or national tax jurisdiction or both.
4. Transfer Pricing : MNCs try to reduce their overall tax burden. An MNC reports most of its profits in a low – tax country, even though the actual profits are earned in a high tax country. tp = tax rate in the parent country ; th = tax rate in the host country If tp > th, then under price its exports to the subsidiary in the host country, and overprice its imports from the subsidiary in order to lower tax. Purpose is to manipulate prices between headquarter and the subsidiaries so that profits are highest in the low tax country. Thus, a multinational company’s overall tax could be paid at the minimum of all tax rates of the countries in which it operates. 5. Taxation and Gains from Factor Mobility : It is seen that US firms invest overseas because the returns are higher there. Assume both countries have the same corporate tax rates = 40% US Pretax profits Tax Net to investors 10% 4% 6% Canada 12% 4.8% 7.2%
Total Gains from domestic investment = 10% (= 4% + 6%) because tax revenues can be used for public purposes. Total Gains from foreign investment = 7.2% (because US government gets nothing). The tax revenue which could have been used to build US highways would be used by Canadian government to build their highways. A firm has to evaluate all such kinds of complex factors to fix up any strategy before choosing to enter a foreign market.