International Business

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Rapid growth in international trade and the activities of the multinational enterprises, especially after growing acceptance of liberal economic policies in recent decades have added ample flavor to international business. The fundamental concepts and modalities have undergone a sea change. At the same time complexities have emerged in view of disparate environment ± economic, political, legal, socio cultural and financial ± among different regions of the globe.






International business is a term used to collectively describe all commercial transactions (private governmental, sales, investments, logistics, and transportation) that take place between two or more nations. It refers to all those business activities which involves cross border transactions of goods, services, resources between two or more nations. Transaction of economic resources include capital, skills, people etc. for international production of physical goods and services such as finance, banking, insurance, construction etc In terms of ease of doing business internationally, two major forces are important: 1. Technological developments which make global communication and

transportation relatively quick and convenient; and 2. The disappearance of a substantial part of the communist world, opening many of the world's economies to private business.

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The conduct of international operations depends on companies' objectives and the means with which they carry them out. The operations affect and are affected by the physical and societal factors and the competitive environment.

REASONS TO ENTER INTERNATIONAL TRADE   Managing the product life cycle   Geographic expansion   Technological advantage   Labor advantage   Earning valuable foreign exchange   Core competency of nations   Investment for infrastructure

DOMESTIC V/s INTERNATIONAL BUSINESS Domestic and international enterprises, in both the public and private sectors, share the business objectives of functioning successfully to continue operations. Private enterprises seek to function profitably as well. The difference is because of the differences in across borders. Nation-states generally have unique government systems, laws and regulations, currencies, taxes and duties, and so on, as well as different cultures and practices. An individual traveling from his home country to a foreign country needs to have the proper documents, to carry foreign currency, to be able to communicate in the foreign country, to be dressed appropriately, and so on. Doing business in a foreign country involves similar issues and is thus more complex than doing business at home. The following sections will explore some of these issues. Specifically, comparative advantage is introduced, the international business environment is explored, and forms of international entry are outlined.

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The resulting integration of the world economy has raised living standards around the world. Most developing countries have shared in this prosperity; in some, incomes have risen dramatically. As a group, developing countries have become much more important in world trade²they now account for one-third of world trade, up from about a quarter in the early 1970s. Many developing countries have substantially increased their exports of manufactures and services relative to traditional commodity exports: manufactures have risen to 80 percent of developing country exports. Moreover, trade between developing countries has grown rapidly, with 40 percent of their exports now going to other developing countries. The growth has been driven in part by the even faster rise in international trade. The growth in trade is in turn the result of both technological developments and concerted efforts to reduce trade barriers. Some developing countries have opened their own economies to take full advantage of the opportunities for economic development through trade, but many have not. Remaining trade barriers in industrial countries are concentrated in the agricultural products and labor-intensive manufactures in which developing countries have a comparative advantage. Further trade liberalization in these areas particularly, by both industrial and developing countries, would help the poorest escape from extreme poverty while also benefiting the industrial countries themselves. PARAMETERS TAKEN INTO CONSIDERTATION   Macro and micro economics   Natural resources   Manpower   Political scenario   Historical perspective   Geographical consideration

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International business is different from domestic business because the environment changes when a firm crosses international borders. Typically, a firm understands its domestic environment quite well, but is less familiar with the environment in other countries and must invest more time and resources into understanding the new environment. The following considers some of the important aspects of the environment that change internationally.   Economic environment   Social environment   Political environment   Cultural environment   Technological environment   Legal environment   Competitive environment An international business entry or operation depends on multiple environmental factors. They may change the direction, strategy, and every moment of international business operations. In addition to level of economic development, countries can be classified as free-market, centrally planned, or mixed. y Free-market economies are those where government intervenes minimally in business activities, and market forces of supply and demand are allowed to determine production and prices. y Centrally planned economies are those where the government determines production and prices based on forecasts of demand and desired levels of supply.

