MB0053 International Business Management

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Q.1. Explain the different international trade theories.
1. Mercantilism
Developed in the sixteenth century, mercantilism was one of the earliest efforts to
develop an economic theory. This theory stated that a country’s wealth was determined
by the amount of its gold and silver holdings. In its simplest sense, mercantilists
believed that a country should increase its holdings of gold and silver by promoting
exports and discouraging imports. In other words, if people in other countries buy more
from you (exports) than they sell to you (imports), then they have to pay you the
difference in gold and silver. The objective of each country was to have a trade surplus,
or a situation where the value of exports is 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.

A closer look at world history from the 1500s to the late 1800s helps explain why
mercantilism flourished. The 1500s marked the rise of new nation-states, whose
rulers wanted to strengthen their nations by building larger armies and national
institutions. By increasing exports and trade, these rulers were able to amass more
gold and wealth for their countries. One way that many of these new nations
promoted exports was to impose restrictions on imports. This strategy is
called protectionism and is still used today.

2. Absolute Advantage

1776, Adam Smith. A country has an absolute advantage in the production of a
product when it is more efficient than any other country in producing it

If two countries specialize in production of different products (in which each has
an absolute advantage) and trade with each other, both countries will have more of
both products available to them for consumption

3. Comparative Advantage

1817, David Ricardo - Even if one country has an absolute advantage in
producing two products over another country, trading with that other country will

still yield more output for both countries than if the more efficient producer did
everything for themselves.

The country with the absolute advantage in producing both products would still
produce both products, but less of the one they would trade for, allowing them to









they’re comparatively most efficient at producing

Assumes many things:

Only 2 countries and 2 goods


No transportation costs


No price differences for resources in both countries


Resources can move freely from producing one product to producing
another product


Constant returns to scale


Fixed stock of resources


Free trade does not affect production efficiency


No effects of trade on income distribution within a country
There are some descriptions of potential outcomes of relaxing some of these

assumptions, but I’ll leave this as a thought exercise for you, the reader

4. Heckscher-Ohlin Theory

1919, Eli Heckscher and 1933, Bertil Ohlin – Comparative advantage arises from
differences in national factor endowments, such as land, labor, or capital, as
opposed to Ricardo’s theory which stresses productivity

1953, Wassily Leontief – The Leontief Paradox – theorized that since the U.S. has
abundant capital compared to other nations, they would export capital-intensive
goods and import labor-intensive goods. Data showed that was not the case.

Therefore, Ricardo’s theory seemed to be more predictive.

However, controlling for technological differences (e.g. eliminating them) does
yield a predictive model based on factor endowments

5. The Product Life-Cycle Theory

1960′s, Raymond Vernon – attempts to explain global trade patterns. First, new
products are introduced in the United States. Then, as demand grows in the U.S., it
also appears in other developed nations, to which the U.S. exports. Then, other
developed nations begin to produce the product as well, thus causing U.S.
companies to set up production in those countries as well, and limiting exports from
the U.S. Then, it all happens again, but this time production comes online in
developed nations. Ultimately, the U.S. becomes an importer of the product that
was initially introduced within its borders.

Weakness – Not all new products are created in the United States. Many come
from other countries first, such as video game consoles from Japan, new wireless
phones from Europe, etc. Several new products are introduced in several developed
countries simultaneously

6. New Trade Theory

1970′s – Via the achievement of economies of scale, trade can increase the
variety of goods available to consumers and decrease the average cost of those
goods. Further, the ability to capture economies of scale before anyone else is an
important first-mover advantage.

