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Sikkim Manipal University 4th Semester Spring 2011

1

Alaji Mamadou Cire BAH 540910685 MB0037 SET2

Name : Alaji Mamadou Cire BAH

Roll No. : 540910685

Subject :

International Business Management

Subject Code : MB0037

Program : MBA Semester 4

University : Sikkim Manipal

University

Learning Centre : KnowledgeWorkz

Limited (02544)

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MBA SEMESTER 4

INTERNATIONAL BUSINESS MANAGEMENTMB0037

SET - 2

1. What is WTO? What is GATT? Explain both.Answer:What is WTO?

The World Trade Organization (WTO) is an organization that intends to

supervise and liberalize international trade. The organization officially

commenced on January 1, 1995 under the Marrakech Agreement replacing the

General Agreement on Tariffs and Trade (GATT), which commenced in 1948.

The organization deals with regulation of trade between participating countries;

it provides a framework for negotiating and formalizing trade agreements, and a

dispute resolution process aimed at enforcing participants' adherence to WTO

agreements which are signed by representatives of member governments and

ratified by their parliaments. Most of the issues that the WTO focuses on derive

from previous trade negotiations, especially from the Uruguay Round (1986

1994).

The organization is currently endeavoring to persist with a trade negotiation

called the Doha Development Agenda (or Doha Round), which was launched in

2001 to enhance equitable participation of poorer countries which represent a

majority of the world's population. However, the negotiation has been dogged

by "disagreement between exporters of agricultural bulk commodities and

countries with large numbers of subsistence farmers on the precise terms of a

'special safeguard measure' to protect farmers from surges in imports. At this

time, the future of the Doha Round is uncertain."

The WTO has 153 members, representing more than 97% of the world's

population,and 30 observers, most seeking membership. The WTO is governed

by a ministerial conference, meeting every two years; a general council, which

implements the conference's policy decisions and is responsible for day-to-day

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administration; and a director-general, who is appointed by the ministerial

conference. The WTO's headquarters is at the Centre William Rappard GenevaSwitzerland.

A Brief History of GATT

The WTOs Predecessor, The GATT, Was Established on a Provisional Basis

after the Second World War in the wake of other new multilateral institutions

dedicated to international economic cooperation notably the "Britton Woods"

institutions now known as the World Bank and the International MonetaryFund.

The original 23 GATT countries were among over 50 which agreed a draft

Charter for an International Trade Organization (ITO) a new specialized

agency of the United Nations. The Charter was intended to provide not only

world trade disciplines but also contained rules relating to employment,

commodity agreements, restrictive business practices, international investment

and services.

In an effort to give an early boost to trade liberalization after the Second World

War and to begin to correct the large overhang of protectionist measures which

remained in place from the early 1930s-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 billion or 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 draft ITO Charter. The tariff concessions and rules togetherbecame known as the General Agreement on 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 in Havana 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 Congressional ratification of the

Havana Charter, the ITO was effectively dead. Despite its provisional nature,

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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 and continual efforts to reduce tariffs. Much of this

was achieved through a series of "trade rounds".

2. What is MNCs? Explain the 3 stages of evolution.Answer:

MNCs: or multinational corporations are businesses that operate in more than

one country. 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 be connected to the head office or parent

company through a merger or as some form of subsidiary company.

Multinational Corporations are large companies that can do business locally and

internationally.

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 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 businessmergers 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 from other

industry players. Sequential Market Entry is also one option for MNCs to gain

presence in a 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

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to boost presence in the area. MNCs also do joint ventures with existing players

in a particular country. In this way, the venture partner may retain someautonomy 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 have some sort of influence over

governments, which will lead to exploitation especially to developingeconomies.

Three Stages of Evolution:

a. 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)

b. Foreign Production StageThere 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 a foreign firm.

Licensing

Licensing is usually first experience (because it is easy)

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

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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 is independent)

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 inCanada first. Singer Manufacturing Company established its foreign

plants in Scotland and Australia in the 1850s)

plants are established in several countries Licensing is switched from independent producers to its subsidiaries. export continuesc. 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 must find the best location.

3. Mention the differences between currency markets and exchangerate markets in the context of international business environment.