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Write Up And Analysis y Mixed economies are those where some activities are left to market forces and some, for national and individual welfare reasons, are government controlled. Clearly the level of economic activity combined with education, infrastructure, and so on, as well as the degree of government control of the economy, affect virtually all facets of doing business, and a firm needs to understand this environment if it is to operate successfully internationally. The political environment refers to the type of government, the government relationship with business, and the political risk in a country. Doing business internationally thus implies dealing with different types of governments, relationships, and levels of risk. Government-business relationships also differ from country to country. Business may be viewed positively as the engine of growth, it may be viewed negatively as the exploiter of the workers, or somewhere in between as providing both benefits and drawbacks. Specific government-business relationships can also vary from positive to negative depending on the type of business operations involved and the relationship between the people of the host country and the people of the home country. To be effective in a foreign location an international firm relies on the goodwill of the foreign government and needs to have a good understanding of all of these aspects of the political environment. The cultural environment is one of the critical components of the international business environment and one of the most difficult to understand. This is because the cultural environment is essentially unseen; it has been described as a shared, commonly held body of general beliefs and values that determine what is right for one group. Firms want to understand what beliefs and values they may find in countries where they do business, and a number of models of cultural values have been proposed by scholars. The competitive environment can also change from country to country. This is partly because of the economic, political, and cultural environments; these environmental factors help determine the type and degree of competition that exists in a given country.
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Write Up And Analysis Competition can come from a variety of sources. For the domestic firm the most likely sources of competition may be well understood. The same is not the case when one moves to compete in a new environment. For example, in the 1990s in the United States most business was privately owned and competition was among private sector companies, while in the People's Republic of China (PRC) businesses were owned by the state. Thus, a U.S. company in the PRC could find itself competing with organizations owned by state entities such as the PRC army. This could change the nature of competition dramatically. Technology often is seen as giving firms a competitive advantage; hence, firms compete for access to the newest in technology, and international firms transfer technology to be globally competitive. It is easier than ever for even small businesses to have a global presence thanks to the internet, which greatly expands their exposure, their market, and their potential customer base. For economic, political, and cultural reasons, some countries are more accepting of technological innovations, others less accepting.

SOCIAL CONDITIONS A Sociological perspective of environment includes the Demographic Status and Trends, the Work Ethic and Personal Values and General Cultural Values. Each of these influences how management accomplishes its jobs. Each country has a unique Social Environment and as business becomes international, management must understand these unique environments.   D e m o g ra p h y Demography means the total number of population of any particular territory. They have a greater influence of any business operation. For example in a mass populated area demand of consumer products will be comparatively higher than any lesser populated area. So, we can say that
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Write Up And Analysis demography has a direct impact on business environment. Because demand direct towards maximization of sales. The higher the value of sales the more would be the profits. The more profits impacts on success business operations.   Cultural Forces Culture is that what we are that means our living, eating, food habit, way of dressing and way of speaking everything accumulated to our culture. For example wearing lungi, eating panta with hilsha fish on Bengali New Year is part of Bangladeshi culture, every Bangladeshi respect or practices this culture. It is usual tasks for Bangladeshi inhabitants. But it is not acceptable in western or European culture. Wearing shorts eating fast food, having wine party are their culture. But it is not acceptable in Bangladeshi culture. As a result demand of shorts and wine is completely higher in the western society than that of in Bangladeshi society.   Work Ethics and Personal Value The importance placed upon work by an individual is known as work ethic. Business organizations counted upon the desire to work in its employees, a work ethic expressed in dedication and company loyalty. However work ethic has changed especially in younger workers and it is obvious that the attitudes of the workers will impact upon the organization as it recruits, trains, rewards, and retains employees POLITICAL INFLUENCES Political business environment has a direct impact on any county¶s business

environment. Some political environments result in a comparatively better environment and vice versa. For instance Instable political environment in Bangladesh is a major obstacle for Bangladeshi operations.

