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Master of Business Administration-MBA Semester 4MB0037 International Business Management

Assignment Set- 1

Q.1 What is globalization? What are its benefits? How does globalization help ininternational business? Give some instances.

Ans;- What is Globalization?

Economic "globalization" is a historical process, the result of human innovation andtechnological progress. It refers to the increasing integration of economies around the world,

particularly through trade and financial flows. The term sometimes also refers to the movementof people (labor) and knowledge (technology) across international borders. There are also

broader cultural, political and environmental dimensions of globalization that are not covered

here.

At its most basic, there is nothing mysterious about globalization. The term has come intocommon usage since the 1980s, reflecting technological advances that have made it easier andquicker to complete international transactions both trade and financial flows. It refers to anextension beyond national borders of the same market forces that have operated for centuries atall levels of human economic activity village markets, urban industries, or financial centers.

Markets promote efficiency through competition and the division of labor the specializationthat allows people and economies to focus on what they do best. Global markets offer greater opportunity for people to tap into more and larger markets around the world. It means that they

can have access to more capital flows, technology, cheaper imports, and larger export markets.But markets do not necessarily ensure that the benefits of increased efficiency are shared by all.Countries must be prepared to embrace the policies needed, and in the case of the poorestcountries may need the support of the international community as they do so.

Globalization and Growth of Global Economy

The term "globalization" has acquired considerable emotive force. Some view it as a process thatis beneficial a key to future world economic development and also inevitable andirreversible. Others regard it with hostility, even fear, believing that it increases inequality withinand between nations, threatens employment and living standards and thwarts social progress.

This brief offers an overview of some aspects of globalization and aims to identify ways inwhich countries can tap the gains of this process, while remaining realistic about its potential andits risks.

Globalization offers extensive opportunities for truly worldwide development but it is not progressing evenly. Some countries are becoming integrated into the global economy more

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quickly than others. Countries that have been able to integrate are seeing faster growth andreduced poverty.

Outward oriented policies brought dynamism and greater prosperity to much of East Asia,transforming it from one of the poorest areas of the world 40 years ago. And as living standardsrose, it became possible to make progress on democracy and economic issues such as theenvironment and work standards.

By contrast, in the 1970s and 1980s when many countries in Latin America and Africa pursuedinward-oriented policies, their economies stagnated or declined, poverty increased and highinflation became the norm. In many cases, especially Africa, adverse external developmentsmade the problems worse. As these regions changed their policies, their incomes have begun torise. An important transformation is underway. Encouraging this trend, not reversing it, is the

best course for promoting growth, development and poverty reduction.

The crises in the emerging markets in the 1990s have made it quite evident that the opportunitiesof globalization do not come without risks risks arising from volatile capital movements andthe risks of social, economic, and environmental degradation created by poverty. This is not areason to reverse direction, but for all concerned in developing countries, in the advancedcountries, and of course investors to embrace policy changes to build strong economies and astronger world financial system that will produce more rapid growth and ensure that poverty isreduced.

How can the developing countries, especially the poorest, be helped to catch up? Doesglobalization exacerbate inequality or can it help to reduce poverty? And are countries that

integrate with the global economy inevitably vulnerable to instability? These are some of thequestions covered in the following sections.

Globalization is not just a recent phenomenon. Some analysts have argued that the worldeconomy was just as globalized 100 years ago as it is today. But today commerce and financialservices are far more developed and deeply integrated than they were at that time. The moststriking aspect of this has been the integration of financial markets made possible by modernelectronic communication.

The 20 th century saw unparalleled economic growth, with global per capita GDP increasingalmost five-fold. But this growth was not steady the strongest expansion came during the

second half of the century, a period of rapid trade expansion accompanied by trade andtypically somewhat later, financial liberalization. Chart 1 break the century into four periods.In the inter-war era, the world turned its back on internationalism or globalization as we nowcall it and countries retreated into closed economies, protectionism and pervasive capitalcontrols. This was a major factor in the devastation of this period, when per capita incomegrowth fell to less than 1 percent during 1913-1950. For the rest of the century, even though

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population grew at an unprecedented pace, per capita income growth was over 2 percent, thefastest pace of all coming during the post World War boom in the industrial countries.

The story of the 20th

century was of remarkable average income growth, but it is also quiteobvious that the progress was not evenly dispersed. The gaps between rich and poor countries,and rich and poor people within countries, have grown. The richest quarter of the worlds

population saw its per capita GDP increase nearly six-fold during the century, while the poorestquarter experienced less than a three-fold increase (Chart 1). Income inequality has clearlyincreased. But, as noted below, per capita GDP does not tell the whole story.

Developing countries: How deeply integrated?

Globalization means that world trade and financial markets are becoming more integrated. But just how far have developing countries been involved in this integration? Their experience in

catching up with the advanced economies has been mixed. Chart 2 shows that in some countries,especially in Asia, per capita incomes have been moving quickly toward levels in the industrialcountries since 1970. A larger number of developing countries have made only slow progress or have lost ground. In particular, per capita incomes in Africa have declined relative to theindustrial countries and in some countries have declined in absolute terms. Chart 2b illustrates

part of the explanation: the countries catching up are those where trade has grown strongly.

Consider four aspects of globalization:

Trade: Developing countries as a whole have increased their share of world trade from19 percent in 1971 to 29 percent in 1999. But Chart 2b shows great variation among the

major regions. For instance, the newly industrialized economies (NIEs) of Asia havedone well, while Africa as a whole has fared poorly. The composition of what countriesexport is also important. The strongest rise by far has been in the export of manufacturedgoods. The share of primary commodities in world exports such as food and rawmaterials that are often produced by the poorest countries, has declined.