Nations may benefit from trade even when they do not differ in resource
endowments or technology

Example – If two nations both want sports cars and minivans, but neither can
produce them at a low enough price within their own national markets, trade can
allow each to focus on one product, allowing for the achievement of economies of
scale that will increase the variety of products in both countries at low enough prices

Example – Airbus spent $14 billion to develop a new super-jumbo jet. Demand is
estimated at 400-600 units over the next 20 years, and Airbus will need to sell at
least 250 of them to become profitable in this line of business. Boeing estimates the
demand to be much lower, and has chosen not to compete. Airbus will have the first
mover advantage in this market, and may never see competition in this market

New trade theory is not at odds with Comparative Advantage, since it identifies
first mover advantage as an important source of comparative advantage

Debate – should government provide subsidies that spawn industries such that
companies can gain first mover advantages? Later chapter (and blog post) covers

7. National Competitive Advantage – Porter’s Diamond

1990, Michael Porter – seeks to answer the question of why a nation achieves
international success in a particular industry. Based on four attributes:
Factor endowments


Basic factors – natural resources, climate, location, demographics

Advanced factors – communication infrastructure, sophisticated and
skilled labor, research facilities, and technological know-how

Advanced factors are a product of investment by individuals,
companies, and governments

Porter argues that advanced factors are the most significant for
competitive advantage

Demand conditions – if customers at home are sophisticated and


demanding, companies will have to produce innovative, high quality products
early, which leads to competitive advantage
Relating and supporting industries – If suppliers or related industries exist


in the home country that are themselves internationally competitive, this can
result in competitive advantage in the new industry.
Firm strategy, structure, and rivalry


Different nations are characterized by different management
ideologies, which can either help or hurt them in building competitive

If there is a strong domestic rivalry, it helps to create improved
efficiency, making those firms better international competitors

Porter also notes that chance (such as new breakthrough innovations) and
government policies (such as regulation, investments in education, etc.) can
influence the “national diamond”.

Q.2. Hofstede said “Culture is more often a source of conflict than of
synergy”. Discuss this statement and explain the five cultural dimensions.
Answer: According to Dr. Geert Hofstede, ‘Culture is more often a source of conflict
than of synergy. Cultural differences are a trouble and always a disaster.’
Professor Hofstede carried out a detailed study of how values in the workplace are
influenced by culture. He worked as a psychologist in IBM from 1967 to 1973. At
that time, he gathered and analyzed data from many people in 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:
1. Power Distance Index (PDI) – This focuses on the level of equality or
inequality between individuals in a nation’s society. A country with high
power distance ranking depicts that inequality of power and wealth has been
allowed to grow within the society. These societies follow caste system that
does not allow upward mobility of its people. A country with low power
distance ranking depicts a society which de-emphasizes the differences
between its people’s power and wealth. In these societies equality and
opportunity is stressed for everyone. Countries with high PDI index are Arab
countries, Russia, India and China. Those with low score are Australia and

2. Individualism – This dimension focuses on the extent to which the society
reinforces individual or collective achievement and interpersonal
relationships. A high individualism ranking (western countries, Canada,
Hungary) 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 (Asian and African countries like
Indonesia and Colombia) characterizes societies of a more collective nature
with close links between individuals. These cultures support extended
families and collectives where everyone takes responsibility for fellow
members of their group.
3. 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 (like Japan,
Venezuela, Hungary) shows the country experiences high level of gender
differentiation. In these cultures, men dominate the society and power
structure, with women being controlled and dominated by men. A country
with low masculinity ranking (like Norway and Sweden) shows a low level of
differentiation and discrimination between genders – women are treated
equal to men in all aspects of the society.
4. Uncertainty Avoidance Index (UAI) – This focuses on the degree of
tolerance for uncertainty and ambiguity within the society. 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 fewer concerns about ambiguity and uncertainty and has high
tolerance for a variety of opinions. A society which is less rule-oriented,
readily agrees to changes, and takes greater risks. Latin American countries,
Germany, Belgium, Japan and Eastern Europe score high on this. Countries
with low UAI score are Sweden, Denmark and China.
5. Long-Term Orientation (LTO) – It 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 (China, Japan, Honk
Kong) score high on this dimension. These countries have a long term
orientation, believe in many truths, accept changes easily, and have thrift for
investment. Cultures recording little on this dimension, trust in absolute truth,
are conventional and traditional. They have a small term orientation and a
concern for stability. Many western cultures score considerably low on this
In India, PDI is the highest Hofstede dimension for culture with a rank of 77, LTO
dimension rank is 61, and masculinity dimension rank is 62.
Q.3. Regional integration is helping the countries in growing their trade.
Discuss this statement. Describe in brief the various types of regional

