MB0053-International Business Management

(Cover Pg) ASSIGNMENT – 01/02
Name : Kalidasa Sa!"ara!
#egis$ra$io! No : %&10120'%
(ear!i!g Ce!$er : RAJARAJAN ACADEMY
(ear!i!g Ce!$er Code : 00117
Co)rse : M*A + ISM
S),-e.$ : I!$er!a$io!al *)si!ess Ma!ageme!$
Semes$er : /
Mod)le No : M*00%0
1a$e o2 S),missio! :
Mar"s A3arded :
Signature of Evaluator Signature of Center Coordinator
Directorate of Distance Education
Sikkim Manial !niversit"
## $loor%S"ndicate &ouse
Manial ' (7) 10*
1
Note+ Eac, -uestion carries 10 Marks. Ans/er all t,e -uestions.
1. What is globalisation and what are its benefits?
Globalisation is the process of increasing connectivity and interdependence of the
world’s market and businesses. It is a way of interacting among countries to develop global
economy. Globalisation is the integration of economies of the world through trade and
mutual exchange of technology and knowledge. In India, globalisation refers to the opening
up of the economy to foreign direct investment by offering facilities to foreign companies to
invest in various areas of economic activity. Globalisation had a strong impact in all sectors
and business in India. It has created challenge for technical manpower in India. Globalisation
has helped India in the following ways to:
• Open up Indian economy to foreign direct investments and to facilitate foreign
companies to invest in different sectors of economic activities.
• nable Indian companies to enter into foreign collaboration.
• !emove restrictions for the entry of multinational companies.
• "ave a direct and indirect impact on Indian currency and enable inflow of foreign
exchange into India.
Promotion of free trade:
• limination of tariffs# creation of free trade $ones with small or no tariffs
• !educed transportation costs, especially resulting from development of
containeri$ation for ocean shipping.
• !eduction or elimination of capital controls
• !eduction, elimination, or harmoni$ation of subsidies for local businesses
• %reation of subsidies for global corporations
• "armoni$ation of intellectual property laws across the ma&ority of states, with more
restrictions.
• 'upranational recognition of intellectual property restrictions (e.g. patents granted by
%hina would be recogni$ed in the )nited 'tates*
Benefits of Globalisation
+he merits and demerits of globalisation are highly debatable. ,hile globalisation
creates employment opportunities in the host countries, it also exploits labour at a very low
cost compared to the home country. -et us consider the benefits and ill.effects of
globalisation. 'ome of the benefits of globalisation are as follows:
• /romotes foreign trade and liberalisation of economies.
• Increases the living standards of people in several developing countries through capital
investments in developing countries by developed countries.
• 0enefits customers as companies outsource to low wage countries. Outsourcing helps the
companies to be competitive by keeping the cost low, with increased productivity.
• /romotes better education and &obs.
• -eads to free flow of information and wide acceptance of foreign products, ideas, ethics,
best practices, and culture.
• /rovides better 1uality of products, customer services, and standardised delivery models
across countries.
• Gives better access to finance for corporate and sovereign borrowers.
2
• Increases business travel, which in turn leads to a flourishing travel and hospitality industry
across the world.
• Increases sales as the availability of cutting edge technologies and production techni1ues
decrease the cost of production.
• /rovides several platforms for international dispute resolutions in business, which
facilitates international trade.
0
2. Discuss in brief the Absolute and comparatie cost adantage theories.
+he international trade theory focuses on the following:
• +ype of products exported and imported.
• %ost and terms of trade.
• !elationship between the trade flows and characteristics of a country and their effects on
domestic factor prices.
• +he gain obtained from a trade and the distribution of the gain among the trading countries.
Basis for trade
+hough the price difference remains the basic cause of trade, this explanation is not
ade1uate. +he two.way flow of goods must be traced to systematic international differences
in the cost and pricing structure. Goods that are cheaper to produce at home will be
exported and goods that are cheaper to produce abroad will be imported.
Absolute adantage
2dam 'mith (a social philosopher and a pioneer of politicl economics* argued that
nations differ in their ability to manufacture goods efficiently and he saw that a country gains
by trading. If the two countries exchanged two goods at a ratio of 3:3, country I gets one unit
of goods 0 by sacrificing only 34 units of labour, whereas it has to give up 54 units of labour
if it produced the goods itself. In the same manner, country II gives up only 34 units of labour
to get one unit of goods 2, whereas it has to give up 54 units of labour if it was made by
itself. "ence, it was understood that both countries had large amount of both goods by
trading.
!omparatie adantage
!icardo (english political economist* 1uestioned 'mith’s theory stating that if one
country is more productive than the other in all lines of production and if country I can
produce all goods with less labour costs, will there be a need for the countries to trade. +he
reply was affirmative. "e used ngland and /ortugal as examples in his demonstration, the
two goods they produced being wine and cloth.
-abor cost of production ( in hrs*
,ine %loth
/ortugal 64 74
ngland 334 84
Cost Comarison 1
2ccording to him, /ortugal has an advantage in both areas of manufacture. +o demonstrate
that trade between both countries will lead to gains, the concept of opportunity cost (O%* is
introduced. +he O% for good 9 is the amount of other goods that have to be given up in
order to produce one additional unit of 9.
Opportunity cost of production ( in hrs*
,ine %loth
/ortugal 64:74 ; 6:7 74:64 ; 7:6
ngland 334:84 ; 33:8 84:334 ; 8:33
0ortunit" Costs 1
2 country has a comparative advantage in producing goods if the O% is lower at home than
in the other country. +he table shows that /ortugal has the lower O% of the 5 countries in
wine.making while ngland has the lower O% in making cloth. +hus /ortugal has the
comparative advantage in the production of wine whereas ngland has one one in the
production of cloth.
/
". #ow is culture an integral part of international business. What are its elements?
