Q.1 Explain the concept and limitations of the theory of comparative costs.

Ans:- The comparative cost theory was first systematically formulated by the English economist David Ricardo in his Principles of Political Economy and Taxation, published in 1817.1 It was later refined by I.S. Mill, Marshall, Taussig and others.

In a nutshell, the doctrine of comparative costs maintains that if trade is left free, each country, in the long run, tends to specialise in the production and export of those commodities in whose production it enjoys a comparative advantage in terms of real costs, and to obtain by importation those commodities which could be produced at home at a comparative disadvantage in terms of real costs, and that such specialisation is to the mutual advantage of the countries participating in it.

The theory of comparative costs was developed on the basis of the labor theory of value, and all theorists who accepted it have indeed assumed that it rests also logically on the labor theory of value. For the authors who reject the labor theory of value, the theory of comparative costs foundes on the cliffs as the former, that is, on the fact that there simply exists no units of real cost, neither in the shape of days of labor nor in any other shape… Fortunately, however, is possible to reformulate the theory in such a way that its analytical value and all conclusions drawn from it are preserved, rendering it at the same time entirely independent of the labor theory of value. This may most readily be shown in a diagrammetic representation of our theorem. (Gottfried Haberler, 1930)

It is well-known that the theory of comparative advantage, which trade economists proudly consider to be “the deepest and most beautiful result in all of economics” (Findlay, 1987, p. 514), orginated in David Ricardo’s famous passage of his Principles of Political Economy and Taxation.1 It is less known that a milestone in the development of the much admired depth and beauty of the theory was laid by Gottfried Haberler in a neglected 1930 article in the Weltwirtschaftliches Archiv.2 In that article Haberler freed the theory of comparative advantage from Ricardo’s labor value formulation, provided us with the modern opportunity cost formulation and laid the conceptual foundation of modern trade theory.

Applying the theory of comparative costs in the real world has a few limitations.

Firstly, the theory is based on an incorrect assumption that wages between industries do not vary. Construction and manufacturing workers are often paid much more than retail workers. Even workers with same skills may receive different wages in different sectors of the economy. For example, a secretary in a car manufacturing company will most likely earn more than one in a public school. So workers moving from high wage sector jobs to low wage sector jobs are hurt if an economy specializes in the latter.

Secondly, the nature and structure of certain industries may be such that the benefits from trade may accrue only to very few workers (owners and managers of banana plantations) whereas the

majority of workers (agricultural labourers) may actually be worse off despite aggregate gains from trade. The welfare consequences of trade for most of the people in such an economy will be negative.

Thirdly, different goods have different elasticities of demand. In tough economic times when global demand may be falling, an economy specializing in producing jewelry, for instance, may find it difficult to trade its products to raise enough money to import food. Some degree of self-reliance in producing essential commodities for the local economy may be preferable to free trade if maintaining economic security and stability is a policy preference.

Q.2 What are the different market entry strategies for a company which is interested to enter International markets? Discuss briefly.

Ans:- Companies enter international markets for varying reasons, and these different objectives at the time of entry should produce different strategies, performance goals, and even forms of market participation. Yet, companies frequently follow a standard market entry and development strategy. The most common, which will be described in the following section, is sometimes referred to as the “increasing commitment” pattern of market penetration, in which market entry is via an independent local distributor or partner with a later switch to a directly controlled subsidiary. This approach results from an objective of building a business in the country-market as quickly as possible but nevertheless with a degree of patience produced by the initial desire to minimize risk and by the need to learn about the country and market from a low base of knowledge. These might be described as straightforward financial objectives that are oriented around long-run profit maximization in the country, so this internationalization strategy could be described as the default option.

The fundamental reason for entering a new market has to be potential demand, of course, but nevertheless it is common to observe other factors driving investment and performance measurement decisions, such as:

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 its home 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 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 entered sequentially, but with relatively little learning and marketing efforts being shared across countries. In the multi-national stage, some efficiencies are pursued by standardizing across a region (e.g., Central America, West Africa, or Northern Europe). Finally, in the global stage, the focus centers on the entire World market, with decisions made optimize

the product’s position across markets—the home country is no longer the center 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 locally centered, firms.