Capital movements: Chart 3 depicts what many people associate with globalization,sharply increased private capital flows to developing countries during much of the 1990s.It also shows that:

1. the increase followed a particularly "dry" period in the 1980s;2. net official flows of "aid" or development assistance have fallen significantly

since the early 1980s; and3. the composition of private flows has changed dramatically. Direct foreigninvestment has become the most important category. Both portfolio investmentand bank credit rose but they have been more volatile, falling sharply in the wakeof the financial crises of the late 1990s.

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Movement of people: Workers move from one country to another partly to find better employment opportunities. The numbers involved are still quite small, but in the period1965-90, the proportion of labor forces round the world that was foreign born increased

by about one-half. Most migration occurs between developing countries. But the flow of migrants to advanced economies is likely to provide a means through which global wagesconverge. There is also the potential for skills to be transferred back to the developingcountries and for wages in those countries to rise.

Spread of knowledge (and technology): Information exchange is an integral, oftenoverlooked, aspect of globalization. For instance, direct foreign investment brings notonly an expansion of the physical capital stock, but also technical innovation. Moregenerally, knowledge about production methods, management techniques, export marketsand economic policies is available at very low cost, and it represents a highly valuableresource for the developing countries.

The special case of the economies in transition from planned to market economies they too are becoming more integrated with the global economy is not explored in much depth here. In fact,the term "transition economy" is losing its usefulness. Some countries (e.g. Poland, Hungary) areconverging quite rapidly toward the structure and performance of advanced economies. Others(such as most countries of the former Soviet Union) face long term structural and institutionalissues similar to those faced by developing countries.

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Chart 1

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Source: IMF World Economic Outlook Databases: (May 2000), Direction of Trade1/ Excludes oil exporting countries.

2/ Consists largely of bank lending.

Q.2 What is culture and in the context of international business environment how does itimpact international business decisions?

Ans;- Culture and International Business

The following can be looked as the various aspects of the cultural dichotomies.

Cultural Dichotomies

In this new millennium, few executives can afford to turn a blind eye to global businessopportunities. Japanese auto-executives monitor carefully what their European and Koreancompetitors are up to in getting a bigger slice of the Chinese auto-market. Executives of Hollywood movie studios need to weigh the appeal of an expensive movie in Europe and Asia asmuch as in the US before a firm commitment. The globalizing wind has broadened the mindsetsof executives, extended the geographical reach of firms, and nudged international business (IB)research into some new trajectories. One such new trajectory is the concern with national culture.Whereas traditional IB research has been concerned with economic/ legal issues andorganizational forms and structures, the importance of national culture broadly defined asvalues, beliefs, norms, and behavioural patterns of a national group has become increasinglyimportant in the last two decades, largely as a result of the classic work of Hofstede (1980).

National culture has been shown to impact on major business activities, from capital structure(Chui et al., 2002) to group performance (Gibson, 1999). For reviews, see Boyacigiller andAdler (1991) and Earley and Gibson (2002).

The purpose of this Unit is to provide a state-of-the-art review of several recent advances inculture and IB research, with an eye toward productive avenues for future research. It is not our

purpose to be comprehensive; our goal is to spotlight a few highly promising areas for

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leapfrogging the field in an increasingly boundary-less business world. We first review the issuessurrounding cultural convergence and divergence, and the processes underlying cultural changes.We then examine novel constructs for characterizing cultures, and how to enhance the precision

of cultural models by pinpointing when the effects of culture are important. Finally, we examinethe usefulness of experimental methods, which are rarely employed in the field of culture and IB.A schematic summary of our coverage is given in Table 2.1, which suggests that the topicsreviewed are loosely related, and that their juxtaposition in the present paper represents our attempt to highlight their importance rather than their coherence as elements of an integrativeframework.

Cultural change, convergence and divergence in an era of partial globalization

An issue of considerable theoretical significance is concerned with cultural changes andtransformations taking place in different parts of the world. In fact, since the landmark study of

Haire et al. (1966) and the publication of Industrialism and Industrial Man by Kerr et al. (1960),researchers have continued to search for similarities in culture-specific beliefs and attitudes invarious aspects of work related attitudes and behaviours, consumption patterns, and the like. If cultures of the various locales of the world are indeed converging (e.g., Heuer et al., 1999), IB-related practices would indeed become increasingly similar. Standard, culture-free business

practices would eventually emerge, and inefficiencies and complexities associated with divergent beliefs and practices in the past era would disappear. In the following section, we review theevidence on the issue and conclude that such an outlook pertaining to the convergence of variousIB practices is overly optimistic.

Q.3 Explain the meaning of the term trade liberalization and advantages. Also, identifysome commonly observed mistakes in international trade.

Ans:- Trade Liberalization

Policies that make an economy open to trade and investment with the rest of the world areneeded for sustained economic growth. The evidence on this is clear. No country in recentdecades has achieved economic success, in terms of substantial increases in living standards for its people, without being open to the rest of the world. In contrast, trade opening (along withopening to foreign direct investment) has been an important element in the economic success of

East Asia, where the average import tariff has fallen from 30 percent to 10 percent over the past20 years.

Opening up their economies to the global economy has been essential in enabling manydeveloping countries to develop competitive advantages in the manufacture of certain products.In these countries, defined by the World Bank as the "new globalizers," the number of people inabsolute poverty declined by over 120 million (14 percent) between 1993 and 1998.

