MB0053 International Business Management
Content
INTERNATIONAL BUSINESS MANAGEMENT (MB-0037) ASSIGNMENT-1 (Book ID:B1724) Q1. Write a note on Globalization. Ans:- According to business terminologies, globalization is defined as ‘the worldwide trend of businesses
expanding beyond their domestic boundaries’. It is advantageous for the economy of countries because it promotes prosperity in the countries that embrace globalization. In this section, we will understand globalization, its benefits and challenges. Benefits of globalization The merits and demerits of globalization are highly debatable. While globalization creates employment opportunities in the host countries, it also exploits labour at a very low cost compared to the home country. Let us consider the benefits and ill-effects of globalization. Some of the benefits of globalization are as follows: 1. Promotes foreign trade and liberalization of economies. 2. Increases the living standards of people in several developing countries through capital investments in developing countries by developed countries. 3. Benefits customers as companies outsource to low wage countries. Outsourcing helps the companies to be competitive by keeping the cost low, with increased productivity. 4. Promotes better education and jobs. 5. Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best practices, and culture. 6. Provides better quality of products, customer services, and standardized delivery models across countries. 7. Gives better access to finance for corporate and sovereign borrowers. 8. Increases business travel, which in turn leads to a flourishing travel and hospitality industry across the world. 9. Increases sales as the availability of cutting edge technologies and production techniques decrease the cost of production. 10. Provides several platforms for international dispute resolutions in business, which facilitates international trade. In spite of its disadvantages, globalisation has improved our lives through various fields like communication, transportation, healthcare, and education.
Q2. Why do nations trade? Discuss the relevance of Porter’s diamond model in today’s business context. Ans:- The answer to the above questions would be that countries world over are endowed with different natural, human, and capital resources. Each country varies from the other in combining these resources (land, labour and capital). In a globalised set-up, every country cannot be as efficient as the best in producing the goods and services that their residents demand. As a result, they have to trade off their decisions to produce any good or service based on opportunity cost. Opportunity cost model helps us understand the ‘choice of producing one good or another’. The production decision of the country depends on whether it is more efficient to produce the goods and services with lower opportunity cost with increased and specialized production, or to trade those goods, with goods of higher opportunity cost. If a country can produce more of any goods or services with the same resources used by any other country, it is said to have an absolute cost advantage in the production of those goods or services. For example, India has absolute cost advantage in cutting and polishing of diamond. Around 68% of the diamonds from
all over the world are cut and polished in India. India is the largest producer of diamond jewellery in the world. On the other hand, India would import items which can be imported at a lower cost than it would take to manufacture these items locally, for example Swiss watches where Switzerland has absolute advantage. Thus countries trade their production decision based on absolute cost advantages. Trade in globalised set-up has been used as an instrument for enhancing a country’s economic growth and is usually beneficial to both the exporting and importing countries. Nations even if they have an absolute cost advantage in the production of goods that are to be traded vis a vis its counterpart, would like to specialize in higher opportunity cost products. The production size and scale may be limited by other constraints. For example India and Thailand have signed a Free Trade Agreement. Thailand is cost efficient in both auto component and pharmaceuticals. India would like to import auto component and would export pharmaceuticals to Thailand. This will be beneficial to India as it will benefit from economies of scale with higher production of pharmaceuticals. Opportunity cost and efficiency in production varies from country to country as countries have different endowments of productive resources like land, labour and capital. For example, US, a capital rich country will specialize in production of aeroplanes and India, rich in labour pool will specialize in rendering of information technology services. Trade is also affected as different countries are endowed with different natural resources and climate zones, longer growing seasons for a produce, abundance of natural resources such as oil, mica, coal, iron ore, and highly educated and skilled workers, and larger quantities of sophisticated machinery. For example Saudi Arabia will export oil, India will export mica, iron ore and information technology, Brazil will export coffee and Thailand will export rice. Porter’s diamond model In 1990, Michael Porter analysed the reason behind some nations’ success and others’ failure in international competition. His thesis outlined four broad attributes that shape the environment in which local firms compete and these attributes promote the creation of competitive advantage. They are explained as follows: Factor endowments – Characteristics of production were analysed in detail. There are basic factors like natural resources, climate, and location and so on and advanced factors like communications infrastructure, research facilities. Demand conditions – The role of home demand in improving competitive advantage is emphasised since firms are most sensitive about the needs of their closest customers. For example, the Japanese camera industry which caters to a sophisticated and knowledgeable local market. Relating and supporting industries – The presence of suppliers or related industries is advantageous since the benefits of investment in advanced factors of production spill over to these supporting industries. Successful industries within a country tend to be grouped into clusters of related industries. For example Silicon Valley. Firm strategy, structure and rivalry – Domestic rivalry creates pressure to innovate, improve quality, and reduce costs which in turn helps create world-class competitors. He said that these four attributes constituted the diamond and he argued that firms are most likely to succeed in industries where the diamond is most favorable. He also stated that the diamond is a mutually reinforcing system and the effect of one attribute depends on the state of others. For example, favourable demand conditions will not result in a competitive advantage unless the state of rivalry is enough to elicit a response from the firms.