Answer: Regional integration can be defined as the unification of countries into a
larger whole. It also reflects a country’s willingness to share or unify into a larger
whole. The level of integration of a country with other countries is determined by
what it shares and how it shares. Regional integration requires some compromise on
the part of participating countries. It should aim to improve the general quality of
life for the citizens of those countries. In recent years, we have seen more and more
countries moving towards regional integration to strengthen their ties and
relationship with other countries. This tendency towards integration was activated
by the European Union (EU) market integration. This trend has influenced both
developed and developing countries to form customs unions and Free Trade Areas
(FTA). The World Trade Organization (WTO) terms these agreements of integration
as Regional Trade Agreements (RTA). Regional integration 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. Regional integration induces reduction on tariffs
and prohibitions. It spreads goodwill among member countries and also helps in
reducing the chances of conflict. Different types of regional integration are
discussed in this section.
Preferential trading agreement
Preferential trading agreement 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. The tariffs are not abolished completely but are lower
than the tariffs charged to countries not party to the agreement. India is in PTA with
countries like Afghanistan, Chile and South Common Market (MERCOSUR). The
introduction of PTA has generated an increase in the market size and resulted in the
availability and variety of new products.
Free trade area
Free Trade Area (FTA) is a type of trade bloc and can be considered as the second
stage of economic integration. It comprises of all countries that are willing to or
agree to reduce preferences, tariffs and quotas on services and goods traded
between them. Countries choose this kind of economic integration if their economic
structures are similar. If countries compete among themselves, they are likely to
choose customs union. The importers must obtain product information from all
suppliers within the supply chain in order to determine the eligibility for a Free Trade
Agreement (FTA). After receiving the supplier documentation, the importer must
evaluate the eligibility of the product depending on the rules pertaining the
products. The importers product is qualified individually by the FTA. The product
should have a minimum percentage of local content for it to be qualified.
Custom union
Custom Union is an agreement among two or more countries having already
entered into a free trade agreement to further align their external tariff to help
remove trade barriers. Custom union agreement among negotiating countries may

encompass to reduce or eliminate customs duty on mutual trade. Under customs
union agreement, countries generally impose a common external -tariff (CTF) on
imports from non-member countries. Such common external tariff helps the
member countries to reap the benefits of trade expansion, trade creation and trade
diversification. In the absence of common external tariff, there is a possibility that
countries with lower custom duties may become conduits for members which has
higher custom duty. Custom union is third stage in level of economic integration and
is followed only after free trade agreement among participating countries.
Common market
Common market is a group formed by countries within a geographical area to
promote duty free trade and free movement of lab our and capital among its
members. European community is an example of common market. Common
markets levy common external tariff on imports from non-member countries. A
single market is a type of trade bloc, comprising a free trade area with common
policies on product regulation, and freedom of movement of goods, capital, lab our
and services, which are known as the four factors of production. This agreement
aims at making the movement of four factors of production between the member
countries easier. The technical, fiscal and physical barriers among the member
countries are eliminated considerably as these barriers hinder the freedom of
movement of the four factors of production. The member countries must come
forward to eliminate these barriers, have a political will and formulate common
economic policies. A common market is the first step towards a single market. It
may be initially limited to a FTA with moderate free movement of capital and
services, but it is not capable of removing the other trade barriers.

Q.4. Write short note on:
a) Foreign currency derivatives
Currency derivative is defined as a financial contract that seeks to swap two
currencies at a predetermined 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 that 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
Figure 1 describes the examples of currency derivatives. 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.
Foreign Currency Derivatives
Some of the risks associated with currency derivatives are:

Credit risk takes place, arising from the parties involved in a contract.