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Write Up And Analysis On the other hand before two decades Bangladesh, Vietnam and Malaysia were same ranking countries from economic aspects. But today Malaysia and Vietnam have advanced a lot themselves throw their proper political decisions, skilled leadership, finally stable political situation and responsible leadership make them emerging economical power in the southeast Asia as well as around the globe. Law & order situation should be controlled by the government. But if any government failed to control this important factor of batter business outcomes than the business environment of that country hamper & businessmen feel insecure than no foreign investor can try to come such as deadly environment. By this way businesses as well as total economy of that country fall down. Such as China has a control law & order situation & any investor have a positive thinking to invest in china which is not ensure in Bangladesh or some other country¶s government. An example of indicating impact of Political Influence is how, after destroying former Soviet Union we are directly observing the US interference in the political situation of every country around the world. They impose different economics barriers / economics blockades even global sanction of different countries those who are not their followers or from which country they being unable to take any undue advantage. On the other hand they facilitate various countries from different economic and political aspects those who are their followers or from whom they are capable to take undue advantages. These types of US foreign policies hamper the normal flow of international business. This is not legal practice but an unavoidable impact of world politics on International business .

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Write Up And Analysis Legal/Regulatory Practices

Laws are the primary way in which Business is directly affected by the legal system of a country. Legal practices of any country have a direct impact on the business operation of that country. For example, if there are any bindings on the international business transaction from the legal authority of any country then no company can break down that rules. For example we can take the case of License Raj License Raj, which refers to the elaborate licenses, regulations and the accompanying red tape that were required to set up and run business in India between 1947 and 1990. Up to 80 government agencies had to be satisfied before private companies could produce something and, if granted, the government would regulate production. The License Raj was a result of India's decision to have a planned economy, where all aspects of the economy are controlled by the state and licenses were given to a select few. License Raj established the "irresponsible, self-perpetuating bureaucracy that still exists throughout much of the country" and corruption flourished under this system. Inspired by the economy in the Soviet Union, he implemented mixed economy in India. A mixed economy is one in which capitalism is followed with government control. Private players could manufacture goods only with official licenses. The quantity of goods they were allowed to produce was determined by the license regime, not by free-market demand. Thus we can clearly see how Legal and Regulatory Practices impact the Economy and Business of a Country.

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Write Up And Analysis Economic Conditions In the functioning of a Business Enterprise we can see that an organization makes use of resources (input factors) to produce goods and service (output). All this takes place within the general economic environment, which affects each of these factors. y y y Economy Customers Competitiveness

An example of the impact that Economic Condition have on Business Organizations can be analyzed with the initiation of the Economic Reforms by the Govt of India in 1991 involving the deregulation and decontrol, Trade Policy Changes and opening up the economy to foreign investment. These reformist measures have provided many opportunities as well as posed serious challenges and threats of increasing competition to Indian Companies.

Also the current scenario can help us to understand the impact of Economics Factors on Business and Industry in a better way. The subprime crisis led to the failure of various financial institutions and banks globally. This Global Financial meltdown has a caused a huge Havoc in various sectors and various markets globally. Currently there is a huge liquidity crunch worldwide and there is a huge gap between the demand and supply across the world markets. Many major companies are unable to meet their operational expenses and are on the verge of Bankruptcy (for eg The Big Three Auto Giants of US, namely Ford, GM and Chrysler). Countries across the world are trying to stimulate demand and are following various measures to maintain the required levels of liquidity in the markets. Various measures are being taken up such as Direct Bailout of Ailing companies (as we can see by the case of US Government bailing out AIG ) or the measures taken by the Indian

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Write Up And Analysis Government by reducing various Interest rates (such as PLR, Repo, RRepo, SLR, Cash Reserve Ratio and etc) in order to increase the money supply in the market and to bridge the gap between consumption and production.