%ulture is defined as the art and other signs or demonstrations of human customs,
civilisation, and the way of life of a specific society or group. %ulture determines every
aspect that is from birth to death and everything in between it. It is the duty of people to
respect other cultures, other than their culture. !esearch shows that national <<cultures’’
generally characterise the dominant groups’ values and practices in society, and not of the
marginalised groups, even though the marginalised groups represent a ma&ority or a minority
in the society.
%ulture is very important to understand international business. %ulture is the part of
environment, which human has created, it is the total sum of knowledge, arts, beliefs, laws,
morals, customs, and other abilities and habits gained by people as part of society.
+he following are the four factors that 1uestion assumptions regarding the impact of
global business in culture:
• =ational cultures are not homogeneous and the impact of globalisation on heterogeneous
cultures is not easily predicted.
• %ulture is not similar to cultural practice.
• Globalisation does not characterise a rupture with the past but is a continuation of prior
trends.
• Globalisation is only one of many processes involved in cultural change.
#ofstede$s cultural dimensions
2ccording to >r. Geert "ofstede, <%ulture is more often a source of conflict than of
synergy. %ultural differences are a trouble and always a disaster.’
+he following are the five cultural dimensions:
• Power Distance %nde& 'PD%(
+his focuses on the level of e1uality or ine1uality, between individuals in the nation’s
society. 2 country with high power distance ranking depicts that ine1uality of power and
wealth has been allowed to grow within the society. +hese societies follow caste system that
does not allow large upward mobility of its people. 2 country with low power distance ranking
depicts the society and deemphasises the differences between its people’s power and
wealth. In these societies e1uality and opportunity is stressed for everyone.
• %ndiidualism
+his dimension focuses on the extent to which the society reinforces individual or
collective achievement and interpersonal relationships. 2 high individualism ranking depicts
that individuality and individual rights are dominant within the society. Individuals in these
societies form a larger number of looser relationships. 2 low individualism ranking
characterises societies of a more collective nature with close links between individuals.
+hese cultures support extended families and collectives where everyone takes
responsibility for fellow members of their group.
• )asculinit*
+his focuses on the extent to which the society supports or discourages the
traditional masculine work role model of male achievement, power, and control. 2 country
with high masculinity ranking shows the country experiences high level of gender
differentiation. In these cultures, men dominate a ma&or part of the society and power
structure, with women being controlled and dominated by men. 2 country with low
masculinity ranking shows the country, having a low level of differentiation and discrimination
between genders. In low masculinity cultures, women are treated e1ual to men in
all aspects of the society.
%
• +ncertaint* Aoidance %nde& '+A%(
+his focuses on the degree of tolerance for uncertainty and ambiguity within the
society that is unstructured situations. 2 country with high uncertainty avoidance ranking
shows that the country has low tolerance for uncertainty and ambiguity. 2 rule.oriented
society that incorporates rules, regulations, laws, and controls is created to minimise the
amount of uncertainty. 2 country with low uncertainty avoidance ranking shows that the
country has less concern about ambiguity and uncertainty and has high tolerance for a
variety of opinions. 2 society which is less rule.oriented, readily agrees to changes, and
takes greater risks reflects a low uncertainty avoidance ranking.
• ,ong-.erm /rientation ',./(
>escribes the range at which a society illustrates a pragmatic future oriented
perspective instead of a conventional historic or short term point of view. +he 2sian countries
are scoring high on this dimension. +hese countries have a long term orientation, believe in
many truths, accept change easily, and have thrift for investment. %ultures recording little on
this dimension, trust in absolute truth is conventional and traditional. +hey have a small term
orientation and a concern for stability. ?any western cultures score
considerably low on this dimension.
0ignificance of countr* culture
very society has its own uni1ue culture. %ulture must not be imposed on individuals
of different culture. @or example, the %adbury Araft 2c1uisition, 5448 was a landmark
international deal, in which a ).'. based company Araft ac1uired the 0ritish chocolate giant,
%adbury which were in complete extremes in terms of culture. -et us discuss the ma&or
cultural elements that are related to business.
!ultural elements that relate business
+he most important cultural components of a country which relate business
transactions are:
• -anguage.
• !eligion.
• %onflicting attitudes.
,anguage
-anguage is something more tan &ust spoken and written words. Gestures, non.
verbal communication, facial expressions, and body language all communicate a message.
2n interpreter is used when two people do not speak common language. @ailure in
understanding the cultural context when non.verbal communication takes place or failure in
reading the person across the table results in sending a wrong signal.
1eligion
+he dominant religious beliefs within a culture have a great impact on a person’s
approach to business than most people expect, even if that person is not a follower of a
specific culture.
!onflicting attitudes
%ultural values have a massive effect on the way business is carried out. +he cultural
values that are evident in everyday life are not only shown in business but they are
exaggerated. If the cultural basics are not understood, $e! $ere is 4ossi,ili$5 $a$ a deal e!ds
eve! ,e2ore $e !ego$ia$io!s s$ar$6
7
2. Describe the tools and methods of countr* ris3 anal*sis.
%ountry !isk 2nalysis (%!2* identifies imbalances that increase the risks in a cross.
border investment. %!2 represents the potentially adverse impact of a countryBs
environment on the multinational corporationBs cash flows and is the probability of loss due
to exposure to the political, economic, and so.ial )4eavals i! a 2oreig! .o)!$r56 All ,)si!ess
deali!gs i!volve ris"s6
,hen business transactions occur across international borders, they bring additional
risks compared to those in domestic transactions. +hese additional risks are called country
risks which include risks arising from national differences in socio.political institutions,
economic structures, policies, currencies, and geography. +he %!2 monitors the potential
for these risks to decrease the expected return of a cross.border investment.