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There is considerable evidence that more outward-oriented countries tend consistently to growfaster than ones that are inward-looking. Indeed, one finding is that the benefits of tradeliberalization can exceed the costs by more than a factor of 10. Countries that have opened their

economies in recent years, including India, Vietnam, and Uganda, have experienced faster growth and more poverty reduction. On average, those developing countries that lowered tariffssharply in the 1980s grew more quickly in the 1990s than those that did not.

Freeing trade frequently benefits the poor especially. Developing countries can ill-afford thelarge implicit subsidies, often channeled to narrow privileged interests that trade protection

provides. Moreover, the increased growth that results from free trade itself tends to increase theincomes of the poor in roughly the same proportion as those of the population as a whole. New

jobs are created for unskilled workers, raising them into the middle class. Overall, inequalityamong countries has been on the decline since 1990, reflecting more rapid economic growth indeveloping countries, in part the result of trade liberalization.

The potential gains from eliminating remaining trade barriers are considerable. Estimate of thegains from eliminating all barriers to merchandise trade range from US$250 billion to US$680

billion per year. About two-thirds of these gains would accrue to industrial countries. But theamount accruing to developing countries would still be more than twice the level of aid theycurrently receive. Moreover, developing countries would gain more from global tradeliberalization as a percentage of their GDP than industrial countries, because their economies aremore highly protected and because they face higher barriers.

Although there are benefits from improved access to other countries markets, countries benefitmost from liberalizing their own markets. The main benefits for industrial countries would come

from the liberalization of their agricultural markets. Developing countries would gain aboutequally from liberalization of manufacturing and agriculture. The group of low-incomecountries, however, would gain most from agricultural liberalization in industrial countries

because of the greater relative importance of agriculture in their economies.

Advantages of International Trade

Advantages

Enhance your domestic competitiveness Increase sales and profits Gain your global market share Reduce dependence on existing markets Exploit international trade technology Reduce dependence on existing markets Exploit international trade technology Extend sales potential of existing products Stabilize seasonal market fluctuations

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Enhance potential for expansion of your business Sell excess production capacity Maintain cost competitiveness in your domestic market

Some Common Mistakes in International Trade

Common Export MistakesSolutions

1. Failure to obtain qualifiedexport counselling and todevelop a master internationalmarketing plan before startingan export business.

Obtain ExportCounselling

2. Insufficient commitment by top

management to exporting.

Determine ExportReadiness

3. Failure to have a solid agent/distributors agreement

UnderstandAgent/DistributorContracts

4. Blindly chasing E-orders from

around the world.

Avoid AccidentalExporting

5. Failure to understand theconnectionbetween country risk and

securing export financing.

Understand ExportFinancing

6. Failure to understandIntellectualProperty Rights

Understand IntellectualPropertyRights (IPR)

7. Insufficient attention tomarketing and advertisingrequirements.

Pay Attention toOverseasMarketing andAdvertising

8. Lack of attention to productpreparation needs.

Pay Attention to ProductPreparationRequirements

9. Failure to consider legalaspects of going global.

Understand Licensing and JointVentures

10. Failure to know the rules of trade.

Understand ExportRegulations

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Q.4 Explain the product life cycle theory.

Ans:- Product Life Cycle Theory

Life cycle theory has been used since the 1970s to describe the behaviour of a product or service

from design to obsolescence.

The typical pattern of a product is represented by a curve divided into four distinct phases:introduction, growth, maturity, and decline. Recent research in the area has focused on its use indecision making in areas ranging from those as broad as overall strategy to those as narrow asequipment replacement.

But does the product life cycle, or PLC, really tell the entire story? Consider the Ford Mustang.Since its 1964 introduction, the automobile has undergone several changes. Performance wasincreased with the addition of the 428 CobraJet in 1968 and Mach I styling in 1969. Another substantial change took place in 1971 with the introduction of the high-performance Boss 351.

Then a true muscle car, the Mustang was detuned in 1974, when oil prices forced a more fuel-efficient redesign, called Mustang II. The fourth generation Mustang, introduced as the 1994model, has been further refined and is more aerodynamic than its immediate predecessor. Yet itstill shares roots with earlier models. A 302 V-8 is still offered, the wheelbase is similar, and if one looks closely enough, one can see its genesis in the 1964 model. The pattern evidenced bythe life of the Mustang, then, is several curves of introduction, growth, maturity, and decline.

Another intriguing example is the C-130 Hercules aircraft manufactured by Lockheed. Thecompany recently announced the sale of 25 "J" models to the Royal Air Force, which is the fifthversion of the Hercules originally produced in the 1950s. Although the aircraft resembles itsolder relatives, the new model features a totally different electronics package and more powerful

engines. Here again, the Hercules PLC shows a curve with five local maximum points (swells of activity, in effect), rather than the traditional, single maximum point, PLC curve.

The examples above suggest a PLC model represented by waves of product introductions,growth, maturity, and decline. Design engineering, process engineering, product marketing,

production, and end-of-life decisions are key elements within the system. Each has its own cycleconsisting of varying levels of activity. The waves are triggered by critical decision points during

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the life of a product, when production, operations, and marketing managers must optimize their collective efforts.

The final stage is decline. Here the firm may continue to market the product hoping thatcompetitors will discontinue their products. Other strategies are to maximize profit byeliminating as many product costs as possible as sales slow, or else to eliminate the productaltogether.

Life Cycle Elements

Design Engineering Process Engineering Production Relationships Product Marketing End of Life

Design engineering, process engineering, product marketing, and production have been recurringelements in each stage of the product life cycle. In addition, end-of-life (EOL) issues must beaddressed when the product approaches obsolescence.