Market risk occurs due to adverse moves in the overall market.

Liquidity risks occur due to the requirement of available counterparties to
take the other side of the trade.

Settlement risks similar to the credit risks occur when the parties involved in
the contract fail to provide the currency at the agreed time.

Operational risks are one of the biggest risks that occur in trading derivatives
due to human error.

Legal risks pertain to the counterparties of currency swaps that go into
receivership while the swap is taking place.

b) Bases of international tax systems
Taxation plays a vital role for the worldwide operation of firms. The tax decision or
taxation which is relevant in domestic firms has become central to various financing
decisions involving fund raising decisions, international investment decisions,
international working capital decisions and decisions related to dividend and other
The bases of international tax system are:
1. Tax neutrality – To keep the economic efficiency from being affected the
international tax system should remain neutral. For the nationality of the
investor or the locality of the investment not to be influenced, a neutral tax is
important. Such an environment will allow capital to move from a nation with
lesser return to a nation with higher return, resulting in well allocated
resources that will ensure a high gross world output.
2. Tax equity – The principle of tax equity states that all equally positioned tax
players contribute in the cost of operating the government according to the
equal rules. The concept of equity can be perceived in two ways. It is assert
by the first view that the input of each tax player must be consistent with the
amount of public services as received. The second maintains that the
contribution of each tax player must be in terms of their ability to pay. The
ability to pay means the one with greater ability is likely to pay a larger
amount of tax.

3. Avoidance of double taxation – The avoidance of double income asserts
that one must not be taxed twice for the same income. However, double
taxation occurs if the recipient of post-tax income in a foreign country is
taxed again. As an alternative, the requirements of foreign tax credits may be
formed in the domestic tax system.
Q.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.
Answer: Strategic planning involves the structured efforts of an organization to
effectively recognize its purposes for existing, the direction that the organization will
pursue, and how that direction will allow the entity to achieve its short-term and
long-term goals. Strategic planning is an important element in all kinds of
organizations and is applied by governments, non-profit agencies, individuals and
A simple approach to strategic planning is as discussed below:
1. The first step is to accurately assess where the entity is today, with respect to
its ability and resources.
2. The second step is to recognize where the organization would like to reach at
some specific point of time in the future, by efficiently setting goals and
objectives that it needs to accomplish.
3. The third and final step engages choosing how to successfully progress from
the conditions of today and methodically work toward those goals in a
structured and logical manner.

During the strategic planning process, experts employ many ways, and sometimes
break down each process into a series of steps. The complexity of the exact
approach used frequently comprises of the nature of the organization, the kind of
goals laid down and the resources needed to attain those goals.
Strategic planning process involves allocation of resources to firms to fulfil their
long-term goals. Any business plan can be classified into three types. They are:

Strategic planning: This planning process is the best among the three
business planning processes. It is a long-term process that the business
owners utilize to unveil their business’ vision and mission. It also determines
a gateway for business owners for achieving their goals. Strategic planning
fulfills the mission and the overall goals of the firm. Whereas, the other two
are rather more short-term and are used sometimes without any relation to
the long-term business goals. However, these three kinds of planning work
well when used within a strategic plan.

Intermediate planning: This planning process is for six months to two
years. They outline the manner in which the strategic plan is pursued.

Intermediate plans are often used for campaigns with the purpose and goal of
supporting the trades’ long-term goals.