Q3. Why do firms pay so much attention to economic factors while entering in particular market? Justify your answer with practical examples. Ans:- The economic environment refers to the economic conditions under which a business operates and takes
into account all factors that have affected it. It includes prime interest rates, legislation concerning employment of foreigners, return of profits, safety of country, political stability and so on. National economic policies National economic policies depend on a country’s socio-economic and cultural background. All governments aspire to achieve four major economic objectives: 1. Full employment. 2. A high economic growth rate.
3. A low rate of inflation. 4. Absence of deficit in the country’s balance of payments. The basic problem is that the first two objectives work against the last two. Measures such as low interest rates, tax cuts and increase in public spending creates jobs and stimulates growth but also causes inflation, increase in wage, and higher imports. Due to increased consumer expenditure the country’s balance of trade worsens. Economic structure International Business managers need to understand and assess international economic forces at work. Key variables that need to be examined include Gross Domestic Product (GDP) per capita, regional distribution of GDP, levels of investment, consumer expenditure, labour costs, inflation and unemployment. Variables that are examined when assessing national economic environments include: Economic structure – The structure of a nation’s economy is determined by the size and rate of its population growth, income levels and distribution of income, natural resources, agricultural, manufacturing and services sector. Economic infrastructure is the sum of all the external facilities and services that support the work of firms including communication, transportation, electricity supply, banking and financial services. Industry structure – The structure of an industry is determined by factors such as:
Market growth – It is measured in terms of local currency and adjusted for inflation. Local currency is used because conversions into other currencies are affected by exchange rate fluctuations. Income levels – It is taken as the GDP per capita and GDP is directly proportional to the productivity of the country. Net income is another important variable and is without tax payments from individual gross incomes. Sector wise trends – Growth activity in a country might vary significantly among certain industries. For example, India has a vibrant software services industry. Openness of the economy – The ratio of a country’s imports and exports to its Gross National Product (GNP) indicates its vulnerability to fluctuations in international trade. A nation with a high foreign trade or GNP depends heavily on the economic well-being of the nations it exports to. Conversely, closed economies have a high degree of control over the economy. International debt – An outstanding loan that one country owes to another country or institutions within that country. Foreign debt also includes due payments to international organizations. Foreign exchange reserves should not be less than outstanding short-term foreign debts. On the other hand, a high foreign debt servicing requirement maybe a positive indicator, suggesting that a country has borrowed heavily to invest in its future. Degree of urbanization – This is an important factor because there are major differences in incomes and lifestyles between urban and rural areas in most countries such as: – shopping frequency, average purchase value. Expectations in quality and technical sophistication. . Q4. How has India reacted towards regional integration? Discuss briefly the trade agreements
signed by India. Ans:- India and Trade Agreements
After learning about regional trading arrangements in the previous section, we shall now discuss the trading agreements conducted by India. India considers Regional Trading Arrangements (RTA's) as the building blocks towards the objective of trade liberalization. Therefore, India participates in a number of RTAs, which include Free Trade Agreements (FTAs), Preferential Trade Agreements (PTAs) and so on. These agreements take place bilaterally or in a regional grouping. We shall now discuss some of the major agreements signed by India. Asia-Pacific Trade Agreement (APTA)
The Asia-Pacific Trade Agreement (APTA), previously known as the Bangkok Agreement, was signed on 31st of July 1975, as an initiative of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). The United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) is the regional development arm of the United Nations for the Asia-Pacific region. It focuses on issues that are most effectively addressed through regional cooperation and includes issues oft: 1. All or a group of countries in the region face, for which it is necessary to learn from each other. 2. Benefit from regional or multi-country involvement. 3. Cut across boundaries, or that would benefit from collaborative inter-country approaches. 4. Are sensitive or emerging and require further advocacy and negotiation. The first agreement on trade negotiations among the developing member countries of ESCAP was the APTA/ Bangkok agreement. It is basically a preferential tariff agreement that aims at promoting intra-regional trade through exchange of mutually agreed concessions by the members of the ESCAP region. The first signatories to the agreement were Bangladesh, India, Lao People’s Democratic Republic, the Republic of Korea and Sri Lanka. China's accession to the agreement was accepted at the 16th Session of the Standing Committee of the Bangkok Agreement in April 2000. The objective of this agreement is to encourage economic development gradually through trade expansion among the developing member countries of ESCAP and to further international economic cooperation through the adoption of mutually beneficial trade liberalization measures. The following general principles govern the agreement: 1. The Agreement shall be based on overall cooperation and mutuality of advantages in such a way, to benefit all participating states equally. 