These elements vary in importance as the product or service moves through its life, thus creatingwaves of activity. The fact that they change in importance and magnitude requires that they beclosely managed. Lets begin our discussion of the individual elements with design engineering.

According to Emehiser (1991):

An EOL program is a unique opportunity for a manufacturer to sell the legal obligation of supporting a product that is no longer in manufacture. All or part of product support may beassumed, dependent on the amount of finished product in use, anticipated life of the product,

spares available, and other considerations. Product support can include parts distribution, service, technical support, quality assurance, and/or continuation engineering.

In effect, the EOL Company assumes responsibility for supporting the product or service, whichthe original manufacturer no longer produces. The former therefore becomes the manufacturer and has its own single-peaked manufacturing cycle.

In summary, then, each of the five elements of the product life cycle system has its own cycles.These cycles, or waves, are formed by product decisions that result in varying activity levelsamong the five elements. Figure 4 provides an initial comparison between the traditional productlife cycle and the five-element wave.

Q.5 Discuss the implications of Heckscher-Ohlin theory model.

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Ans:- Heckscher-Ohlin Trade Model

The Heckscher-Ohlin (HO hereafter) model was first conceived by two Swedish economists, Eli

Heckscher (1919) and Bertil Ohlin. Rudimentary concepts were further developed and addedlater by Paul Samuelson and Ronald Jones among others. There are four major components of the HO model:

1. Factor Price Equalization Theorem,2. Stolper-Samuelson Theorem,3. Rybczynski Theorem, and4. Heckscher-Ohlin Trade Theorem.

Due to the difficulty of predicting the goods trade pattern in a world of many goods, instead of the Heckscher-Ohlin Theorem, the Heckscher-Ohlin-Vanek Theorem that predicts the factor

content of trade received attention in recent years.

Eli Heckscher (1879 1952)

Heckscher was a Swedish economist. He is probably best known for his book "Mercantilist."Although his major interest was in studying economic history, he also developed the essentials of the factor endowment theory of international trade in a short article in Swedish in 1919. It wastranslated into English thirty years later.

Bertil Ohlin (1899-1979)

Heckschers student, Bertil Ohlin developed and elaborated the factor endowment theory. Hewas not only a professor of economics at Stockholm, but also a major political figure in Sweden.He served in Riksdag (Swedish Parliament), was the head of liberal party for almost a 1/4 of acentury. He was Minister of Trade during World War II. In 1979 Ohlin was awarded a Nobel

prize jointly with James Meade for his work in international trade theory.

HO Model = 2 2 2 model (2 countries, 2 commodities, 2 factors)

For example, there are two countries (America and Britain); each country is endowed with 2homogeneous factors (labour and capital) and produces 2 commodities.

This is the smallest case of " even" model, i.e., the number of commodities is equal to that of factors. Extending the model to a more general case is not easy. In fact, the results obtained froma more general model do not have the clear, common sense interpretations which the simple HOmodel enjoys.

Q.6 Do you think WTO is helpful for promoting international business? Give reasons foryour answer.

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Ans:- The past 50 years have seen an exceptional growth in world trade. Merchandise exportsgrew on average by 6% annually. Total trade in 2000 was 22-times the level of 1950. GATT andthe WTO have helped to create a strong and prosperous trading system contributing to

unprecedented growth.

The system was developed through a series of trade negotiations, or rounds, held under GATT.The first rounds dealt mainly with tariff reductions but later negotiations included other areassuch as anti-dumping and non-tariff measures. The last round the 1986-94 Uruguay Round led to the creation of WTO.

The result is assurance. Consumers and producers know that they can enjoy secure supplies andgreater choice of the finished products, components, raw materials and services that they use.Producers and exporters know that foreign markets will remain open to them.

The result is also a more prosperous, peaceful and accountable economic world. Virtually alldecisions in the WTO are taken by consensus among all member countries and they are ratified by members' parliaments. Trade friction is channelled into the WTO's dispute settlement processwhere the focus is on interpreting agreements and commitments, and how to ensure thatcountries' trade policies conform with them. That way, the risk of disputes spilling over into

political or military conflict is reduced.

By lowering trade barriers, the WTOs system also breaks down other barriers between peoplesand nations.

At the heart of the system known as the multilateral trading system are the WTOs

agreements, negotiated and signed by a large majority of the worlds trading nations, and ratifiedin their parliaments. These agreements are the legal ground-rules for international commerce.Essentially, they are contracts, guaranteeing member countries important trade rights. They also

bind governments to keep their trade policies within agreed limits to everybodys benefit.

The agreements were negotiated and signed by governments. But their purpose is to help producers of goods and services, exporters, and importers conduct their business.

The goal is to improve the welfare of the peoples of the member countries

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Master of Business Administration-MBA Semester 4MB0037 International Business ManagementAssignment Set- 2

Q.1 What is WTO? What is GATT? Explain both.

Ans:- What is the WTO?

The World Trade Organisation was established in 1995. It includes 153 countries and isheadquartered in Geneva, Switzerland. The WTO has been used to push an expansive array of

policies on trade, investment and deregulation that exacerbate the inequality between the Northand the South, and among the rich and poor within countries. The WTO enforces some twentydifferent trade agreements, including the General Agreement on Trade in Services (GATS), theAgreement on Agriculture (AoA) and Trade-Related Intellectual Property Rights (TRIPS).