@or example, a multinational enterprise (?=* that sets up a plant in a foreign
country faces different risks compared to bank lending to a foreign government. +he ?=
must consider the risks from a broader spectrum of country characteristics. 'ome categories
relevant to a plant investment contain a much higher degree of risk because the ?=
remains exposed to ris" 2or a lo!ger 4eriod o2 $ime6
2nalysts have categorised country risk into following groups:
• 4conomic ris3 C
+his type of risk is the important change in the economic structure that produces a
change in the expected return of an investment. !isk arises from the negative changes in
fundamental economic policy goals (fiscal, monetary, international, or wealth distribution or
creation*.
• .ransfer ris3 C
+ransfer risk arises from a decision by a foreign government to restrict capital
movements. It is analysed as a function of a countryBs ability to earn foreign currency.
+herefore, it implies that effort in earning foreign currency increases the possibility of capital
controls.
• 4&change ris3 C
+his risk occurs due to an unfavourable movement in the exchange rate. xchange
risk can be defined as a form of risk that arises from the change in price of one currency
against another. ,henever investors or companies have assets or business operations
across national borders, they face currency risk if their positions are not hedged.
• ,ocation ris3 C
+his type of risk is also referred to as neighborhood risk. It includes effects caused by
problems in a region or in countries with similar characteristics. -ocation risk includes effects
caused by troubles in a region, in trading partner of a country, or in countries with similar
perceived characteristics.
• 0oereign ris3 C
+his risk is based on a government’s inability to meet its loan obligations. 'overeign
risk is closely linked to transfer risk in which a government may run out of foreign exchange
due to adverse developments in its balance of payments. It also relates to political risk in
which a government may decide not to honor its commitments for political reasons.
• Political ris3 C
+his is the risk of loss that is caused due to change in the political structure or in the
politics of country where the investment is made. @or example, tax laws, expropriation of
assets, tariffs, or restriction in repatriation of profits, war, corruption and bureaucracy also
contribute to the element of political risk.
&
)ethodolog*
+he )' 9I? bank classified the various methods of country risk assessment used
by the banks into four types. +hey are:
• 5ull* 6ualitatie method C
+he fully 1ualitative method involves a detailed analysis of a country. It includes
general discussion of a country’s economic, political, and social conditions and prediction.
@ully 1ualitative method can be adapted to the uni1ue strengths and problems of the country
undergoing evaluation.
• 0tructured 6ualitatie method C
+he structured method uses a uniform format with predetermined scope. In
structured 1ualitative method, it is easier to make comparisons between countries as it
follows a specific format across countries. +his techni1ue was the most popular among the
banks during the late seventies.
• !hec3list method C
+he checklist method involves scoring the country based on specific variables that
can be either 1uantitative, in which the scoring does not need personal &udgment of the
country being scored or 1ualitative, in which the scoring needs sub&ective determinations. 2ll
items are scaled from the lowest to the highest score. +he sum of scores is then used to
determine the country risk.
• Delphi techni6ue C
+he techni1ue involves a set of independent opinions without group discussion. 2s
applied to country risk analysis, the ?=% can assess definite employees who have the
capability to evaluate the risk characteristics of a particular country. +he ?=% gets
responses from its evaluation and then may determine some opinions about the risk of the
country.
• %nspection isits C
Involves travelling to a country and conducting meeting with government officials,
business executives, and consumers. +hese meetings clarify any vague opinions the firm
has about the country.
• /ther 6uantitatie methods C
+he 1uantitative models used in statistical studies of country risk analysis can be
classified as discriminant analysis, principal component analysis, logit analysis and
classification and regression tree method.
.ools
+he risk management demands a regular follow up regarding governmental policies,
external and internal environment, outlook provided by rating agencies, and so on. @ollowing
are the tools recommended:
• !hain of alue C
Includes the main countries that sustain trade relationships with the nation, broken by
sectors and products.
• 0trength and wea3ness chart . @ocus the key aspects that warn the country.
• .able of financial mar3ets performance C
@ollow up the behavior of bonds and stocks already issued and to be issued.
• .able of macroeconomic ariables C
/rovides alert signals when the ,eavior o2 a!5 ra$io 4rese!$s a releva!$ .a!ge6
'
7. Write short notes on:
a. 0pot and forward contracts
• 80pot9 and 85orward9 contracts C
2 'pot contract is a binding obligation to buy or sell a definite amount of foreign
currency at the existing or spot market rate. 2 forward contract is a binding obligation to buy
or sell a definite amount of foreign currency at the pre.agreed rate of exchange, on or before
a certain date.
+he advantage of spot dealing has resulted in a simplest way to deal with all 2oreig!
.)rre!.5 re8)ireme!$s6 I$ .arries $e grea$es$ ris" o2 e9.a!ge ra$e fluctuations due to lack of
certainty of the rate until the deal is carried out. +he spot rate that is intended to receive will
be set by current market conditions, the demand and supply of currency being traded and
the amount to be dealt. In general, a better spot rate can be received if the amount of
dealing is high. +he spot deal will come to an end in two working days after the deal is
struck.
2 forward market needs a more complex calculation. 2 forward rate is based on the
existing spot rate plus a premium or discounts which are determined by the interest rate
connecting the two currencies that are involved. @or example, the interest rates of )A are
higher than that of )' and therefore a modification is made to the spot rate to reflect the
financial effect of this differential over the period of the forward contract. +he duration will be
up to two years for a forward contract. 2 variation in foreign exchange markets can be
affected to any company whether or not they are directly involved in the international trade or
not. +his is often referred to as :E.o!omi.; 2oreig! e9.a!ge a!d mos$ di22i.)l$ $o 4ro$e.$ a
,)si!ess6
+he three ways of managing risks are as follows:
• %hoosing to manage risk by dealing with the spot market whenever the need of
cash flow rises. +his will result in a high risk and speculative strategy since one will
not know the rate at which a transaction is dealt until the day and time it occurs.
?anaging the business becomes difficult if it depends on the selling or buying the
currency in the spot market.