2. The principles of transparency, national treatment and most-favored-nation treatment shall apply to the trade relations among the participating states. 3. The special needs of least developed country participating states shall be clearly recognized and concrete preferential measures in their favor shall be agreed upon. Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Bangladesh India Myanmar Sri Lanka and Thailand Technical and Economic Cooperation (BIMSTEC), a subregional economic cooperation grouping, was formed in Bangkok in June 1997. Myanmar joined the grouping later in December 1997. Bhutan and Nepal too joined in February 2004. Five members of SAARC (India, Bangladesh, Bhutan, Nepal and Sri Lanka) and two members of ASEAN (Thailand, Myanmar) are members of this agreement. Thus, it is considered as a ‘bridging link' between the two major regional groupings that is, ASEAN and SAARC. The chairmanship of BIMSTEC rotates among the member countries in alphabetical order. The immediate priority of the grouping is to merge its activities to make it attractive for economic cooperation. Initially, cooperation was proposed into six sectors. But, during the 11th Senior Official Meeting in New Delhi on August 2006, it was agreed that the areas of cooperation should be expanded to 13 sectors and each sector will be led by members in a voluntary manner. The member countries proposed cooperation in the following sectors: 1. Trade and Investment (Bangladesh). 2. Technology (Sri Lanka). 3. Energy (Myanmar). 4. Transport and Communication (India). 5. Tourism (India). 6. Fisheries (Thailand). 7. Agriculture (Myanmar). 8. Cultural Co-operation (Bhutan). 9. Environment and Disaster Management (India). 10. Public Health (Thailand). 11. People-to-People Contact (Thailand). 12. Poverty Alleviation (Nepal). 13. Counter-Terrorism and Trans-national Crimes (India). BIMSTEC member countries agreed to establish the BIMSTEC Free Trade Area Framework Agreement in order
to encourage trade and investment in the countries party to the agreement, and attract outsiders to trade with and invest in BIMSTEC at a higher level. The Framework Agreement on the BIMST-EC FTA was signed on 8th February, 2004 in Phuket, Thailand. Framework Agreement on Comprehensive Economic Co-operation between India and the Association of South East Asian Nations ‘Look East Policy’ led India to engage with the Association of South East Asian Nations (ASEAN) and it started in the year 1991. The ASEAN’s political economic and strategic importance in the larger Asia-Pacific Region and its capability to become a major partner of India in trade and investment made India to join association with ASEAN. While, ASEAN looks to utilize and access India’s technical and professional wealth, India and ASEAN look forward to strengthen the security in the region. ASEAN was established on 8th August 1967 in Bangkok by the five original member countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Now, it has a membership of 10 countries namely Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. India is one of the four 'Summit level Dialogue Partners' of ASEAN. An agreement on Comprehensive Economic Cooperation between ASEAN and India was signed on 8th October 2003 in Bali (Indonesia). The key elements of the agreement are, FTA in services, goods and investment as well as in the areas of economic cooperation. The objectives of this agreement are to: 1. Promote and strengthen trade, economic and investment co-operation between the parties. 2. Progressively liberalize and promote trade in goods and services as well as create a transparent, liberal and facilitative investment regime. 3. Explore new areas and develop appropriate measures for closer economic co-operation between the parties. 4. Facilitate the more effective economic integration of the new ASEAN Member States and bridge the development gap among the parties. The areas where economic cooperation is required are when appropriate parties: 1. 2. 3. 4. 5. Agree to strengthen their cooperation in the following areas: Trade facilitation. Sectors of cooperation. Trade and investment promotion. Agree to implement capacity building programmers’ and technical assistance, particularly for the New ASEAN Member States, in order to adjust their economic structure and expand their trade and investment with India. 6. Establish other bodies, which may be necessary to coordinate and implement any economic cooperation activities undertaken pursuant to this Agreement. India-MERCOSUR Preferential Trade Agreement (PTA) India and MERCOSUR signed a framework agreement on 17th June 2003. The objective of this agreement is to create an environment for negotiations in the first stage, by granting mutual tariff preferences, and in the second stage, to negotiate a FTA between the two parties in conformity with the rules of the WTO. As a follow up to the framework agreement, a Preferential Trade Agreement (PTA) was signed in New Delhi on January 25, 2004. The aim of this PTA is to expand and strengthen the existing relations between MERCOSUR and India and promote the expansion of trade by granting mutual fixed tariff preferences with the ultimate objective of creating a free trade area between the parties. Other agreements include: India and Singapore Comprehensive Economic Cooperation Agreement (CECA). India-Sri Lanka Free Trade Agreement (ISFTA). India-Chile Preferential Trade Agreement (PTA). India-Afghanistan Preferential Trade Agreement (PTA). India-Bhutan Trade Agreement. India-Nepal Trade Treaty.