The WTO is inherently undemocratic. Its trade tribunals, working behind closed doors, haveruled against a stunning array of national health and safety, labor, human rights andenvironmental laws, which have been directly challenged as trade barriers by governments actingon behalf of their corporate clients. National policies and laws found to violate WTO rules must

be eliminated or changed or else the violating country faces perpetual trade sanctions that can bein the millions of dollars. Since the WTO's inception in 1995, the vast majority of rulings in tradedisputes between member nations have favored powerful industrialized countries. Consequently,many countries, particularly developing countries, feel enormous pressure to weaken their publicinterest policies whenever a WTO challenge is threatened in order to avoid costly sanctions.

A Brief History of GATT

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The WTOs Predecessor, The GATT, Was Established on a Provisional Basis after the SecondWorld War in the wake of other new multilateral institutions dedicated to international economiccooperation notably the "Britton Woods" institutions now known as the World Bank and the

International Monetary Fund.

The original 23 GATT countries were among over 50 which agreed a draft Charter for anInternational Trade Organization (ITO) a new specialized agency of the United Nations. TheCharter was intended to provide not only world trade disciplines but also contained rules relatingto employment, commodity agreements, restrictive business practices, international investmentand services.

In an effort to give an early boost to trade liberalization after the Second World War and to beginto correct the large overhang of protectionist measures which remained in place from the early1930s-tariff negotiations were opened among the 23 founding GATT "contracting parties" in

1946. This first round of negotiations resulted in 45,000 tariff concessions affecting $10 billionor about one-fifth of world trade. It was also agreed that the value of these concessions should be protected by early and largely "provisional" acceptance of some of the trade rules in the draftITO Charter. The tariff concessions and rules together became known as the General Agreementon Tariffs and Trade and entered into force in January 1948.

Although the ITO Charter was finally agreed at a UN Conference on Trade and Employment inHavana in March 1948, ratification in national legislatures proved impossible in some cases.When the United States government announced, in 1950, that it would not seek Congressionalratification of the Havana Charter, the ITO was effectively dead. Despite its provisional nature,the GATT remained the only multilateral instrument governing international trade from 1948

until the establishment of the WTO.

Although, in its 47 years, the basic legal text of the GATT remained much as it was in 1948,there were additions in the form of "plural-lateral voluntary membership agreements andcontinual efforts to reduce tariffs. Much of this was achieved through a series of "trade rounds".

Q.2 What is MNC? Explain the 3 stages of evolution.

Ans;- MNCs or multinational corporations are businesses that operate in more than onecountry. Usually these companies have a center of operations or some head office in one country,

with sub-offices and/or other facilities located in other countries. These facilities may beconnected to the head office or parent company through a merger or as some form of subsidiarycompany. Multinational Corporations are large companies that can do business locally andinternationally.

Most multinational corporations operating today come from the US, Japan, and Western Europe.Popular brands we know today are products of multinational corporations. These brands include

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Coca-Cola the best known softdrink brand in many countries, Nike known worldwide for quality shoes and apparel, Honda car and motorcycle maker from Japan, and many others.

Multinational corporations penetrate new markets or countries through business mergers or acquisitions, sequential market entry, and/or joint ventures with other smaller businesses.Coming in as a foreign investment, MNCs capitalize on their size and resources to take over companies in a new country. With tightening competition, many MNCs are in the lookout for companies to acquire or merge with, not only to boost sales but also to gain market share fromother industry players. Sequential Market Entry is also one option for MNCs to gain presence ina new market. In this way, one MNC may opt to start small and invest in one product at a time.Little by little, the product line will be increased to boost presence in the area. MNCs also do

joint ventures with existing players in a particular country. In this way, the venture partner mayretain some autonomy from the parent MNC while enjoying the benefits of technology and/or expertise transfer.

Many agree that the entry of multinational corporations can greatly help the economy of a particular country. But skeptics also believe that MNCs are selfish and are only concerned of their business bottom line. They are seen as too large and too powerful as many of them havesome sort of influence over governments, which will lead to exploitation especially todeveloping economies.

Three Stages of Evolution

1. Export stage

initial inquiries firms rely on export agents expansion of export sales further expansion foreign sales branch or assembly operations (to save transport cost)

2. Foreign Production Stage

There is a limit to foreign sales (tariffs, NTBs)

DFI versus Licensing

Once the firm chooses foreign production as a method of delivering goods to foreign markets, it

must decide whether to establish a foreign production subsidiary or license the technology to aforeign firm.

Licensing

Licensing is usually first experience (because it is easy)

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e.g.: Kentucky Fried Chicken in the U.K.

it does not require any capital expenditure it is not risky payment = a fixed % of sales

Problem: the mother firm cannot exercise any managerial control over the licensee (it isindependent)

The licensee may transfer industrial secrets to another independent firm, thereby creating a rival.

Direct Investment

It requires the decision of top management because it is a critical step.

it is risky (lack of information) (US firms tend to establish subsidiaries in Canada first.Singer Manufacturing Company established its foreign plants in Scotland and Australiain the 1850s)

plants are established in several countries licensing is switched from independent producers to its subsidiaries. export continues

3. Multinational Stage

The company becomes a multinational enterprise when it begins to plan, organize and coordinate production, marketing, R&D, financing, and staffing. For each of these operations, the firm mustfind the best location.

Q.3 Mention the differences between currency markets and exchange rate markets in thecontext of international business environment.