Some forces in international trade. The text contains a rather long-winded appendix discussing some relatively simple ideas. Comparative advantage, discussed in more detail in the economics notes, suggests trade between countries is beneficial because these countries differ in their relative economic strengths—some have more advanced technology and some have lower costs. The International Product Life Cycle suggests that countries will differ in their timing of the demand for various products. Products tend to be adopted more quickly in the United States and Japan, for example, so once the demand for a product (say, VCRs) is in the decline in these markets, an increasing market potential might exist in other countries (e.g., Europe and the rest of Asia). Internalization/transaction costs refers to the fact that developing certain very large scale projects, such as an automobile intended for the World market, may entail such large costs that these must be spread over several countries.

Learning in Lead Markets: In some circumstances, a company might undertake a foreign market entry not for solely financial reasons, but to learn. For example, the white goods division of Koc, the Turkish conglomerate, entered Germany, regarded as the world’s leading market for dishwashers, refrigerators, freezers, and washing machines both in terms of consumer sophistication and product specification. In doing so, it recognized that its unknown brand would struggle to gain much market share in this fiercely competitive market. However, Koc took the view that, as an aspiring global company, it would undoubtedly benefit from participating in the world’s lead market and that its own product design and marketing would improve and enable it to perform better around the world.4 In most sectors, participation in the “lead market” would be a prerequisite for qualifying as a global leader, even if profits in that lead market were low. The lead market will vary by sector: the United States for software, Japan for consumer electronics and telecommunications, France or Italy for fashion, and so on.

The important point about such an objective for market entry is that it will change the calculus of the market entry mode decision. If a company is to maximize learning from a lead market, for example, it will need to participate with its own subsidiary and a cadre of its own executives. Learning indirectly, via a local distributor or other partner, is obviously less effective and will contribute less to the company’s development as a global player, even if short-term profitability is superior because of the lower investment required.

Competitive Attack or Defense : In some situations, market entry is prompted not by some attractive characteristics of the country identified in a market assessment exercise, but as a reaction to a competitor’s move. The most common scenario is market entry as a follower move, when a company enters the market simply because a major competitor has done so. This is obviously driven by the belief that the competitor would gain a significant advantage if it were allowed to operate alone in that market, and so it is most common in concentrated or even duopolistic industries. Another frequent scenario is “offense as defense,” in which a company enters the home market of a competitor—usually in retaliation for an earlier entry into its own domestic market. In this case, the objective is also to force the competitor to allocate increased resources to an intensified level of competition. In both cases, a company will have to adapt its strategies to the particular strategic stakes: rather than focusing on market development, the firm will set market share objectives and be prepared to accept lower levels of profitability and higher levels of marketing expenditure. This requires different performance standards and budgets from the usual scenario of low-risk entry and long-run development, and the company’s control system must have sufficient flexibility to adapt to this. The overriding competitive objective should also be taken into account when considering whether and how to participate in the market with a local distributor or partner. Certainly, the low-intensity entry modes, such as import agents and trading houses, would be inappropriate unless the local partner will accept the lower profit expectations.

Scale Economics or Marketing Leverage : A number of objectives result from

internationalization undertaken as what is sometimes described as a “replication strategy,” in

which a company seeks a larger market arena in which to exploit an advantage. In many

manufacturing industries, for example, internationalization can help the company achieve greater

economies of scale, particularly for companies from smaller domestic country-markets. In other

cases, a company may seek to exploit a distinctive and differentiating asset (often protected as

intellectual property), such as a brand, service model, or patented product. In both cases, the

emphasis is on “more of the same,” with relatively little adaptation to local markets, which

would undermine scale economies or diminish the returns from replication of the winning model.

To achieve either of these objectives, a company must retain some control, so it may enter

markets with relatively high-intensity modes, such as joint ventures. In particular, either

franchising or licensing are business models naturally suited for the rapid replication of

businesses through expansion of units since both are centered on protected and predefined assets.