• +he decision must be made to book a foreign exchange contract with the bank
whenever the foreign exchange risk is likely to occur. +his will help to fix the
exchange rate immediately and will give a clear idea of knowing the exact cost of
foreign currency and the amount to be received at the time of settlement whenever
this due occurs.
• 2 currency option will prevent unfavourable exchange rate movements in the similar
way as a forward contract does. It will permit gains if the markets move as per the
expectations. @or this base, a currency option is often demonstrated as a forward
contract that can be left if it is not followed. Often banks provide currency options
which will ensure protection and flexibility, but the likely problem to arise is the
involvement of premium of particular kind. +he premium involved might be a cash
amount or it could also influence into the charge of the
transaction.
<
b. 5oreign currenc* deriaties
%urrency derivative is defined as a financial contract in order to swap two currencies
at a predestined rate. It can also be termed as the agreement where the value can be
determined from the rate of exchange of two currencies at the spot. +he currency derivative
trades in markets correspond to the spot (cash* market. "ence, the spot market exposures
can be enclosed with the currency derivatives. +he main advantage from derivative hedging
is the basket of currency available.
+he 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. +he standard agreement made in order to buy or sell foreign currencies
in future is termed as currency futures.
+hese are usually traded through organised exchanges. +he authority to buy or sell
the foreign currencies in future at a specified rate is provided by currency option. +hese will
help the businessmen to enhance their foreign exchange dealings. +he agreement
undertaken to exchange cash flow streams in one currency for cash flow streams in another
currency in future is provided by currency swaps. +hese will help to increase the funds of
foreign currency from the cheapest sources.
'ome of the risks associated with currency derivatives are:
• %redit risk takes place, arising from the parties involved in a contract.
• ?arket risk occurs due to adverse moves in the overall market.
• -i1uidity risks occur due to the re1uirement of available counterparties to take the other
side of the trade.
• 'ettlement 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.
10
• -egal risks pertain to the counterparties of currency swaps that go into re.eiversi4 3ile $e
s3a4 is $a"i!g 4la.e6
:. Discuss the importance of transfer pricing for );!s.
+ransfer pricing is the process of setting a price that will be charged by a subsidiary
(unit* of a multi.unit firm to another unit for goods and services, which are sold between such
related units. +ransfer pricing is a critical issue for a ?=% operating internationally.
+ransfer pricing is determined in three ways: market based pricing, transfer at cost
and cost.plus pricing. +he 2rm’s -ength pricing rule is used to establish the price to be
charged to the subsidiary.
+ransfer pricing can also be defined as the rates or prices that are utilised when
selling goods or services between a parent company and a subsidiary or company divisions
and departments that may be across many countries.
+he price that is set for the exchange in the process of transfer pricing may be a rate
that is reduced due to internal depreciation or the original purchase price of the goods in
1uestion. ,hen properly used, transfer pricing helps to efficiently manage the ratio of profit
and loss within the company.
+ransfer pricing is a relatively simple method of moving goods and services among
the overall corporate family. ?any managers consider transfer pricing as non.market based.
+he reason for transfer pricing may be internal or external. Internal transfer pricing
include motivating managers and monitoring performance. xternal factors include taxes,
tariffs, and other charges.
.ransfer Pricing )anipulation '.P)( is used to oercome these reasons.
Governments usually discourage +/? since it is against transfer pricing, where
transfer pricing is the act of pricing commodities or services."owever, in common
terminology, transfer pricing generally refers +/?.
+/? assists in saving the organisation’s tax by shifting accounting profits from high
tax to low tax &urisdictions.
+/? also enables to fix transfer price on a non.market basis and thus enables to
save tax. +his method facilitates in moving the tax revenues of one country to another.
2 similar trend can be observed in domestic markets where different states try to
attract investment by reducing the 'ales tax rates, and this leads in an outflow from one
state to another.
+herefore, the Government is trying to implement a taxing system in order to curb tax
evasion.
11
(Cover Pg) ASSIGNMENT – 02/02
Name : Kalidasa Sa!"ara!
#egis$ra$io! No : %&10120'%
(ear!i!g Ce!$er : RAJARAJAN ACADEMY
(ear!i!g Ce!$er Code : 00117
Co)rse : M*A + ISM
S),-e.$ : I!$er!a$io!al *)si!ess Ma!ageme!$
Semes$er : /
Mod)le No : M*00%0
1a$e o2 S),missio! :
Mar"s A3arded :
Signature of Evaluator Signature of Center Coordinator
Directorate of Distance Education
Sikkim Manial !niversit"
## $loor%S"ndicate &ouse
Manial ' (7) 10*
12
Note+ Eac, -uestion carries 10 Marks. Ans/er all t,e -uestions.
1. Write a note on strategic ob<ecties.
'trategic ob&ectives assist in the implementation process of the organisation’s
ob&ectives or goals. ,hile implementing an international strategy, an organisation has to
identify the opportunities present in these countries, explore the various resources available,
their strengths and capabilities and plan to work on their core competencies. +he ob&ective
should be formed in a way that it is not deficient or immeasurable.
+he strategic ob&ectives must help the organisation to achieve their mission and
vision. ?ost of strategic ob&ectives focus on producing greater profits and returns for the
business owners# others focus on customers or society at large.
+he strategic ob&ectives are as follows:
• )easurable C
+o measure progress against fulfilling the ob&ective there must be at least one
indicator.
• 0pecific C
2 clear message as to what needs to be achieved is provided.
• Appropriate C
,ith the given vision and mission of the organisation, ob&ectives must be consistent.
• 1ealistic C
Ob&ectives must be an achievable target given the organisation’s abilities and
opportunities in the environment. +his means that ob&ectives must be challenging and
attainable.