Technological Advancement

The final factor in the external environment is that of Technology. It has one of the most dramatic effects on Business, as changes in technology are often felt quickly by the company. A Company may be thoroughly committed to a form of technology and may have invested heavily in machinery and training, only to see a new, more innovative and cost effective technology emerge. As seen by the unprecedented speed of growth of the Internet in the last five years of the 20 th Century, markets can change almost overnight, much to the distress of the companies that fail to adjust to changing technology.

Technology is upgrading itself so quickly than that of our imagination. Telecommunication system has revolt every system than ever before. Because, only three decades ago communicating with a European partner with documentation was one month lengthy process. But today we are doing it within a moment. It has a greatest impact on business communication. Without rapid communication no business can run smoothly, profitably in the competitive market. There are two major aspects regarding the Technological Environment that a Business should be concerned about: y y Process Of Innovation. Technology Transfer Process.

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Trade Agreements and the Environment What institutions and policies can be effective in balancing the goals of trade benefits and environmental protection? A variety of approaches have been suggested, some similar to the standard free trade model, and some which are significantly different. The World Trade Organization This approach retains the overarching policy goal of free or ³liberalized´ trade, pursued for five decades through ³rounds´ of trade agreements under the General Agreement on Tariffs and Trade (GATT), which became the World Trade Organization (WTO) in 1994. The GATT and the WTO, whose membership now includes over 120 nations, have worked to lower tariffs and nontariff barriers to trade, as well as to eliminate subsidies for export industries. WTO authorities tend to be suspicious of ³green protectionism´ ± the use of trade barriers to protect domestic industry from competition under the guise of environmental regulation. They are also unsympathetic to efforts by nations to use trade measures to affect environmental policy outside their borders. From the WTO perspective, the responsibility for environmental policy should remain at the national level. As far as possible, decisions on international trade policy should not be complicated with environmental issues. This is consistent with an economic principle known as the specificity rule: policy solutions should be targeted directly at the source of the problem. Using trade measures to accomplish environmental policy goals is therefore a second-best solution, which is likely to cause other, undesired effects such as the reduction of gains from trade. The North American Free Trade Agreement (NAFTA) Approach In 1993, the United States, Canada, and Mexico signed the NAFTA agreement, lowering trade barriers across the continent. During the negotiations for this agreement, environmental groups argued strongly that freer trade could lead to negative

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Write Up And Analysis environmental consequences, pointing to the severe environmental problems already affecting the maquiladoras²tariff-free industrial zones along the Mexican border. As a result, a side agreement, the North American Agreement on Environmental Cooperation (NAAEC), set up the tripartite Commission for Environmental Cooperation (CEC), while another side agreement, the North American Agreement on Labor Cooperation (NAALC), dealt with labor issues. The European Union Approach The European Union (EU) is unusual in being a free trade area that has its own legislative and administrative institutions. Unlike the North American CEC, the European Union has the power to set environmental standards which are binding on its member countries. This is known as the harmonization of environmental standards.

ASEAN The Association of Southeast Asian Nations (ASEAN) is a political and economic Organization of countries located in Southeast Asia. ASEAN was formed on August 8, 1967 by the Philippines, Malaysia, Thailand, Indonesia, and Singapore, as a display of solidarity against communist expansion in Vietnam and insurgency within their own borders. Following the Bali Summit of 1976, the organization embarked on a mission of economic cooperation, which floundered in the mid-1980s only to be revived around a 1991 Thai proposal for a regional "free trade area". The countries meet annually. International Monetary Fund The International Monetary Fund was created in July 1945, originally with 45 members, with a goal to stabilize exchange rates and assist the reconstruction of the world's international payment system. Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances (Condon, 2007). The IMF was important when it was first created because it helped the world stabilize the economic system. The IMF works to improve the economies of its member countries. The IMF describes itself as "an organization of 187 countries (as of July 2010), working to foster global monetary cooperation, secure financial stability,

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Write Up And Analysis facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty". International Finance Corporation The International Finance Corporation (IFC) promotes sustainable private sector investment in developing countries. IFC is a member of the World Bank Group and is headquartered in Washington, DC. It shares the primary objective of all World Bank Group institutions: to improve the quality of the lives of people in its developing member countries.[1] Established in 1956, IFC is the largest multilateral source of loan and equity financing for private sector projects in the developing world. It promotes sustainable private sector development primarily by: 1. Financing private sector projects and companies located in the developing world. 2. Helping private companies in the developing world mobilize financing in international financial markets. 3. Providing advice and technical assistance to businesses and governments.