Apart from these varied marketing objectives, it is also common for governments to

“incentivize” their country’s companies to export, in which case the company may enter markets

it would otherwise not have tackled. In summary, given the rapid business evolution that has

been identified as one of the distinctive characteristics of international markets, it is reasonable

to suppose that, for most companies, international operations will consist of a patchwork of

country-market operations that are pursuing different objectives at any one time. This, in turn,

would suggest that most companies would adopt different entry modes for different markets.

More commonly, however, companies have a template that is followed in almost all markets.

This usually starts with market entry via an indirect distribution channel, usually a local

independent distributor or agent.

Q.3. a. What are the benefits of MNC’s?

Ans:- Multinational companies (MNCs) are not without benefits, which may be to the government, the economy, and the people or even to itself. Cole (1996) stated that the size of multinational organization is enormous; many of them have total sales well in excess of the GND of many of the world's nations. Cole also stated that World Bank statistics of comparison between multinational companies and national GNPs shows, for example, that large oil firms such as Exxon and Shell are large in economic terms that nations such as South Africa, Australia and Argentina are substantially greater than nations such as Greece, Bulgaria and Egypt.

Other large multinational companies include General Motors, British Petroleum, Ford and International Business Machine (IBM). Some of the benefits of multinational companies are:

1. There is usually huge capital investment in major economic activities 2. The country enjoys varieties of products, services and facilities, brought to their door

steps 3. There is creation of more jobs for the populace 4. The nation's pool of skills are best utilized and put to use effectively and efficiently 5. There is advancement in technology as these companies bring in state-of-the-art-

technology for their businesses 6. The demand for training and retraining and advancement in the people's education

becomes absolutely necessary. This will in turn help strengthen the economy of the nation

7. The living standard of the people is boosted 8. Friendliness between and among nations in trade i.e. it strengthen international relation9. The balance of payments of nations in trade are improved on

In the words of Cole (1996), he stated that the sheer size (and wealth) of multinationals means that they can have a significant effect on host country. To Cole, most of the effects are beneficial and include some of the above or all. The Electronic Library of Scientific Literature (1996) explained the benefits of MNCs under a theory known as 'The Theory of Externalities'. The theory considers the benefits of MNCs from the point of view of those who maintain the importance of Foreign Direct Investment (FDI) as part of the engine necessary for growth. In the contribution of Davies (1989), he gave some theories on the benefits/advantages of multinational. Davies (1989:260) tagged this 'Economic Theory' and the multinational where he took a comprehensive and critical look at the benefits of MNCs.

More benefits came along with these people's theories and some are:

1. There is significant injection into the local economy in respect to investment 2. Best utilization of the country's natural resources 3. They help in strengthening domestic competition 4. They are good source of technological expertise 5. Expansion of market in the host country

AQ.3. b. Give a short note on OPEC.

Ans: - The Organization of Petroleum Exporting Countries (OPEC) was established on September 14, 1960, at a conference in Baghdad, Iraq.  Its founders were Venezuela, Iran, Iraq and Kuwait. Since then, a few other major exporters of oil have been allowed to join the group.

The OPEC Oil Ministers.  Photo Credit: OPEC.

The purpose of OPEC is to restrict the amount of oil produced.  By doing so, OPEC can make sure that it receives a high price for its oil by only selling at the quantity where marginal cost equals marginal revenue.  Restricting the quantity of output drives up the price, allowing OPEC to set the quantity that maximizes its profits.

In economic terms, OPEC is a cartel.  This means that its members come together to form an organization that is basically a monopoly.  OPEC's member countries currently hold about 2/3 of the known oil reserves in the world.

One major difficulty faced by all cartels is restricting production among members.  OPEC has been plagued by this historically, as members "cheat" by selling more than they are allowed to at the inflated price.  Maintaining a cartel is difficult because it is in the short-term interests of every member to cheat.