• .imel* C
+o accomplish the ob&ective there need to be a time frame. ,hen strategic ob&ectives
are thoroughly implemented, it will result in strategic competitiveness that improves the
performance and innovation of these organisations. ,hen ob&ectives fulfil the above
conditions, there are many profits for the organisation.
+he profits are:
• @irst, they help guide employees throughout the organisation towards achieving the
common goals. +his aids the organisation to concentrate and conserve valuable
resources and to work together in a timely manner.
• 'econd, challenging ob&ectives help encourage and inspire employees throughout
the organisation to higher levels of commitment and effort. 2 research has supported
the concept that individuals work harder when they are motivated toward specific
goals, instead of being asked simply to do their best.
• +hird, for different parts of an organisation there is always the potential to follow
their own goals rather than the overall company goals. +hough these intentions are
good, these may work at cross purposes to the organisation as a whole. +hus,
meaningful ob&ectives help resolve divergence when they occur.
• @inally, appropriate ob&ectives offer a standard for rewards and incentives. +hey not
only result in higher levels of motivation by employees but they will also help ensure
a greater sense of e1uity or fairness when rewards are allocated.
10
+here are other ob&ectives that are even more specific. +hese are commonly referred
to as short.term ob&ectives that are essential components of action 4la!s6 Te5 are .ri$i.al i!
im4leme!$i!g a! orga!isa$io!;s .ose! s$ra$eg56
2. Discuss in brief the role of W./ in promoting international business.
+he ,orld +rade Organisation (,+O*. ,+O was established on 3st Danuary 388E. In
2pril 388F, the @inal 2ct was signed at a meeting in ?arrakesh, ?orocco. +he ?arrakesh
>eclaration of 3Eth 2pril 388F was formed to strengthen the world economy that would lead
to better investment, trade, income growth and employment throughout the world. +he ,+O
is the successor to the General 2greement of +ariffs and +rade (G2++*. India is one of the
founder members of ,+O.
,+O represents the latest attempts to create an organisational focal point for
liberal trade management and to consolidate a global organisational structure to govern
world affairs. ,+O has attempted to create various organisational attentions for regulation of
international trade.
,+O created a 1ualitative change in international trade. It is the only international
body that deals 3i$ $e r)les o2 $rades ,e$3ee! !a$io!s6
1ole of W./
+he key ob&ective of ,+O is to promote and ensure international trade in developing
countries. +he other ma&or functions include:
• "elping trade flows by encouraging nations to adopt discriminatory trade policies.
• /romoting employment, expanding productions and trade and raising standard of
living and income and utilising the world’s resources.
• nsuring that developing countries secure a better share of growth in world trade.
• /roviding forum for trade negotiations.
• !esolving trade disputes.
5unctions of W./
+he important functions of the ,+O as stated in the ,+O agreement are the
following:
• Deeloping transitional economies C
?a&ority of the ,+O members belong to developing countries. +he developing
countries such as India, %hina, ?exico, 0ra$il and others have an important role in the
organisation. +he ,+O helps in solving the problems of developing economies. +he
developing states are provided with trade and tariff data. +his depends on the country’s
individual export interest and their participation in ,+O.bodies. +he new members benefit
hugely from these services.
• Proiding help for e&port promotion C
+he ,+O provides specialised help for export promotion to its members. +he export
promotion is done through the International +rade %enter established by the G2++ in 38GF.
It is operated by the ,+O and the )nited =ations. +he center accepts re1uests from
member countries, usually developing countries for support in formulating and implementing
export promotion programmes.
+he center provides information on export market and marketing techni1ues. +he
center also provides assistance in establishing export promotion and marketing services.
+hrough this ,+O proves its commitment in the upliftment of the world economy.
• !ooperating in global economic polic*-ma3ing C
1/
+he main function of the ,+O is to cooperate in global economic policy.making. In
the ?arrakesh ?inisterial ?eeting in 2pril 388F, a separate declaration was adopted to
achieve this ob&ective. +he declaration specifies the responsibility of ,+O as, to improve
and maintain the cooperation with international organisations such as the ,orld 0ank,
International ?onetary @und (I?@* that are involved in monetary and financial matters.
,+O analyses the impact of liberalisation on the growth and development of national
economies which is the important factor in the success of the economy.
• )onitoring implementation of the agreement C
+he ,+O administers sixty different agreements that have the statue of international
legal documents. +he member.governments sign and confirm all ,+O agreeme!$s o!
a$$ai!me!$6
• Proiding forum for negotiations C
+he ,+O provides a permanent forum for negotiations among members. +he
negotiations can be on matters already in the ,+O agreements or matters not addressed in
the ,+O law.
• Administrating dispute settlement C
+he important function of ,+O is the administration of the ,+O dispute settlement
system. It helps in settling multilateral trading dispute. 2 dispute arises when a member
country adopts a trade policy and other fellow members consider it as a violation of ,+O
agreements. +he >ispute 'ettlement 0ody (>'0* is responsible for the settlement of
disputes. +he dispute settlement system is prohibited from adding or deleting the rights and
obligations provided in the ,+O agreements.
+he ,+O dispute settlement system helps to:
° /reserve the rights and responsibilities of the members.
° %larify the current provisions of the agreements.
Principles
+he ,+O principles of the trading system are:
• +rading without discrimination
• +rade barriers negotiated downwards
• /redictable trading
• %ompetitive trading
• ncourage development and economic reforms
Agreements
+he ,+O agreements are a set of rules that are followed by the member
governments while formulating policies and practices in the area of i!$er!a$io!al $rade6
+he ma&or agreements are:
• General Agreement on .rade in 0erices 'GA.0(
G2+' is a framework agreement defining the rules under which trade in services
must occur.
• .rade-1elated Aspects of %ntellectual Propert* 1ights '.1%P0( C
+he 2greement on +rade.!elated 2spects of Intellectual /roperty !ights (+!I/'* is
one of the ,+O agreements that are compiled by all the ,+O members
• General Agreement on .ariffs and .rade 'GA..( C
G2++ is a multilateral agreement among countries providing a framework for
conducting international trade.