Answer: The exchange rate regimes adopted by countries in todays

international monetary and financial system, and the system itself, are

profoundly different from those envisaged at the 1944 meeting at Bretton

Woods establishing the IMF and the World Bank. In the Bretton Woods system:

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exchange rates were fixed but adjustable. This system aimed both toavoid the undue volatility thought to characterize floating exchange rates

and to prevent competitive depreciations, while permitting enough

flexibility to adjust to fundamental disequilibrium under international

supervision;

private capital flows were expected to play only a limited role infinancing payments imbalances, and widespread use of controls would

prevent instability in such flows;

temporary official financing of payments imbalances, mainly through theIMF, would smooth the adjustment process and avoid unduly sharp

correction of current account imbalances, with their repercussions on

trade flows, output, and employment.

In the current system, exchange rates among the major currencies (principally

the U.S. dollar, the euro, and Japanese yen) fluctuate in response to market

forces, with short-run volatility and occasional large medium-run swings

(Figure 1). Some medium-sized industrial countries also have market

determined floating rate regimes, while others have adopted harder pegs,including some European countries outside the euro area. Developing and

transition economies have a wide variety of exchange rate arrangements, with a

tendency for many but by no means all countries to move toward increased

exchange rate flexibility.

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

following characteristics:

partly for efficiency reasons, and also because of the limited effectivenessof capital controls, industrial countries have generally abandoned such

controls and emerging market economies have gradually moved away

from them. The growth of international capital flows and globalization of

financial markets has also been spurred by the revolution in

telecommunications and information technology, which has dramatically

lowered transaction costs in financial markets and further promoted the

liberalization and deregulation of international financial transactions;

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international private capital flows finance substantial current accountimbalances, but the changes in these flows appear also sometimes to be a

cause of macroeconomic disturbances or an important channel through

which they are transmitted to the international system;

Developing and transition countries have been increasingly drawn intothe integrating world economy, in terms of both their trade in goods and

services and of financial transactions.

Lessons from the recent crises in emerging markets are that for such countries

with important linkages to global capital markets, the requirements forsustaining pegged exchange rate regimes have become more demanding as a

result of the increased mobility of capital. Therefore, regimes that allow

substantial exchange rate flexibility are probably desirable unless the exchange

rate is firmly 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 a key feature of the system. The launch of the euro in January1999 marked a new phase in the evolution 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 medium-

sized industrial countries, and developing and transition economies, in an

environment of increasing capital market integration, may also continue to

maintain market-determined floating 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 tocontinue to exhibit volatility, and schemes to reduce volatility are neither

likely to be adopted, nor to be desirable as they prevent monetary policy

from being devoted consistently to domestic stabilization 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 time the policy disciplines and institutional

structures required to make possible the eventual adoption of the euro.

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The approach taken by the IMF continues to be to advise member countries on

the implications of adopting different exchange rate regimes, to consider thechoice of regime to be a matter for each country to decide and to provide policy

advice that is consistent with the maintenance of the chosen regime.

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

Answer:

a.Role of privatization in international businessEconomists generally agreed on the need for speed in carrying out liberalization

and stabilization. But on privatization of large enterprises, there was a debate on

whether to have a 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 to citizens, for instance, through vouchers that gave their holders

the right and means to purchase state-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 and resisted the process.

Others advocated a more gradual scaling back of state enterprises as new private

sector firms emerged in the economy. They were in favour of the privatization

of enterprises through the sale of assets to those likely to work on improving the

performance of the companies. They also stressed the imposition of hard

budget constraints on enterprises so that chronic loss makers would be forced

out, leaving the more profitable enterprises to attract investors. Hungary

followed this gradualist approach to privatization, and it appears to have proved

more conducive to genuine restructuring of enterprises.

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By contrast, experience has shown some of the pitfalls of the rapid privatization

approach. In the Czech Republic, for instance, the assets transferred to millionsof ordinary citizens in the first phase of rapid privatization were sold by the

recipients and ended up being consolidated in investment funds. But there was

no genuine restructuring of enterprises, either because the investment 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 performance of the Czech Republic in the late-1990s, relative to other

CEE countries, is attributed in part to its 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 to expectations, insider privatization did

not lead to self-induced restructuring of firms. It was hoped that secondary

trading would introduce outside ownership, and that transparent methods would

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-cutting that might occur under outside control, andmanagers found it easier to keep enterprises alive by lobbying 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 to restructure more quickly and perform better than comparable firmsthat remain in state ownership, but only if complementary conditions are met.

These conditions include the presence of hard budget constraints and

competition, effective standards of corporate governance, and an effective 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 five countries.

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b.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 be a customs clearance

centre. Buyer is responsible for the main carriage/freight, cargo insurance and

other costs and risks.