The other major problem faced by cartels such as OPEC is preventing non-members from entering the market.  OPEC has never included every oil-producing nation in the world, so there have always been countries that have sold as much as they have wanted, taking advantage of the high price made possible by the sacrifices of OPEC member states.

In 1973, OPEC began restricting oil production among its members.  Prices rose greatly, and all the members nations benefited.  Ultimately, the price rose to US$35 per barrel in 1981.  Changes in prices, as well as wars and political issues, caused supply shocks in oil.  This meant that oil was suddenly unavailable, creating major problems in economies worldwide.

However, the high price discouraged use of oil and increased the inclination of other countries to begin producing what oil they could.  In addition, research into renewable energy took off, motivated by the economic pain caused by oil prices and oil shocks.

The high price also caused many OPEC nations to cheat, raising production levels to boost profits.  In 1984 Saudi Arabia demanded its fellow members to quit cheating.  It was too difficult to continue running OPEC though, and in December 1985, the organization eliminated production restrictions, basically giving up.

Q.4. a. How will socio-cultural environment of a country have an impact on a multinational

business? Explain with an example.

Ans:- The aspect of culture in the human society and business has a direct relationship with each other. They both establish interesting conditions when they associate in a common platform which in my view is a good way to get used to challenging moments. In many parts of the world, people adopt different cultures based on their own understanding. There are different ways in which people in different areas respond to certain gestures and signs. Cultural activities are used in almost every aspect of human living and for this matter, in some areas they are a great influence to the businesses.

Culture in international business therefore comprises of various practices, cultural influences and different ways in which people think. Some of the factors which influence international businesses based on different cultural practices are, how various people do communicate when making business negotiations, the manner in which they engage in the business and also how they spend their The use of body language explains the mannerism in business which looks at how people use different gestures and the behaviors the gestures reflect to the other partner. A sign to show good will in one country could be mean something very different from that in another. Particularly in business, some of the gestures used by   people like laughter or uncomfortable smile, could cost ones business loss of huge amounts of money when may be a deal is broken due to misunderstanding when certain gestures are used to mean some thing else which to them is positive and to the other partner could be irritating. Shaking of head to some people means that they are listening but to others, it is a sign of disagreeing with some statements, so in case of business transaction such events could lead to misunderstanding

In broad terms, the social-cultural environment includes everything that is not included in the economy or the political system. Economic life is organized primarily through a market in which individuals relate to one another as buyers and sellers and the purpose is production. In political life individuals relate to one another as citizens and the basic purpose is making collective

decisions and rules. The economic and political systems together create the conditions—goods, ervices and rules—which we all need in order to live the kinds of lives that we choose. The socialcultural environment, then, consists of the whole range of behaviours and relationships in which individuals engage in their personal and private lives, including:

The characteristics of the population (e.g. age, sex, race or ethnicity, class) Walues and attitudes Lifestyles and relationships.

Culture is an attribute of groups, and this can mean society as a whole (e.g. national culture), groups within society (sub-cultures), or even groups of societies and nations (trans-national culture).

For example, it is quite common to speak of ‘western culture’. This term implies that there are certain values and ways of life that western societies might be said to share, such as:

Secularism—this refers to the increasing influence of rational and scientific thought, and the decline of religion as a framework of understanding and guide to behaviour.

Consumerism or materialism—this refers to the view that achieving higher levels of consumption of goods and services leads to greater happiness. A good life means having more ‘stuff ’. This attitude lies behind the belief that economic growth is always a good thing.

Individualism—this usually refers to the idea that individuals make their own life-style choices and are motivated primarily by self-interest. It can also involve the idea that individuals should strive to be self-reliant.

However these attitudes or values vary in strength between western societies (e.g. UK society ismore secular than the United States), and they also have their own distinctive cultural traits. Forexample, ‘Britishness’ might be said to include (among other traits):

An attitude of reserve (e.g. compared to American outspokenness) A sensitivity to class differences (as expressed by accent and manners) A sense of fair play.

A game of cricket on the village green—is this the meaning of ‘Britishness’?