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". Write a note on arious e&port promotion schemes b* G/%.
xport promotion schemes are the incentive programs that are developed to attract
more firms into exporting. It helps in identification of the product and market. +his also helps
in pre.shipment and post.shipment financing, training, payment guarantee schemes, trade
fairs, trade visits, and foreign representation and so on.
India being a developing economy, export promotion schemes are needed to give a
boost for our economy.
+he needs of the export promotion scheme are explained as follows:
2s the economy of the country is progressing with the increase in terms of
population, there is a need for more number of imports. ,e need to have surplus exports to
pay our imports.
• It is not wise to depend on the other external assistances for financing essential imports,
rather exportable surplus needs to be created.
• In any country, there are some capital goods, machinery and raw materials that cannot be
produced for some more time and it has to be imported from the other countries. In order to
pay for such imports, the country needs to have sufficient funds so that the country has to
promote for its exports.
• +he earning of the exports need to be raised to create the purchasing power in order to
import the essential goods.
• ,e need to explore the foreign markets in order to expand the capacities of the existing
units and find market for the new units.
• +o tap our export potentials completely, we need to focus on our strengths like, price
stability, low wages and the industrial bases to increase its exports.
• +he deficits of payments in Indian economy can be resolved through funds received
through the foreign assistance. ,e need to create the re4a5i!g .a4a.i$5 3i$ $e el4 o2
e94or$s6
+he three main categories that are associated with the export promotion measures are
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+he export promotion measures are explained as follows:
• 4&port production C
@or gearing up the production, we need to sharpen the competitive edge and
upgrade the technology to get a better 1uality.
• ,iberalisation C
+he policies like the trade and industrial licensing are oriented towards exports.
• 0uppl* of raw materials C
+here are some license free import goods such as the raw materials, intermediates,
components, consumables, spares, part accessories and other items that are not regulated
by negative list of imports.
+here are many export promotion schemes and xport /romotion %apital Goods (/%G* is
one of the export promotion schemes.
4&port Promotion !apital Goods '4P!G( scheme
+his scheme allows import of the capital goods at the reduced rate of 3Epercent
customs duty. +he goods can be both new and second hand goods and to the 'ervices
sector. +his scheme has even extended to the services sector.
+hese are explained as follows:
• %mport of second hand capital goods C
+he import of second hand goods that have the minimum residual life of five years
are allowed free of licence but is sub&ected to actual user conditions.
• Dut* e&emption scheme C
+his scheme aims at import of duty free goods. +he goods that can be imported by
this way include raw materials, components, consumables, accessories, computer software.
+hey can be imported under various schemes.
• %nestment in plant and e6uipment C
+he investments beyond 6E lakhs is permitted for the small scale industrial sectors.
• Processing =ones for e&port C
+he establishment of the xport /rocessing Hones (/H*, xport Oriented )nits
(O)*, lectronic "ardware +echnology /arks ("+/* and 'oftware +echnology /arks
('+/* helps in facilitating the export production in non.traditional sectors.
• >ualit* C
+he central government helps in modernising and upgrading the test houses and
laboratories in order to bring the standards so that the certifications from such test houses
are very well recognised with.in and outside the country.
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2. What do *ou understand b* regional integration? ,ist its t*pes.
!egional integration can be defined as the unification of countries into a larger whole.
!egional integration also reflects a country s willingness to share or unify into a larger ‟
whole. +he level of integration of a country with other countries is determined by what it
shares and how it shares. !egional integration re1uires some compromise on the part of
countries. It should aim $o im4rove $e ge!eral 8)ali$5 o2 li2e 2or $e .i$i=e!s o2 $ose .o)!$ries6
+he tendency towards integration was activated by the uropean )nion ()* market
integration. +his trend has influenced both developed and developing countries to form
customs unions and @ree +rade 2reas (@+2*. +he ,orld +rade Organisation (,+O* terms
these agreements of i!$egra$io! as #egio!al Trade Agreeme!$s (#TA)6
.*pes of %ntegration
Preferential trading agreement
/referential trading agreement is a trade pact between countries. It is the weakest
type of economic integration and aims to reduce the taxes on few products to the countries
who sign the pact. +he tariffs are not abolished completely but are lower than the tariffs
charged to countries not party to the agreement. India is in /+2 with countries like
2fghanistan, %hile and 'outh %ommon ?arket (?!%O')!*. +he introduction of /+2 has
generated an increase in the market si$e, and resulted in the availability and variety of
new products.
5ree trade area
@ree +rade 2rea (@+2* is a type of trade bloc and can be considered as a second
stage of economic integration. It is made up of all the countries that are willing to or agree to
reduce preferences, tariffs and 1uotas on most of the services and goods traded between
them. %ountries choose this kind of economic integration if their economical structures are
similar. If the countries compete among themselves, they are likely to choose customs
union.
+he importers must obtain product information from all the suppliers within the supply
chain, in order to determine the eligibility for a @ree +rade 2greement (@+2*. 2fter receiving
the supplier documentation, the importer must evaluate the eligibility of the product
depending on the rules surrounding the products. +he importers product is 1ualified
individually by the @+2. +he basis on which the product will be 1ualified is that the finished
product should have a minimum percentage of local content.
!ommon mar3et
%ommon market is a group formed by countries within a geographical area to
promote duty free trade and free movement of labour and capital among its members.
uropean community is an example of common market.
%ommon markets levy common external tariff on imports from non.member
countries.
2 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, labour and
services, which are known as the four factors of production.
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+his agreement aims at making the movement of four factors of production between
the member countries easier. +he 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.