Framework Agreement for Establishing Free Trade between India and Thailand. Free Trade Agreement (FTA) between India and Gulf Cooperation Council (GCC). India- Japan Trade Agreement. Joint Study Group between India and Korea. Trade Agreement between India and Bangladesh. Comprehensive Economic Cooperation and Partnership Agreement (CECPA) between India and Mauritius.
Q5. What is global sourcing? What makes India so attractive for global sourcing? Ans:- Globalization of the world economy under the WTO has opened abundant opportunities of cost cutting,
gaining competitive advantage and saving time for industries worldwide. Indian industries have experienced such developments as India is a member of the WTO since its inception in 1995. ‘Global sourcing’ is described as ‘the practice of sourcing cost effective and best goods and services across geopolitical boundaries in order to cater to global markets’. Global sourcing strategy is aimed at exploiting ‘global efficiencies’ in all areas of manufacturing, trading and services to enable offering clients and customer the best possible product or service. Usually, efficiencies that prompt firms for global sourcing are low cost skilled labor, low cost raw material, proximity to key markets, time zone differences and other economic factors such as tax exemption and low trade tariffs. Indian industries have successfully levered global sourcing strategies in their global trade operations and sourcing has been the driving force behind the development and expansion of Indian foreign trade in the recent past. Global sourcing strategy has made Indian industry more globalised as buyers from all over the world are bidding for Indian goods, particularly services, to enable executing their contracts on time, reduce prices and generate efficiency in the system through increased competition. Indian industries, in order to reap the benefits of sourcing opportunities, has opened global offices and subsidiaries to tap opportunities on all fronts, i.e., manufacturing, trading, skilled services and call centers. As we know, manufacturing costs vary from country to country due to factors such as currency conversion and cost of living. Due to different factor endowments of countries, the costs of labor and materials may differ, for example, labour cost is far lower in developing countries like India than in North America and Europe. For companies that have labour intensive work, this difference in costing results into significant savings in terms of salaries, wages, post retirement benefits, fringe benefits and other benefits. India is emerging as a global hub in gems and jewellery, oil refining, engineering equipments, textiles, sports goods, auto components, etc. In a globalised set up, trade and commerce of skilled services such as IT enabled services, software development and testing, purchasing, engineering and integrated chip designing, knowledge process outsourcing (KPO), offshoring and home shoring is growing much faster than trade in merchandise. India, with its demographic dividends has been benefitted from all such developments as the level of skill and knowledge held by Indian professional allows them to provide high quality services to their clients in developed countries. For example, India has been successful in software development, BPO services, KPO services and in the recent past in areas like Engineering Process Outsourcing, Analysis Process Outsourcing, content development and website designing. The main reasons for skills sourcing to India is represented pictorially as under:
Global sourcing has both benefits and risks for the Indian industry. Global sourcing has helped Indian companies in the generation of additional revenue and profits, precious foreign exchange, scalable business operations and employment. There are spillover effects of outsourcing to India and its economy has grown additionally by emerging as lower cost suppliers of merchandise and services. Brand India is widely recognized in the ‘silicon valley’ and the
Indian government’s bargaining power has increased due to the dependence of many countries for Indian services. Living standards of the people has improved, higher wages, improved working conditions and learning transferable skills has helped thousands of Indians. Risks from global sourcing such as cultural and language related issues, withdrawal of tax benefits, accent problems, high labour attrition, diversification of business operations across different countries, increased business travel and local management issues are present. In addition to this, there also comes the risks related to logistics and transportation.
Q6. Write short notes on: 1. Cross culture management 2. WTO
Ans:- Cross cultural management skills
The ability to demonstrate a series of behavior is called a skill. It is functionally linked to achieving a performance goal. The most important aspect to qualify as a manager for positions of international responsibility is communication skills. The managers must adapt to other cultures and have the ability to lead its members. The managers cannot expect to force members of other culture to fit into their cultural customs. This is the main assumption of cross cultural skills learning. Any organization that tries to enforce its behavioral customs on unwilling workers from another culture faces conflict. The manager has to possess the skills linked with the following:
WTO In this section we will discuss about the World Trade Organisation (WTO). WTO was established on 1st January 1995. In April 1994, the Final Act was signed at a meeting in Marrakesh, Morocco. The Marrakesh Declaration of 15th April 1994 was formed to strengthen the world economy that would lead to better investment, trade, income growth and employment throughout the world. The WTO is the successor to the General Agreement of Tariffs and Trade (GATT). Objectives and functions The key objective of WTO is to promote and ensure international trade in developing countries. The other major functions include:
the world’s resources.