There are some basic decisions that the firm must take befor forien expansion like: which markets to enter, when to enter those markets, and on what scale. Which foreign markets? y y The choice based on nation¶s long run profit potential. Look in detail at economic and political factors which influence foreign markets.

Long run benefits of doing business in a country depend on following factors: y Size of market (in terms of demographics)

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Write Up And Analysis y y The present wealth of consumer markets (purchasing power) Nature of competition

By considering such factors firm can rank countries in terms of their attractiveness and long-run profit. Timing of entry:Entry is early when an international business enters a foreign market before other foreign firms and late when it enters after other international businesses. The advantage is when firms enters early in the foreign market commonly known as firstmover advantages First mover advantage;1. It¶s the ability to prevent rivals and capture demand by establishing a strong brand name. 2. Ability to build sales volume in that country. So that they can drive them out of market. 3. Ability to create customer relationship. Disadvantage: Firms has to devote effort, time and expense to learning the rules of the country. Risk is high for business failure(probability increases if business enters a national market after several other firms they can learn from other early firms mistakes) MODES OF ENTRY:--

y y y y

Exporting L ic en s in g F ran ch isin g Tu rnkey Project

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Write Up And Analysis y y y Mergers & Acquisitions Joint Ventu re Wholly Owned Subsidiary

EXPORTING: It means the sale abroad of an item produced ,stored or processed in the supplying firm¶s home country. It is a convenient method to increase the sales. Passive exporting occurs when a firm receives canvassed them. Active exporting conversely results from a strategic decision to establish proper systems for organizing the export functions and for procuring foreign sales. Advantages of Exporting: a. Need for limited finance; If the company selects a company in the host country to distribute the company can enter international market with no or less financial resources but this amount would be quite less compared to that would be necessary under other modes. b. Less Risks; Exporting involves less risk as the company understand the culture , customer and the market of the host country gradually. Later after understanding the host country the company can enter on a full scale. c. Motivation for exporting: Motivation for exporting is proactive and reactive. Proactive motivations are opportunities available in the host country. Reactive motivators are those efforts taken by the company to export the product to a foreign country due to the decline in demand for its product in the home country. LICENSING: In this mode of entry, the domestic manufacturer leases the right to use its intellectual property (ie) technology, copy rights, brand name etc to a manufacturer in a foreign country for a fee. Here the manufacturer in the domestic country is called

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Write Up And Analysis licensor and the manufacturer in the foreign is called licensee. The cost of entering market through this mode is less costly. The domestic company can choose any international location and enjoy the advantages without incurring any obligations and responsibilities of ownership, managerial, investment etc. Advantages; 1. Low investment on the part of licensor. 2.Low financial risk to the licensor 3.Licensor can investigate the foreign market without many efforts on his part. 4.Licensee gets the benefits with less investment on research and development 5. Licensee escapes himself from the risk of product failure. Disadvantages: 1. It reduces market opportunities for both 2.Both parties have to maintain the product quality and promote the product. Therefore one party can affect the other through their improper acts. 3.Chance for misunderstanding between the parties. 4.Chance for leakages of the trade secrets of the licensor. 5. Licensee may develop his reputation 6. Licensee may sell the product outside the agreed territory and after the expiry of the contract.