The very idea of Britishness is contested by some on the grounds that British society contains a diverse range of cultures. For example, Britain is often described as a ‘multicultural’ society, eferring to the co-existence of different communities defined by their race, ethnicity or faith. Sub-cultures can also be related to class membership (e.g. working class culture) or age (e.g. youth culture). Youth culture is, of course, itself diverse, partly reflecting lifestyle choices in relation to clothing and music.

In analysing the social-cultural environment of business it is important to recognize that society and culture are not homogeneous or fixed. Rather they are diverse and fluid or dynamic. Social and cultural change is a hallmark of modern societies (more than in the past), symbolized by the widely recognised phenomenon of a generation gap. This refers to the way in which, due to social and cultural change, each generation tends to feel somewhat out of touch with (and even bewildered or shocked by) the attitudes and behaviours of the next. Business needs to stay in touch with social and cultural shifts.

Stop and ThinkWhat do you see as the main aspects of the culture of your own society?Do you agree that the cultural traits listed above are characteristic of western / British society?Do you share all aspects of the culture of your society?Can you think of any aspects of the culture that relate to the role of business in society?

Examples of social-cultural impacts on business

Business is an activity undertaken by people whose values and attitudes are shaped by the cultureand society of which they are a part. To some extent the roles we perform in business are quitediscrete from other aspects of our lives and require that we adopt different behaviours andpersonas. However there is not, of course, a complete separation between ‘work’ and ‘life’. We carry values and attitudes shaped by the wider culture and society into our roles as managers, employees and consumers.

It can be argued that capitalist business owes its historical origins and development in part to non-economic factors. Max Weber argued that the ‘spirit of capitalism’, or ethos of capitalist business, with its emphasis on accumulating wealth, can be traced to religious belief—the ‘Protestant ethic’. This religious belief encouraged the reinvestment of wealth in business rather than the pursuit of a life of luxury, thus fuelling economic growth and dynamism (Giddens, 2006: 103–4). A version of this theory persists today in the idea that economic success depends on the prevalence of a ‘work ethic’ in society which sees work as a morally desirable activity. We can perhaps see this reflected in the welfare-to-work initiatives of the Labour governments since 1997 with their emphasis on seeking and accepting employment as a moral responsibility.

Some writers have argued that the UK’s relatively poor long-term economic performancehas been due in part to wider cultural factors such as an emphasis on the arts rather than

science, engineering and technology and a weak entrepreneurial culture. The basic idea here is that societies that prize business and entrepreneurship are more likely to be economically successful. Since the 1980s both Conservative and Labour governments have attempted to make the wider culture and society of the UK more supportive of business. For example, the opportunity for members of the public to buy shares in privatized industries in the 1980s was intended, in part, to create a ‘share-owning democracy’. Owning shares would, it was thought, give people a stake in business and foster a more positive attitude towards it. Other important areas of policy have included encouraging business start-ups and a stronger emphasis on vocational education.

An important process of social change in western societies has been the declining influence of racist and sexist attitudes and behaviours, though these problems have not gone away. Equal opportunities legislation, such as the Sex Discrimination and Race Relations Acts in the UK in the 1970s, both reflected and promoted these shifting attitudes. These laws prohibit discrimination in the offer of employment on grounds of the sex or race of the applicants. The need for these laws reflects the way social attitudes permeate business. In other words, if sexist attitudes are prevalent in the wider society it is likely that they will also show up in the business arena. This influence is all the more striking since, on the face of it, discrimination is irrational in terms of the ‘bottom line’. In other words, sexism is bad for business).

In economics textbooks consumers are often portrayed (like businesses) as ‘rational maximizers’, meaning that they allocate their spending so as to maximize their personal self-interest. Yet this view seems to be at odds with the growth of ‘ethical consumerism’ Here consumers are willing to trade-off their own interests against thos of others by, for example, paying more for fair trade products to ensure a better deal for producers in ‘Third World’ countries. This is a prime example of consumer behaviour, and therefore the behaviour of business in response, being shaped by shifts in the values of the wider society—in this case towards a greater concern for Third World poverty. It can be argued that the increasing emphasis on corporate social responsibility also reflects the way in which business leaders have been influenced by shifting social attitudes and values

Q.4 b. Discuss the origin of WTO and its principles.