expanding beyond their domestic boundaries’. It is advantageous for the economy of countries because it promotes prosperity in the countries that embrace globalization. In this section, we will understand globalization, its benefits and challenges. Benefits of globalization The merits and demerits of globalization are highly debatable. While globalization creates employment opportunities in the host countries, it also exploits labour at a very low cost compared to the home country. Let us consider the benefits and ill-effects of globalization. Some of the benefits of globalization are as follows: 1. Promotes foreign trade and liberalization of economies. 2. Increases the living standards of people in several developing countries through capital investments in developing countries by developed countries. 3. Benefits customers as companies outsource to low wage countries. Outsourcing helps the companies to be competitive by keeping the cost low, with increased productivity. 4. Promotes better education and jobs. 5. Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best practices, and culture. 6. Provides better quality of products, customer services, and standardized delivery models across countries. 7. Gives better access to finance for corporate and sovereign borrowers. 8. Increases business travel, which in turn leads to a flourishing travel and hospitality industry across the world. 9. Increases sales as the availability of cutting edge technologies and production techniques decrease the cost of production. 10. Provides several platforms for international dispute resolutions in business, which facilitates international trade. In spite of its disadvantages, globalisation has improved our lives through various fields like communication, transportation, healthcare, and education.
Q2. Why do nations trade? Discuss the relevance of Porter’s diamond model in today’s business context. Ans:- The answer to the above questions would be that countries world over are endowed with different natural, human, and capital resources. Each country varies from the other in combining these resources (land, labour and capital). In a globalised set-up, every country cannot be as efficient as the best in producing the goods and services that their residents demand. As a result, they have to trade off their decisions to produce any good or service based on opportunity cost. Opportunity cost model helps us understand the ‘choice of producing one good or another’. The production decision of the country depends on whether it is more efficient to produce the goods and services with lower opportunity cost with increased and specialized production, or to trade those goods, with goods of higher opportunity cost. If a country can produce more of any goods or services with the same resources used by any other country, it is said to have an absolute cost advantage in the production of those goods or services. For example, India has absolute cost advantage in cutting and polishing of diamond. Around 68% of the diamonds from
all over the world are cut and polished in India. India is the largest producer of diamond jewellery in the world. On the other hand, India would import items which can be imported at a lower cost than it would take to manufacture these items locally, for example Swiss watches where Switzerland has absolute advantage. Thus countries trade their production decision based on absolute cost advantages. Trade in globalised set-up has been used as an instrument for enhancing a country’s economic growth and is usually beneficial to both the exporting and importing countries. Nations even if they have an absolute cost advantage in the production of goods that are to be traded vis a vis its counterpart, would like to specialize in higher opportunity cost products. The production size and scale may be limited by other constraints. For example India and Thailand have signed a Free Trade Agreement. Thailand is cost efficient in both auto component and pharmaceuticals. India would like to import auto component and would export pharmaceuticals to Thailand. This will be beneficial to India as it will benefit from economies of scale with higher production of pharmaceuticals. Opportunity cost and efficiency in production varies from country to country as countries have different endowments of productive resources like land, labour and capital. For example, US, a capital rich country will specialize in production of aeroplanes and India, rich in labour pool will specialize in rendering of information technology services. Trade is also affected as different countries are endowed with different natural resources and climate zones, longer growing seasons for a produce, abundance of natural resources such as oil, mica, coal, iron ore, and highly educated and skilled workers, and larger quantities of sophisticated machinery. For example Saudi Arabia will export oil, India will export mica, iron ore and information technology, Brazil will export coffee and Thailand will export rice. Porter’s diamond model In 1990, Michael Porter analysed the reason behind some nations’ success and others’ failure in international competition. His thesis outlined four broad attributes that shape the environment in which local firms compete and these attributes promote the creation of competitive advantage. They are explained as follows: Factor endowments – Characteristics of production were analysed in detail. There are basic factors like natural resources, climate, and location and so on and advanced factors like communications infrastructure, research facilities. Demand conditions – The role of home demand in improving competitive advantage is emphasised since firms are most sensitive about the needs of their closest customers. For example, the Japanese camera industry which caters to a sophisticated and knowledgeable local market. Relating and supporting industries – The presence of suppliers or related industries is advantageous since the benefits of investment in advanced factors of production spill over to these supporting industries. Successful industries within a country tend to be grouped into clusters of related industries. For example Silicon Valley. Firm strategy, structure and rivalry – Domestic rivalry creates pressure to innovate, improve quality, and reduce costs which in turn helps create world-class competitors. He said that these four attributes constituted the diamond and he argued that firms are most likely to succeed in industries where the diamond is most favorable. He also stated that the diamond is a mutually reinforcing system and the effect of one attribute depends on the state of others. For example, favourable demand conditions will not result in a competitive advantage unless the state of rivalry is enough to elicit a response from the firms.