Ans:- Exchange Rate Markets and Currency Markets

The exchange rate regimes adopted by countries in todays international monetary and financialsystem, and the system itself, are profoundly different from those envisaged at the 1944 meetingat Bretton Woods establishing the IMF and the World Bank. In the Bretton Woods system:

exchange rates were fixed but adjustable. This system aimed both to avoid the unduevolatility thought to characterize floating exchange rates and to prevent competitivedepreciations, while permitting enough flexibility to adjust to fundamental disequilibriumunder international supervision;

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private capital flows were expected to play only a limited role in financing paymentsimbalances, and widespread use of controls would prevent instability in such flows;

temporary official financing of payments imbalances, mainly through the IMF, would

smooth the adjustment process and avoid unduly sharp correction of current accountimbalances, with their repercussions on trade flows, output, and employment.

In the current system, exchange rates among the major currencies (principally the U.S. dollar, theeuro, and Japanese yen) fluctuate in response to market forces, with short-run volatility andoccasional large medium-run swings (Figure 1). Some medium-sized industrial countries alsohave market determined floating rate regimes, while others have adopted harder pegs,including some European countries outside the euro area. Developing and transition economieshave a wide variety of exchange rate arrangements, with a tendency for many but by no meansall countries to move toward increased exchange rate flexibility (Figure 2).

This variety of exchange rate regimes exists in an environment with the followingcharacteristics:

partly for efficiency reasons, and also because of the limited effectiveness of capitalcontrols, industrial countries have generally abandoned such controls and emergingmarket economies have gradually moved away from them. The growth of internationalcapital flows and globalization of financial markets has also been spurred by therevolution in telecommunications and information technology, which has dramaticallylowered transaction costs in financial markets and further promoted the liberalization andderegulation of international financial transactions;

international private capital flows finance substantial current account imbalances, but the

changes in these flows appear also sometimes to be a cause of macroeconomicdisturbances or an important channel through which they are transmitted to theinternational system;

developing and transition countries have been increasingly drawn into the integratingworld economy, in terms of both their trade in goods and services and of financialtransactions.

Lessons from the recent crises in emerging markets are that for such countries with importantlinkages to global capital markets, the requirements for sustaining pegged exchange rate regimeshave become more demanding as a result of the increased mobility of capital. Therefore, regimesthat allow substantial exchange rate flexibility are probably desirable unless the exchange rate isfirmly fixed through a currency board, unification with another currency, or the adoption of another currency as the domestic currency (dollarization).

Flexible exchange rates among the major industrial country currencies seem likely to remain akey feature of the system. The launch of the euro in January 1999 marked a new phase in theevolution of the system, but the European Central Bank has a clear mandate to focus monetary

policy on the domestic objective of price stability rather than on the exchange rate. Many

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medium-sized industrial countries, and developing and transition economies, in an environmentof increasing capital market integration, may also continue to maintain market-determinedfloating rates, although more countries could may adopt harder pegs over the longer term. Thus,

prospects are that: exchange rates among the euro, the yen, and the dollar are likely to continue to exhibit

volatility, and schemes to reduce volatility are neither likely to be adopted, nor to bedesirable as they prevent monetary policy from being devoted consistently to domesticstabilization objectives;

several of the transition countries of central and eastern Europe, especially those preparing for membership in the European Union, are likely to seek to establish over timethe policy disciplines and institutional structures required to make possible the eventualadoption of the euro.

The approach taken by the IMF continues to be to advise member countries on the implicationsof adopting different exchange rate regimes, to consider the choice of regime to be a matter for each country to decide and to provide policy advice that is consistent with the maintenance of thechosen regime.

Q.4 a) Explain the role of privatization in international business.

b) Mention the relevance of these international commercial terms: FCA, EXW,DES, CIF and DDP

Ans:- A

R ole of privatization in international business

As noted above, economists generally agreed on the need for speed in carrying out liberalizationand stabilization. But on privatization of large enterprises, there was a debate on whether to havea rapid transfer of assets from the state to the private sector or to adopt a more gradual approach.

Advocates of rapid privatization called for eliminating state ownership by giving assets tocitizens, for instance, through vouchers that gave their holders the right and means to purchasestate-owned companies on sale. They were motivated by considerations of fairness, a desire to

give ordinary citizens a stake in the economy. They also perceived a need to seize the window of opportunity that had opened for privatization before the state bureaucracies regrouped andresisted the process.

Others advocated a more gradual scaling back of state enterprises as new private sector firmsemerged in the economy. They were in favour of the privatization of enterprises through the saleof assets to those likely to work on improving the performance of the companies. They also

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stressed the imposition of hard budget constraints on enterprises so that chronic loss makerswould be forced out, leaving the more profitable enterprises to attract investors. Hungaryfollowed this gradualist approach to privatization, and it appears to have proved more conducive

to genuine restructuring of enterprises.

By contrast, experience has shown some of the pitfalls of the rapid privatization approach. In theCzech Republic, for instance, the assets transferred to millions of ordinary citizens in the first

phase of rapid privatization were sold by the recipients and ended up being consolidated ininvestment funds. But there was no genuine restructuring of enterprises, either because theinvestment funds lacked the capital to develop them or because the funds were in turn controlled

by state-owned banks that did not impose hard budget constraints. The weak growth performanceof the Czech Republic in the late-1990s, relative to other CEE countries, is attributed in part toits weak enterprise reforms.