Ans:- The Origins of the WTO

The underlying idea and the conceptual origin of the WTO goes back to World War II. The leaders of the allied powers were of the view that one of the main causes of the war was the failure of the open world trading system in the 1930s. They agreed that the enduring peace and welfare of nations were inextricably connected with mutual friendly relations, fairness, equality, and the maximum predictable degree of freedom in international trade.

Soon after the war ended, preparations for creating a new international economic order commenced. One of the important pillars of this new order, embodied in the Bretton Woods Institutions, was the establishment of the International Trade

Organization (ITO), along with the International Monetary Fund, and the International Bank for Reconstruction and Development (The World Bank).

The United Nations Economic and Social Council decided in early 1946 to hold an international conference to draft the charter of the ITO. It established for that purpose a preparatory committee that held its first meeting in London in October of the same year. After further preparatory meetings, the UN Conference on Trade and Employment was held in Havana, from November 1947 to March 1948. The end result of this conference was the Havana Charter, which contained theo bjectives, principles, rules, and institutional setup of an International Trade Organization. The Havana Charter was signed on March 24, 1948 by representatives of 54 countries.

In tandem with the preparations for the ITO charter, some 23 members of the preparatory committee carried out negotiations for the reduction of tariffs, which at that time were the main obstacle to international trade. In order to implement and secure the results of tariff reductions in advance of the ITO, it was decided by the 23 countries to establish an interim agreement.

Accordingly, they agreed on a General Agreement on Tariffs and Trade that was based on the chapters on trade policy in the draft charter of the ITO.1The results of tariff negotiations were inscribed in country schedules annexed to the text of the GATT and became an integral part of it.

The General Agreement on Tariffs and Trade was signed by 23 countries on October 30, 1947 and entered into force on January 1, 1948. It was a provisional agreement without an institutional setup because it was envisaged that it would be taken over by the ITO.

The Havana Charter never entered into force because it was not ratified by the US Congress. Thus, the GATT remained the only legal framework of rules for the conduct of world trade for almost half a century. However, the GATT regulated only trade in goods. It did not cover services or investments. Over the years, the GATT ensured liberalization of world trade through the elimination or reduction of tariffs and other barriers to merchandise trade. It was responsible for the manifold expansion of international trade. The greatest achievement of the GATT was establishing its role as a rules-based system for the conduct of trade relations among nations, which averted further 1930s-like economic depressions.

However, the GATT also had its failings. GATT rules never fully applied to agriculture, and its basic principles and some of its main rules were rendered largely inoperative in the case of textiles and clothing.The GATT also lagged behind new developments in international trade. Initially, its rules applied to trade in goods only.Trade in services, which had grown rapidly and had become an important and dynamic element of international trade, was not subject to GATT rules.

When the Uruguay Round negotiations started in 1986, it was not envisaged that a new organization would be established to implement the results of the negotiations. However, as the negotiations developed and growth intwo new areas, services and intellectual property, became increasingly visible, the countries taking part in the Uruguay Round started focusing on the need

for establishing a permanent institutional setup to implement and jadminister the results of the negotiations. It was agreed that an umbrella organization was needed to house the outcome of negotiations in goods, services, and trade-related aspects of intellectual property rights, and to implement the 20 or so agreements and legal texts negotiated and accepted as a single undertaking.

The charter of the World Trade Organization was elaborated during the last several years of the Uruguay Round negotiations. It was formalized in the Marrakesh Agreement Establishing the World Trade Organization, signed in Marrakesh on April 15, 1994. After necessary ratification, the agreement entered into force on January 1, 1995.