Q3. Why do firms pay so much attention to economic factors while entering in particular market? Justify your answer with practical examples. Ans:- The economic environment refers to the economic conditions under which a business operates and takes
into account all factors that have affected it. It includes prime interest rates, legislation concerning employment of foreigners, return of profits, safety of country, political stability and so on. National economic policies National economic policies depend on a country’s socio-economic and cultural background. All governments aspire to achieve four major economic objectives: 1. Full employment. 2. A high economic growth rate.
3. A low rate of inflation. 4. Absence of deficit in the country’s balance of payments. The basic problem is that the first two objectives work against the last two. Measures such as low interest rates, tax cuts and increase in public spending creates jobs and stimulates growth but also causes inflation, increase in wage, and higher imports. Due to increased consumer expenditure the country’s balance of trade worsens. Economic structure International Business managers need to understand and assess international economic forces at work. Key variables that need to be examined include Gross Domestic Product (GDP) per capita, regional distribution of GDP, levels of investment, consumer expenditure, labour costs, inflation and unemployment. Variables that are examined when assessing national economic environments include: Economic structure – The structure of a nation’s economy is determined by the size and rate of its population growth, income levels and distribution of income, natural resources, agricultural, manufacturing and services sector. Economic infrastructure is the sum of all the external facilities and services that support the work of firms including communication, transportation, electricity supply, banking and financial services. Industry structure – The structure of an industry is determined by factors such as:
Market growth – It is measured in terms of local currency and adjusted for inflation. Local currency is used because conversions into other currencies are affected by exchange rate fluctuations. Income levels – It is taken as the GDP per capita and GDP is directly proportional to the productivity of the country. Net income is another important variable and is without tax payments from individual gross incomes. Sector wise trends – Growth activity in a country might vary significantly among certain industries. For example, India has a vibrant software services industry. Openness of the economy – The ratio of a country’s imports and exports to its Gross National Product (GNP) indicates its vulnerability to fluctuations in international trade. A nation with a high foreign trade or GNP depends heavily on the economic well-being of the nations it exports to. Conversely, closed economies have a high degree of control over the economy. International debt – An outstanding loan that one country owes to another country or institutions within that country. Foreign debt also includes due payments to international organizations. Foreign exchange reserves should not be less than outstanding short-term foreign debts. On the other hand, a high foreign debt servicing requirement maybe a positive indicator, suggesting that a country has borrowed heavily to invest in its future. Degree of urbanization – This is an important factor because there are major differences in incomes and lifestyles between urban and rural areas in most countries such as: – shopping frequency, average purchase value. Expectations in quality and technical sophistication. . Q4. How has India reacted towards regional integration? Discuss briefly the trade agreements
signed by India. Ans:- India and Trade Agreements
After learning about regional trading arrangements in the previous section, we shall now discuss the trading agreements conducted by India. India considers Regional Trading Arrangements (RTA's) as the building blocks towards the objective of trade liberalization. Therefore, India participates in a number of RTAs, which include Free Trade Agreements (FTAs), Preferential Trade Agreements (PTAs) and so on. These agreements take place bilaterally or in a regional grouping. We shall now discuss some of the major agreements signed by India. Asia-Pacific Trade Agreement (APTA)
The Asia-Pacific Trade Agreement (APTA), previously known as the Bangkok Agreement, was signed on 31st of July 1975, as an initiative of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). The United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) is the regional development arm of the United Nations for the Asia-Pacific region. It focuses on issues that are most effectively addressed through regional cooperation and includes issues oft: 1. All or a group of countries in the region face, for which it is necessary to learn from each other. 2. Benefit from regional or multi-country involvement. 3. Cut across boundaries, or that would benefit from collaborative inter-country approaches. 4. Are sensitive or emerging and require further advocacy and negotiation. The first agreement on trade negotiations among the developing member countries of ESCAP was the APTA/ Bangkok agreement. It is basically a preferential tariff agreement that aims at promoting intra-regional trade through exchange of mutually agreed concessions by the members of the ESCAP region. The first signatories to the agreement were Bangladesh, India, Lao People’s Democratic Republic, the Republic of Korea and Sri Lanka. China's accession to the agreement was accepted at the 16th Session of the Standing Committee of the Bangkok Agreement in April 2000. The objective of this agreement is to encourage economic development gradually through trade expansion among the developing member countries of ESCAP and to further international economic cooperation through the adoption of mutually beneficial trade liberalization measures. The following general principles govern the agreement: 1. The Agreement shall be based on overall cooperation and mutuality of advantages in such a way, to benefit all participating states equally. 