Rapid privatization fared even worse in Russia. The countrys mass privatization programme of 1992-94 transferred ownership of over 15,000 firms into private hands. However, contrary toexpectations, insider privatization did not lead to self-induced restructuring of firms. It washoped that secondary trading would introduce outside ownership, and that transparent methodswould be used in the second wave of privatization of remaining firms still in state hands. Neither hope was fulfilled. Insiders were wary of relinquishing control; workers feared the cost-cuttingthat might occur under outside control, and managers found it easier to keep enterprises alive bylobbying the state for subsidies than to foster competitive performance through involvement of outsiders. The second wave of privatization, in particular the so-called "loans-for-shares"scheme, was non-transparent and systematically excluded foreign investors and banks in favour of parties with ties to government interests.

Overall, the experience of the transition economies suggests that privatized firms tend torestructure more quickly and perform better than comparable firms that remain in stateownership, but only if complementary conditions are met. These conditions include the presenceof hard budget constraints and competition, effective standards of corporate governance, and aneffective legal structure and property rights.

In contrast to the mixed experience on privatization of large enterprises, the privatization of small scale enterprises has been generally successful and has been completed in all but fivecountries.

Ans:- B

INCOTERMS (ICC 2000)

The INCOTERMS (International Commercial Terms) is a universally recognized set of definitions of international trade terms, such as FOB, CFR and CIF, developed by the

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International Chamber of Commerce (ICC) in Paris, France. It defines the trade contractresponsibilities and liabilities between buyer and seller. It is invaluable and a cost-saving tool.The exporter and the importer need not undergo a lengthy negotiation about the conditions of

each transaction. Once they have agreed on a commercial term like FOB, they can sell and buy atFOB without discussing who will be responsible for the freight, cargo insurance, and other costsand risks.

The INCOTERMS was first published in 1936 INCOTERMS 1936 and it is revised periodically to keep up with changes in the international trade needs. The complete definition of each term is available from the current publication INCOTERMS 2000 . The publication isavailable at your local Chamber of Commerce affiliated with the International Chamber of Commerce (ICC).

Many importers and exporters worldwide are accustomed to and may still use the INCOTERMS

1980 , the predecessor of INCOTERMS 1990 and INCOTERMS 2000 .

Under the INCOTERMS 2000 , the international commercial terms are grouped into E , F , C andD , designated by the first letter of the term (acronym), as follows:

( INCOTERMS )

In practice, trade terms are written with either all upper case letters (e.g. FOB, CFR, CIF,and FAS) or all lower case letters (e.g. fob, cfr, cif, and fas). They may be written withperiods (e.g. F.O.B. and c.i.f.).

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FCA {+ the named point of departure}

Free Carrier

The delivery of goods on truck, rail car or container at the specified point (depot) of departure,which is usually the sellers premises, or a named railroad station or a named cargo terminal or into the custody of the carrier, at sellers expense. The point (depot) at origin may or may not bea customs clearance centre. Buyer is responsible for the main carriage/freight, cargo insuranceand other costs and risks.

EXW {+ the named place}

Ex Works

Ex means from. Works means factory, mill or warehouse, which are the sellers premises. EXWapplies to goods available only at the sellers premises. Buyer is responsible for loading thegoods on truck or container at the sellers premises, and for the subsequent costs and risks.

In practice, it is not uncommon that the seller loads the goods on truck or container at the sellers premises without charging loading fee.

In the quotation, indicate the named place (sellers premises) after the acronym EXW , for example EXW Kobe and EXW San Antonio .

The term EXW is commonly used between the manufacturer (seller) and export-trader (buyer),

and the export-trader resells on other trade terms to the foreign buyers. Some manufacturers mayuse the term Ex Factory , which means the same as Ex Works.

DES {+ the named port of destination}

Delivered Ex Ship

The delivery of goods on board the vessel is at the named port of destination (discharge) atsellers expense. Buyer assumes the unloading fee, import customs clearance, payment of customs duties and taxes, cargo insurance, and other costs and risks.

In the export quotation, indicate the port of destination (discharge) after the acronym DES , for example DES Helsinki and DES Stockholm .

CIF {+ the named port of destination}

Cost, Insurance and Freight

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The cargo insurance and delivery of goods is to the named port of destination (discharge) at thesellers expense. Buyer is responsible for the import customs clearance and other costs and risks.

In the export quotation, indicate the port of destination (discharge) after the acronym CIF , for example CIF Pusan and CIF Singapore .

Under the rules of the INCOTERMS 1990, the term CIF is used for ocean freight only.However, in practice, many importers and exporters still use the term CIF in the air freight.

DDP {+ the named point of destination}

Delivered Duty Paid

The seller is responsible for most of the expenses, which include the cargo insurance, import

customs clearance, and payment of customs duties and taxes at the buyers end, and the deliveryof goods to the final point at destination, which is often the project site or buyers premises. Theseller may opt not to insure the goods at his/her own risks.

In the export quotation, indicate the point of destination (discharge) after the acronym DDP , for example DDP Bujumbura and DDP Mbabane .

International Commercial Terms

Diagram showing the functioning of INCOTERMS

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Q.5 Give short notes on Letter of credit and Bill of Lading

Ans:- Letter of Credit

A letter of credit is a document issued mostly by a financial institution which usually provides anirrevocable payment undertaking (it can also be revocable, confirmed, unconfirmed, transferableor others e.g. back to back: revolving but is most commonly irrevocable/confirmed) to a

beneficiary against complying documents as stated in the credit. Letter of Credit is abbreviatedas an LC or L/C, and often is referred to as a documentary credit, abbreviated as DC or D/C,documentary letter of credit, or simply as credit (as in the UCP 500 and UCP 600). Once the

beneficiary or a presenting bank acting on its behalf, makes a presentation to the issuing bank or confirming bank, if any, within the expiry date of the LC, comprising documents complying with

the terms and conditions of the LC, the applicable UCP and international standard banking practice, the issuing bank or confirming bank, if any, is obliged to honour irrespective of anyinstructions from the applicant to the contrary. In other words, the obligation to honour (usually

payment) is shifted from the applicant to the issuing bank or confirming bank, if any. Non-bankscan also issue letters of credit however parties must balance potential risks.