EXW {+ the named place}

Ex Works

Ex means from. Works means factory, mill or warehouse, which are the sellers

premises. EXW applies to goods available only at the sellers premises. Buyer is

responsible for loading the goods 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 theforeign buyers. Some manufacturers may use the term Ex Factory, which

means the same as Ex Works.

DES {+ the named port of destination}

Delivered Ex Ship

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The delivery of goods on board the vessel is at the named port of destination

(discharge) at sellers expense. Buyer assumes the unloading fee, importcustoms 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

The cargo insurance and delivery of goods is to the named port of destination

(discharge) at the sellers 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 cargoinsurance, import customs clearance, and payment of customs duties and taxes

at the buyers end, and the delivery of goods to the final point at destination,

which is often the project site or buyers premises. The seller 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.

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5. Give short notes on Letter of credit and Bill of LadingAnswer: Letter of Credit

A letter of credit is a document issued mostly by a financial institution which

usually provides an irrevocable payment undertaking (it can also be revocable,

confirmed, unconfirmed, transferable or 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 abbreviated as 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 any

instructions 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-banks can 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 the customer, for the purpose of facilitating trade. There are basically

two types: commercial and standby. The commercial letter of credit is the

primary payment mechanism for a transaction, whereas the standby letter of

credit is a secondary payment mechanism.

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 international carrier. A through Bill of Lading

involves the use of at least two different modes of transport from road, rail, air

and sea. The term derives from the noun "bill", a schedule of costs for services

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supplied or to be supplied, and from the verb "to lade" which means to load a

cargo onto a ship or other form of transport.

In addition to acknowledging the receipt of goods, a Bill of Lading indicates the

particular vessel on which the goods have been placed, their intended

destination, and the terms for transporting the shipment to its final destination.

Inland, ocean, through, and airway bill are the names given to bills of lading.

6. Discuss the entry methods in international business with relevantexamples.

Answer: Trade is increasingly global in scope today. There are several reasons

for this. One significant reason is technological because of improved

transportation and communication opportunities today, trade is now more

practical. Thus, consumers and businesses now have access to the very best

products from many different countries. Increasingly rapid technology

lifecycles 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 have taken increasing steps to promote global trade

through agreements such as the General Treaty on Trade and Tariffs, and trade

organizations such as the World Trade Organization (WTO), North American

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 involved across borders. A purely domestic firm focuses only on itshome market, has no current ambitions of expanding abroad, and does not

perceive any significant competitive threat from abroad. 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

obtaining relatively modest revenue) or as "icing on the cake." As the firm

begins to export more, it enters the export stage, where little effort is made to

market the product abroad, although an increasing number of foreign orders are

filled. In the international stage, as certain country markets begin to appear

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especially attractive with more foreign orders originating there, the firm may go

into countries on an ad hoc basis that is, each country may be enteredsequentially, but with relatively little learning and marketing efforts being

shared across countries. In the multi-national stage, some efficiency is pursued

by standardizing across a region (e.g., Central America, West Africa, or

Northern Europe). Finally, in the global stage, the focus centres on the entire

World market, with decisions made optimize the products position across

markets the home country is 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 a truly global one; companies may fall in between these discrete

stages, and different parts of the firm may have characteristics of various stages

for example, the pickup truck division of an auto-manufacturer may be

largely domestically focused, while the passenger car division is globally

focused. Although a global focus is generally appropriate for most large firms,

note that 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 locallycentred, 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 the amount of control that the firm is able to maintain,

are available:

Exporting is a relatively low risk strategy in which few investments aremade in the new country. A drawback is that, because the firm makes few

if any marketing investments in the new country, market share may be

below potential. Further, the firm, by not operating in the country, learns

less about the market (What do consumers really want? Which kinds 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 arrangement may represent a "win-win" situation, but it

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may be more difficult for the firm to enter on its own later if it decides

that larger profits can be made within the country.

Licensing and franchising are also low exposure methods of entry youallow someone else to use your trademarks and accumulated expertise.

Your partner puts up the money and assumes the risk. Problems here

involve the fact that you are training a potential competitor 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 to maintain American standards of cleanliness. Similarly, a foreign

manufacturer may use lower quality ingredients in manufacturing a brand

based on premium contents in the home country.

Contract manufacturing involves having someone else manufactureproducts while you take 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 buildsoperations "from scratch" involve the highest exposure, but also the

greatest opportunities for profits. The firm gains more knowledge about

the local market and maintains greater control, but now has a huge

investment. In some countries, the government may expropriate assets

without compensation, so direct investment entails an additional risk. A

variation involves a joint venture, where a local firm puts up some of the

money and knowledge about the local market.

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