2. The principles of transparency, national treatment and most-favored-nation treatment shall apply to the trade relations among the participating states. 3. The special needs of least developed country participating states shall be clearly recognized and concrete preferential measures in their favor shall be agreed upon. Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Bangladesh India Myanmar Sri Lanka and Thailand Technical and Economic Cooperation (BIMSTEC), a subregional economic cooperation grouping, was formed in Bangkok in June 1997. Myanmar joined the grouping later in December 1997. Bhutan and Nepal too joined in February 2004. Five members of SAARC (India, Bangladesh, Bhutan, Nepal and Sri Lanka) and two members of ASEAN (Thailand, Myanmar) are members of this agreement. Thus, it is considered as a ‘bridging link' between the two major regional groupings that is, ASEAN and SAARC. The chairmanship of BIMSTEC rotates among the member countries in alphabetical order. The immediate priority of the grouping is to merge its activities to make it attractive for economic cooperation. Initially, cooperation was proposed into six sectors. But, during the 11th Senior Official Meeting in New Delhi on August 2006, it was agreed that the areas of cooperation should be expanded to 13 sectors and each sector will be led by members in a voluntary manner. The member countries proposed cooperation in the following sectors: 1. Trade and Investment (Bangladesh). 2. Technology (Sri Lanka). 3. Energy (Myanmar). 4. Transport and Communication (India). 5. Tourism (India). 6. Fisheries (Thailand). 7. Agriculture (Myanmar). 8. Cultural Co-operation (Bhutan). 9. Environment and Disaster Management (India). 10. Public Health (Thailand). 11. People-to-People Contact (Thailand). 12. Poverty Alleviation (Nepal). 13. Counter-Terrorism and Trans-national Crimes (India). BIMSTEC member countries agreed to establish the BIMSTEC Free Trade Area Framework Agreement in order
to encourage trade and investment in the countries party to the agreement, and attract outsiders to trade with and invest in BIMSTEC at a higher level. The Framework Agreement on the BIMST-EC FTA was signed on 8th February, 2004 in Phuket, Thailand. Framework Agreement on Comprehensive Economic Co-operation between India and the Association of South East Asian Nations ‘Look East Policy’ led India to engage with the Association of South East Asian Nations (ASEAN) and it started in the year 1991. The ASEAN’s political economic and strategic importance in the larger Asia-Pacific Region and its capability to become a major partner of India in trade and investment made India to join association with ASEAN. While, ASEAN looks to utilize and access India’s technical and professional wealth, India and ASEAN look forward to strengthen the security in the region. ASEAN was established on 8th August 1967 in Bangkok by the five original member countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Now, it has a membership of 10 countries namely Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. India is one of the four 'Summit level Dialogue Partners' of ASEAN. An agreement on Comprehensive Economic Cooperation between ASEAN and India was signed on 8th October 2003 in Bali (Indonesia). The key elements of the agreement are, FTA in services, goods and investment as well as in the areas of economic cooperation. The objectives of this agreement are to: 1. Promote and strengthen trade, economic and investment co-operation between the parties. 2. Progressively liberalize and promote trade in goods and services as well as create a transparent, liberal and facilitative investment regime. 3. Explore new areas and develop appropriate measures for closer economic co-operation between the parties. 4. Facilitate the more effective economic integration of the new ASEAN Member States and bridge the development gap among the parties. The areas where economic cooperation is required are when appropriate parties: 1. 2. 3. 4. 5. Agree to strengthen their cooperation in the following areas: Trade facilitation. Sectors of cooperation. Trade and investment promotion. Agree to implement capacity building programmers’ and technical assistance, particularly for the New ASEAN Member States, in order to adjust their economic structure and expand their trade and investment with India. 6. Establish other bodies, which may be necessary to coordinate and implement any economic cooperation activities undertaken pursuant to this Agreement. India-MERCOSUR Preferential Trade Agreement (PTA) India and MERCOSUR signed a framework agreement on 17th June 2003. The objective of this agreement is to create an environment for negotiations in the first stage, by granting mutual tariff preferences, and in the second stage, to negotiate a FTA between the two parties in conformity with the rules of the WTO. As a follow up to the framework agreement, a Preferential Trade Agreement (PTA) was signed in New Delhi on January 25, 2004. The aim of this PTA is to expand and strengthen the existing relations between MERCOSUR and India and promote the expansion of trade by granting mutual fixed tariff preferences with the ultimate objective of creating a free trade area between the parties. Other agreements include: India and Singapore Comprehensive Economic Cooperation Agreement (CECA). India-Sri Lanka Free Trade Agreement (ISFTA). India-Chile Preferential Trade Agreement (PTA). India-Afghanistan Preferential Trade Agreement (PTA). India-Bhutan Trade Agreement. India-Nepal Trade Treaty.