+he member countries must come forward to eliminate the barriers, have a political
will and formulate common economic policies. 2 common market is a first step towards a
single market. It may be initially limited to a @+2 with moderate free movement of capital and
services, but it is !o$ .a4a,le o2 removi!g res$ o2 $e $rade ,arriers6
4conomic union
conomic union is a type of trade bloc and is instituted through a trade pact. It
comprises of a common market with a customs union. +he countries that are part of an
economic union have common policies on the freedom of movement of four factors of
production, common product regulations and a common external trade policy.
+he purpose of an economic union is to promote closer cultural and political ties,
while increasing the economic efficiency between the member countries.
conomic unions are established by means of a formal intergovernmental legal
agreement, among independent countries with the intention of fostering greater economic
integration. +he members of an economic union share some elements associated with their
national economic &urisdictions.
+hese include the free movements of:
• Goods and services within the union along with a common taxing method for
imports from non.member countries.
• %apital within the economic union.
• /ersons within the economic union. 'ome form of cooperation usually e9is$s 3e!
2rami!g 2is.al a!d mo!e$ar5 4oli.ies6
Political union
2 political union is a type of country, which consists of smaller countries:nations.
"ere, the individual nations share a common government and the union is acknowledged
internationally as a single political entity. 2 4oli$i.al )!io! .a! also ,e $ermed as a legisla$ive )!io!
or s$a$e )!io!6
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7. What are the challenges faced b* %ndian businesses in global mar3et?
India is a developing country and every developing country has its own
organisational problems. In the past decade, some Indian companies have made
remarkable progress by reaching the international platform in short time. India has
transformed from being primarily domestic players into confident global corporations. +he
+2+2 Daguar deal was one prominent example of an Indian global power house to ac1uire
an internationally
reputed automotive company
Brand %ndia
0rand India is a phrase that describes the campaign which pro&ects India as an
emerging destination for business in various fields such as information technology,
manufacturing, infrastructure, service sector and so on. %ountry names can amount to brand
names and assist consumers in evaluating the 4rod).$s ,e2ore 4)r.asi!g $em6
0rand India is receiving a positive response. "owever, 0rand India is weak in many
ways. In developed countries, people are yet to associate India with world.class standards.
+he initial market entry strategy of a company from a developing country is to offer cheaper
products of acceptable 1uality, example, %hina and Aorea.
+he customers of developed countries buy those products only on the basis of price.
0rand India is comprised of a large number of sub.brands that are relatively established. It
reflects the economic reforms and liberalisation process that Indian economy has
undergone.
+he famous brands from India are Indian information technology (I+* companies such
as Infosys, ,ipro and +ata. +he positive image of these companies help in changing
consumer perceptions and also help in re.branding India as a leading manufacturing and
service hub by improving India’s brand e1uity.
0rand e1uity is the worth derived from the goodwill and name recognition ac1uired
over a period of time. It improves sales volume and profit margins. +he India 0rand 1uity
@oundation (I0@* was established to promote ,ra!d I!dia6
Goernment and bureaucrac*
+he political environment of a country influences the business to a large extent. +he
political environment includes political stability in the country, nature and extent of
bureaucracy, ideology of government, party in power and so on. 2nother challenge that
influences business is bureaucracy. Industrial incentives are administered by an elaborate
and expensive bureaucracy.
+he relationship of government to international business is based on the concept of
sovereignty. +he concept identifies that the nation has complete control over the
international affairs. +he infrastructure such as airport, road or port upgradation takes years
for completion or are stalled for many years. +his affects the business in India negatively.
Government policy and procedures in India are very complex and confusing.
Government policy and bureaucratic culture in India do not encourage international
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business. )nnecessary government interference can hinder globalisation. Government
support is essential to encourage globalisation.
Government support is extended in the form of policy reforms, development of
infrastructure, financial market, !I> support and so on. %hanges in government and
political instability disrupt business. Good business thrives o! 4redi.$a,ili$5 3i. is la."i!g i!
I!dia6
!orporate goernance
%orporate governance is a process of promoting corporate transparency and
accountability. It is set of policies that affect the way a company is administered and
controlled. Juality corporate governance is a tool for socio.economic development.
%orporate governance deals with power and accountability for the safety of assets and
resources entrusted to the operating team of the firm.
+he ob&ective of the corporate governance is to attain highest standards of
procedures and practices that are followed by the corporate world. +he new emerging
corporate India needs guiding principles for corporate governance. +he common aspects for
the failure of corporate governance are misuse of power, frauds, misappropriation of funds
and so on. Good corporate governance promotes accountability in relation to public
satisfaction and responsive delivery of service. In India, corporate governance initiatives are
undertaken by ?inistry of %orporate 2ffairs (?%2* a!d $e Se.)ri$ies a!d E9.a!ge *oard o2
I!dia (SE*I)6
4thics
%orporate governance is about ethical conduct of the business. thics is related to
the code of values and principles that helps a person to choose between right or wrong.
?anagers make decisions based on a set of values and principles that are influenced by the
culture of the organisation. thical leadership is important for the business to be conducted
by meeting the expectations of all the stakeholders. %orporate governance is the ethical
framework under which corporate decisions are taken. thics is a generalised value system
avoiding discrimination in recruitment and adopting fair business practices. 0usiness ethics
provide a general guidelines within which a management can operate. 2n organisation has
to be ethical because it has to exist in the competitive world. +he varying ethical norms and
social values make international business environment complex. +he ethical norms vary
from country to country.
,abour practices
thical concerns are at the core of dispute regarding the labour practices. +he
multinational enterprises are charged of un&ust treatment of workers in developing nations.
+he labour law enforcement is weak. +he laws that force firms to obtain permission from the
government prior to retrenchment are not enforced properly. "iring labors to contractor and
subcontracting non.core activities to other companies provides flexibility to the firms that
seek to manage their labour force in volatile context. %hild labour is used in the manufacture
of exports from the developing countries is criticised by people in the developed countries.