Letters of credit accomplish their purpose by substituting the credit of the bank for that of thecustomer, for the purpose of facilitating trade. There are basically two types: commercial andstandby. The commercial letter of credit is the primary payment mechanism for a transaction,whereas the standby letter of credit is a secondary payment mechanism.

Elements of a Letter of Credit A payment undertaking given by a bank (issuing bank) On behalf of a buyer (applicant) To pay a seller (beneficiary) for a given amount of money On presentation of specified documents representing the supply of goods Within specified time limits Documents must conform to terms and conditions set out in the letter of credit Documents to be presented at a specified place

Bill of Lading

A Bill of Lading is a type of document that is used to acknowledge the receipt of a shipment of goods and is an essential document in transporting goods overland to the exporters internationalcarrier. A through Bill of Lading involves the use of at least two different modes of transportfrom road, rail, air and sea. The term derives from the noun "bill", a schedule of costs for services supplied or to be supplied, and from the verb "to lade" which means to load a cargo ontoa ship or other form of transport.

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In addition to acknowledging the receipt of goods, a Bill of Lading indicates the particular vesselon which the goods have been placed, their intended destination, and the terms for transportingthe shipment to its final destination. Inland, ocean, through, and airway bill are the names given

to bills of lading.

Q.6 Discuss the entry methods in international business with relevant examples.

Ans;- Trade is increasingly global in scope today. There are several reasons for this. Onesignificant reason is technological because of improved transportation and communicationopportunities today, trade is now more practical. Thus, consumers and businesses now haveaccess to the very best products from many different countries. Increasingly rapid technologylifecycles also increases the competition among countries as to who can produce the newest in

technology. In part to accommodate these realities, countries in the last several decades havetaken increasing steps to promote global trade through agreements such as the General Treaty onTrade and Tariffs, and trade organizations such as the World Trade Organization (WTO), NorthAmerican Free Trade Agreement (NAFTA), and the European Union (EU).

Stages in the International Involvement of a Firm

We discussed several stages through which a firm may go as it becomes increasingly involvedacross borders. A purely domestic firm focuses only on its home market, has no currentambitions of expanding abroad, and does not perceive any significant competitive threat fromabroad. Such a firm may eventually get some orders from abroad, which are seen either as an

irritation (for small orders, there may be a great deal of effort and cost involved in obtainingrelatively modest revenue) or as "icing on the cake." As the firm begins to export more, it entersthe export stage, where little effort is made to market the product abroad, although an increasingnumber of foreign orders are filled. In the international stage, as certain country markets begin toappear especially attractive with more foreign orders originating there, the firm may go intocountries on an ad hoc basis that is, each country may be entered sequentially, but withrelatively little learning and marketing efforts being shared across countries. In the multi-nationalstage, some efficiency is pursued by standardizing across a region (e.g., Central America, WestAfrica, or Northern Europe). Finally, in the global stage, the focus centres on the entire Worldmarket, with decisions made optimize the products position across markets the home countryis no longer the centre of the product. An example of a truly global company is Coca Cola.

Note that these stages represent points on a continuum from a purely domestic orientation to atruly global one; companies may fall in between these discrete stages, and different parts of thefirm may have characteristics of various stages for example, the pickup truck division of anauto-manufacturer may be largely domestically focused, while the passenger car division isglobally focused. Although a global focus is generally appropriate for most large firms, note that

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it may not be ideal for all companies to pursue the global stage. For example, manufacturers of ice cubes may do well as domestic, or even locally centred, firms.

Methods of entry

With rare exceptions, products just dont emerge in foreign markets overnight a firm has to build up a market over time. Several strategies, which differ in aggressiveness, risk, and theamount of control that the firm is able to maintain, are available:

Exporting is a relatively low risk strategy in which few investments are made in the newcountry. A drawback is that, because the firm makes few if any marketing investments inthe new country, market share may be below potential. Further, the firm, by not operatingin the country, learns less about the market (What do consumers really want? Whichkinds of advertising campaigns are most successful? What are the most effective methods

of distribution?) If an importer is willing to do a good job of marketing, this arrangementmay represent a "win-win" situation, but it may be more difficult for the firm to enter onits own later if it decides that larger profits can be made within the country.

Licensing and franchising are also low exposure methods of entry you allow someoneelse to use your trademarks and accumulated expertise. Your partner puts up the moneyand assumes the risk. Problems here involve the fact that you are training a potentialcompetitor and that you have little control over how the business is operated. For example, American fast food restaurants have found that foreign franchisees often fail tomaintain American standards of cleanliness. Similarly, a foreign manufacturer may uselower quality ingredients in manufacturing a brand based on premium contents in thehome country.

Contract manufacturing involves having someone else manufacture products while youtake on some of the marketing efforts yourself. This saves investment, but again you may

be training a competitor. Direct entry strategies, where the firm either acquires a firm or builds operations "from

scratch" involve the highest exposure, but also the greatest opportunities for profits. Thefirm gains more knowledge about the local market and maintains greater control, but nowhas a huge investment. In some countries, the government may expropriate assets withoutcompensation, so direct investment entails an additional risk. A variation involves a jointventure, where a local firm puts up some of the money and knowledge about the localmarket.