FRANCHISING Under franchising an independent organization called the franchisee operates the business under the name of another company called the franchisor under this agreement the franchisee pays a fee to the franchisor. The franchisor provides the following services to the franchisee. y y y T rade marks Operating System Product reputation
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Write Up And Analysis y Continuous support system like advertising , employee training , reservation services quality assurances program etc. Advantages: 1. Low investment and low risk 2.Franchisor can get the information regarding the market culture, customs and environment of the host country. 3.Franchisor learns more from the experience of the franchisees. 4.Franchisee gets the benefits of R& D with low cost. 5. Franchisee escapes from the risk of product failure. Disadvantages: 1. It may be more complicating than domestic franchising. 2.It is difficult to control the international franchisee. 3.It reduce the market opportunities for both 4.Both the parties have the responsibilities to maintain product quality and product promotion. 5. There is a problem of leakage of trade secrets. TURNKEY PROJECT: A turnkey project is a contract under which a firm agrees to fully design , construct and equip a manufacturing/ business/services facility and turn the project over to the purchase when it is ready for operation for a remuneration like a fixed price , payment on cost plus basis. This form of pricing allows the company to shift the risk of inflation enhanced costs to the purchaser. Example: nuclear power plants, airports, oil refinery, national highways, railway line etc. Hence they are multiyear project. MERGERS & ACQUISTIONS: A domestic company selects a foreign company and merger itself with foreign

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Write Up And Analysis company in order to enter international business. Alternatively the domestic company may purchase the foreign company and acquires it ownership and control. It provides immediate access to international manufacturing facilities and marketing network. Advantages: 1. The company immediately gets the ownership and control over the acquired firm¶s factories, employee, technology ,brand name and distribution networks. 2. The company can formulate international strategy and generate more revenues. 3. If the industry already reached the stage of optimum capacity level or overcapacity level in the host country. This strategy helps the host country. Disadvantages: 1. Acquiring a firm in a foreign country is a complex task involving bankers, lawyer¶s regulation, mergers and acquisition specialists from the two countries. 2. This strategy adds no capacity to the industry. 3. Sometimes host countries imposed restrictions on acquisition of local companies by the foreign companies. 4. Labor problem of the host country¶s companies are also transferred to the acquired company. JOINT VENTURE Two or more firm join together to create a new business entity that is legally separate and distinct from its parents. It involves shared ownership. Various environmental factors like social, technological economic and political encourage the formation of joint ventures. It provides strength in terms of required capital. Latest technology required human talent etc. and enable the companies to share the risk in the foreign markets. This act improves the local image in the host country and also satisfies the governmental joint venture. Advantages: 1. Joint venture provides large capital funds suitable for major projects.
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Write Up And Analysis 2.It spread the risk between or among partners. 3.It provide skills like technical skills, technology, human skills , expertise , marketing skills. 4.It make large projects and turn key projects feasible and possible. 5. It synergy due to combined efforts of varied parties. Disadvantages: 1. Conflict may arise 2. Partner delay the decision making once the dispute arises. Then the operations become unresponsive and inefficient. 3. Life cycle of a joint venture is hindered by many causes of collapse. 4. Scope for collapse of a joint venture is more due to entry of competitors changes in the partners strength. 5. The decision making is slowed down in joint ventures due to the involvement of a number of parties.

Subsidiary means individual body under parent body. This Subsidiary or individual body as per their own generates revenue. They give their own rent, salary to employees, etc. But policies and trademark will be implemented from the Parent body. There are no branches here. Only the certain percentage of the profit will be given to the parent body. A subsidiary, in business matters, is an entity that is controlled by a bigger and more powerful entity. The controlled entity is called a company, corporation, or limited liability company, and the controlling entity is called its parent (or the parent company). The reason for this distinction is that a lone company cannot be a subsidiary of any organization; only an entity representing a legal fiction as a separate entity can be a subsidiary. While individuals have the capacity to act on their own initiative, a business entity can only act through its directors, officers and employees.

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Write Up And Analysis The most common way that control of a subsidiary is achieved is through the ownership of shares in the subsidiary by the parent. These shares give the parent the necessary votes to determine the composition of the board of the subsidiary and so exercise control. This gives rise to the common

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