@or example, in India the carpet industry uses child labour and social activists in developed
nations demand ban on the import goods embodying child labour. %onsumers tend to
boycott such goods a!d $is i! $)r! adversel5 a22e.$s $e ,)si!ess6
)anaging diersit*
?ost of the international businesses face problems in managing multicultural
diversity. /reviously, ?=%s had a country specific business strategy but now it is moving
towards a global one. ?anaging diversity is a process of establishing workforce to perform in
an unbiased environment where no member has an advantage or disadvantage.
@or an international manager, managing diversity is a challenge. +he challenge is to
create a work environment where every person performs to his full potential and compete for
rewards and promotions that based on merits. +he success of an ?=% is determined by its
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ability to manage diversity. In an international organisation, the workforce consists of variety
of cultures.
+oday, a typical firm is a combination of diverse workforce in terms of gender, race
and so on. ?ost companies encourage exchange programs where employees from one
country come and interact with employees of other countries. +here are some practical steps
taken by managers to manage diversity.
+hey are:
• @ocusing on bringing in best talent.
• stablishing programmes among employees of same and different race.
• >eveloping an age, gender and race profile of the workforce.
• /romoting minorities and other sections to decision.making positions.
• /roviding extended leaves, flexible time, and &ob sharing opportunities.
:. Discuss the arious e-business models.
+he business model describes the manner in which an organisation creates, delivers
and captures the value. +he values can be social, economic forms of value. +he design of
the business model is part of the business strategy
Business to business model
+he business to business (050* model describes the transactions between the
buyers, suppliers, manufactures, resellers, distributors, and trading partners. +his involves
the transactions that involve the products, services, and the information. Internet based e.
business is carried out through the industry sponsored marketplaces and private exchanges
that are conducted by the large companies
In this direct business, the selling enterprise includes wholesaler, retailer or
manufacturers who sell to the buyers of other business.
+he main reason behind introducing this 050 model is to overcome the problems met
by industry sponsored marketplaces in approaching buyers and sellers. ?ost of the
companies do not want to get customised designs through marketplaces as they do not want
to expose proprietary information on a site that is shared by competitors. +herefore,
companies use such marketplaces mainly to purchase products, manage their supply
chains, and conduct indirect procurement transactions, as these are not related to their core
business.
050 e.commerce differs from business.to.consumer e.commerce in many ways.
0usiness to consumer merchants sells on a first.come, first.serve basis. ?ost 050
transactions are done through negotiated contracts that allow the seller to think and plan for
how much the buyer is likely to purchase. In most of the cases, 050 model mainly focus on
maintaining relationship with the business partners.
Business to consumer model
+he activities that serve the business customers with the products and services are
described in the business to consumer model.
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+he best example we can give for the business to consumer (05%* transaction is the
person buying a pair of shoes from the retailer. +he manufacture of the shoes performs
many transactions such as the purchase of leather, laces, rubber and other raw materials.
+here are two models of implementation related to the business to consumer. +hey are
described as follows:
Generic B2! model C
+he generic model is mainly designed for the small and medium enterprises. +he
third party e.market place is used to help the enterprises for selling the products online.
• Dedicated B2! model C
?any of the large enterprises use the dedicated 05% model. +he enterprise itself
owns the e.market place to sell service and support the customers online. 2s the name
indicates this model is fully dedicated to the customers and is almost e1uivalent to the
customer relationship management.
+here are some e.commerce constituents with the 05% model. +hese constituents are
explained as follows:
• !ommerce C
+his involves the process like the catalog, compare, products and a service,
advertisements, order status and also enables the online payment.
• Personalisation C
+his involves the activities like profile matching that matches the web content to
specific profiles and gets the feedback from the customers and deals with the events,
calendaring, and registration.
• !ommunit* serices C
+hese include the services that are dealt for the whole community. +he community
services can be chat, message boards, e.mail services, subscriptions, and newsletters.
• !ustomer serices C
+his process involves the services that are helpful for the customers. +hese include
the activities such as the product support, online support like the call centers and telephony
integration.
!onsumer to consumer model
+he consumer to consumer (%5%* model involves the transaction between the
customers through the third party. +his can be explained by taking the example of online
auction where the customer posts an item for sale and other customer purchases the
product. 0ut in between the third party charges a commission for the sale.
%5% is also called as /eer to /eer (/5/* exchanges.
+he %5% transaction includes the classifieds, music and file sharing, and also the
personal services. +here will be million consumers those who want to sell their products in
the e.business field. 1ually on the other side there are million people who want to purchase
the products and services. @inding each other are beneficial for both the retailer and the
consumers and this can happen many times only with the help of third party that act as the
intermediaries.
+he intermediaries in the %5%business model charge the sellers. +he intermediaries
charge because they bring the customers and sellers to one marketplace.
%5% e.business has created a new dimension in online shopping business.
%5% e.business gives many small business owners a way to sell their products without
running a highly profit draining bricks.and.mortar store.
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+he efficient %5% businesses involve items like handmade gifts, personal artwork, clothing
design, and collectables.
!onsumer to business model
2 consumer to business (%50* model is the electronic business model, in which the
consumers offer products and services to the enterprises. +his is called as the inverted
business model since the process operates completely in the opposite direction of the
traditional e.business model, in which the organisations offer the goods and services to the
consumers.
+he %50 model involves consumers themselves presenting as a group and provides
the goods and services to the enterprise. @or example, www.speakout.com. +his site
provides consumers market strategies and businesses and it also makes them familiar with
the re1uirements of the various businesses. 2 concrete example of this is when competing
airlines gives a traveler best travel and ticket offers in response to the traveler’s
post.
+his %50 model is advantageous because of the following reasons.
+he model helps:
• In connecting large group of people by the bidirectional network. ?any of the traditional
media is of unidirectional but the internet is the bidirectional media.
• Individuals to access the technologies that were once available only for the large
companies.
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