Framework Agreement for Establishing Free Trade between India and Thailand. Free Trade Agreement (FTA) between India and Gulf Cooperation Council (GCC). India- Japan Trade Agreement. Joint Study Group between India and Korea. Trade Agreement between India and Bangladesh. Comprehensive Economic Cooperation and Partnership Agreement (CECPA) between India and Mauritius.
Q5. What is global sourcing? What makes India so attractive for global sourcing? Ans:- Globalization of the world economy under the WTO has opened abundant opportunities of cost cutting,
gaining competitive advantage and saving time for industries worldwide. Indian industries have experienced such developments as India is a member of the WTO since its inception in 1995. ‘Global sourcing’ is described as ‘the practice of sourcing cost effective and best goods and services across geopolitical boundaries in order to cater to global markets’. Global sourcing strategy is aimed at exploiting ‘global efficiencies’ in all areas of manufacturing, trading and services to enable offering clients and customer the best possible product or service. Usually, efficiencies that prompt firms for global sourcing are low cost skilled labor, low cost raw material, proximity to key markets, time zone differences and other economic factors such as tax exemption and low trade tariffs. Indian industries have successfully levered global sourcing strategies in their global trade operations and sourcing has been the driving force behind the development and expansion of Indian foreign trade in the recent past. Global sourcing strategy has made Indian industry more globalised as buyers from all over the world are bidding for Indian goods, particularly services, to enable executing their contracts on time, reduce prices and generate efficiency in the system through increased competition. Indian industries, in order to reap the benefits of sourcing opportunities, has opened global offices and subsidiaries to tap opportunities on all fronts, i.e., manufacturing, trading, skilled services and call centers. As we know, manufacturing costs vary from country to country due to factors such as currency conversion and cost of living. Due to different factor endowments of countries, the costs of labor and materials may differ, for example, labour cost is far lower in developing countries like India than in North America and Europe. For companies that have labour intensive work, this difference in costing results into significant savings in terms of salaries, wages, post retirement benefits, fringe benefits and other benefits. India is emerging as a global hub in gems and jewellery, oil refining, engineering equipments, textiles, sports goods, auto components, etc. In a globalised set up, trade and commerce of skilled services such as IT enabled services, software development and testing, purchasing, engineering and integrated chip designing, knowledge process outsourcing (KPO), offshoring and home shoring is growing much faster than trade in merchandise. India, with its demographic dividends has been benefitted from all such developments as the level of skill and knowledge held by Indian professional allows them to provide high quality services to their clients in developed countries. For example, India has been successful in software development, BPO services, KPO services and in the recent past in areas like Engineering Process Outsourcing, Analysis Process Outsourcing, content development and website designing. The main reasons for skills sourcing to India is represented pictorially as under:
Global sourcing has both benefits and risks for the Indian industry. Global sourcing has helped Indian companies in the generation of additional revenue and profits, precious foreign exchange, scalable business operations and employment. There are spillover effects of outsourcing to India and its economy has grown additionally by emerging as lower cost suppliers of merchandise and services. Brand India is widely recognized in the ‘silicon valley’ and the
Indian government’s bargaining power has increased due to the dependence of many countries for Indian services. Living standards of the people has improved, higher wages, improved working conditions and learning transferable skills has helped thousands of Indians. Risks from global sourcing such as cultural and language related issues, withdrawal of tax benefits, accent problems, high labour attrition, diversification of business operations across different countries, increased business travel and local management issues are present. In addition to this, there also comes the risks related to logistics and transportation.
Q6. Write short notes on: 1. Cross culture management 2. WTO
Ans:- Cross cultural management skills
The ability to demonstrate a series of behavior is called a skill. It is functionally linked to achieving a performance goal. The most important aspect to qualify as a manager for positions of international responsibility is communication skills. The managers must adapt to other cultures and have the ability to lead its members. The managers cannot expect to force members of other culture to fit into their cultural customs. This is the main assumption of cross cultural skills learning. Any organization that tries to enforce its behavioral customs on unwilling workers from another culture faces conflict. The manager has to possess the skills linked with the following:
WTO In this section we will discuss about the World Trade Organisation (WTO). WTO was established on 1st January 1995. In April 1994, the Final Act was signed at a meeting in Marrakesh, Morocco. The Marrakesh Declaration of 15th April 1994 was formed to strengthen the world economy that would lead to better investment, trade, income growth and employment throughout the world. The WTO is the successor to the General Agreement of Tariffs and Trade (GATT). Objectives and functions The key objective of WTO is to promote and ensure international trade in developing countries. The other major functions include:
the world’s resources.