Short-term planning: This planning process involves planning for few
weeks or at least for a year. It involves detailing out the functioning of a
strategic plan on a daily basis. Resources are allocated for business
management and development that takes place daily within the strategic

Top-down vs. bottom-up planning
Top-down 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.
Management must choose techniques to align projects and goals with top-down
planning. Management alone is held responsible for the plans set and the end
result. The benefit of talented employees with prior experience on definite aspects
of the project are not utilized based on the assumption that the management can
plan and perform a project better without the inputs from these employees. Some
think that the top-down planning process is the right way to make a plan, and that
the plan development is not important. It permits the management to segregate a
project into steps, and then break the work into smaller executable parts of the
project. Simultaneously, the work that is broken down is analyzed until all the steps
could be studied, due-dates are precisely assigned, and then parts of the project are
given to employees. However, the focus is on long-term goals and the short-term
Bottom-up planning
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
Top-down planning
Top-down planning helps:

Determine all the goals at the initial stage of the process.

Identify the lack of ground level staff participation.

Estimate the inflexibility.

Find how management imposes the processes.

Determine the lack of motivation.

Find whether the staffs feel that their input is valued or not.

Bottom-up planning
Bottom-up planning helps:

As there is no long term vision here.

Encourage teamwork.

Estimate flexibility.

Determine whether team motivation is of high level.

Identify whether the project is team driven.

Find whether the staff feels valued or not.

Q.6. Explain the function of human resource planning. Discuss the scope of
International Human Resource Management.
Human resource planning (HRP): The ongoing process of systematic planning to
achieve optimum use of an organization's most valuable asset - its human
resources. The objective of human resource (HR) planning is to ensure the best fit
between employees and jobs, while avoiding manpower shortages or surpluses. The
three key elements of the HR planning process are forecasting labor demand,
analyzing present labor supply, and balancing projected labor demand and supply.
Objectives of Human resource planning:
1. To ensure proper utilization of human resources.
2. To check the development of the employees for the achievement of the
organization goal.
3. To ensure proper human resource policies.
4. To provide proper control measures whenever required.
Process of Human resource planning:
1. Analyzing the Corporate Level Strategies: – Human Resource Planning should
start with analyzing corporate level strategies which include expansion,
diversification, mergers, acquisitions, reduction in operations, technology to be
used, method of production etc.

2. Demand forecasting: – Forecasting the overall human resource requirement in
accordance with the organizational plans is one of the key aspects of demand
3. Analyzing Human Resource Supply: – Every organization has two sources of
supply of Human Resources: Internal & External. Internally, human resources can be
obtained for certain posts through promotions and transfers. In order to judge the
internal supply of human resources in future human resource inventory or human
resource audit is necessary.
4. Estimating manpower gaps: – Manpower gaps can be identified by comparing
demand and supply forecasts.
International Human Resource Management (IHRM) is the process of recruiting and
managing the services of an organization’s personnel across the globe, to achieve
its goals.
1. The structure of an organization plays a vital role in HRM. Internal and external
environment contribute the structure of an organization. Business strategy plays an
important role in the structure of an organization.
2. The different types of international organizational structures are export structure,
international division structure, functional structure, regional structure, international
subsidiary structure, product structure, and international matrix structure.
3. IHRM is a vital component in the functioning of a multinational enterprise. IHRM
helps deal with the factors that make the workforce more efficient and the
organization more competitive.
4. Though there are many strategies and policies regarding the deployment of
personnel across various countries, the one that best aligns the needs of the parent
country and employees in foreign subsidiaries is the one that yields the best results.
5. International staffing policies depend on the approach adopted by an
organization. The four approaches are ethnocentric, polycentric, region-centric, and
geocentric approach.
Scope of International Human Resource Management
The three main dimensions of international human resources management are as
1. Human resource activities.
2. Countries of operation.
3. Origin of employees.
Human resource activities - HR activities in an IHRM context involves procurement,
allocation, and utilization of workforce. These functions in turn cover all the six
activities of human resources

management, that is, human resource planning, hiring, training and development,
remuneration, performance management, and employee relations.
Countries of operation - The countries of operation in an IHRM perspective involves
the host country in which the overseas operation is located, the home country that
houses the headquarters of the company, and other countries that supply labor and
Origin of employees - The origin of the workforce of an international business can be
classified into three types - parent country nationals, host country nationals, and
third country nationals

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