Basic Principles of the WTO

The basic principles of the WTO are built on those of the GATT. Relatively few and simple, they are far reaching in importance, and have been the guiding light for the past 50 years and should continue to illuminate the path of the multilateral trading system well into the new millennium. These basic principles are discussed below.

a. Non-discriminatoryory mostfavored- nation treatment: The most important and fundamental principle of the WTO is non-discriminatory treatment or, to be legally precise, most favored nation (MFN) treatment. What it means is simply that any advantage, favor, privilege, or immunity granted by one WTO member to another has to be granted immediately and unconditionally to all other members.

b. National treatment : The principle of national treatment implies that imported goods and services and foreign service suppliers will be given treatment that is no less favorable than that given to domestic goods and services and to domestic service suppliers. The principle is observed by giving either the same treatment or more favorable treatment to imported goods and services and to foreign service suppliers as that given to domestic goods and services and to domestic servicesuppliers.

c. Stability and predictability: The stability and predictability of trading conditions is another basic principle of the WTO. Stable and predictable conditions of access to markets promote confidence because investors and traders can plan their investments secure in the knowledge that market access conditions will not change for the worse. This is achieved through the binding of tariffs and conditions of market access for services.

d. Transparency : WTO rules oblige member countries to ensure transparency in their foreign trade regimes by requiring them to publish all laws, regulations, measures, and administrative decisions affecting trade.The publication of laws has to be done in a manner that allows importers, exporters, consumers and investors to be aware of them. Transparency is also ensured by requiring member countries to submit periodic notification to the WTO Secretariat on different aspects of the trade regime.

e. Trade liberalization : As mentioned earlier, the WTO is not an organization for free trade, sinc it does allow protection. However, one of the principles of the WTO is progressive liberalization of trade in goods and services. This principle is rooted in the belief that the removal or reduction of trade barriers results in an expansion of international trade that is to the benefit of all countries. To achieve progressive liberalization, the WTO provides a forum for trade negotiations and a framework for implementing the results of such negotiations.

f. Fair competition: One of the basic principles of the WTO is fair competition in international trade. The rules on MFN treatment and national treatment are designed to promote fair competition. WTO rules also contain disincentives or remedies against unfair competition, such as dumping or subsidization that causes injury to domestic industries.

g. Economic development: Last, but not least, is the principle of economic development of developing countries. There are many provisions in different WTO agreements designed to promote economic development of developing countries and to encourage economic reforms both in developing countries and in transition economies.

Q. 5 a. Explain the merits and demerits of BoP theory?

Ans:- A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP summarises international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as a negative or deficit item.

When all components of the BOP sheet are included it must balance – that is, it must sum to zero – there can be no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter balanced in other ways – such as by funds earned from its foreign investments, by running down reserves or by receiving loans from other countries.

While the overall BOP sheet will always balance when all types of payments are included, imbalances are possible on individual elements of the BOP, such as the current account. This can result in surplus countries accumulating hoards of wealth, while deficit nations become increasingly indebted. Historically there have been different approaches to the question of how to correct imbalances and debate on whether they are something governments should be concerned about. With record imbalances held up as one of the contributing factors to the financial crisis of

2007–2010, plans to address global imbalances are now high on the agenda of policy makers for 2010.

Merits

Automatic balance of payments adjustment - Any balance of payments disequilibrium will tend to be rectified by a change in the exchange rate. For example, if a country has a balance of payments deficit then the currency should depreciate. This is because imports will be greater than exports meaning the supply of sterling on the foreign exchanges will be increasing as importers sell pounds to pay for the imports. This will drive the value of the pound down. The effect of the depreciation should be to make your exports cheaper and imports more expensive, thus increasing demand for your goods abroad and reducing demand for foreign goods in your own country, therefore dealing with the balance of payments problem. Conversely, a balance of payments surplus should be eliminated by an appreciation of the currency.

Freeing internal policy - With a floating exchange rate, balance of payments disequilibrium should be rectified by a change in the external price of the currency. However, with a fixed rate, curing a deficit could involve a general deflationary policy resulting in unpleasant consequences for the whole economy such as unemployment. The floating rate allows governments freedom to pursue their own internal policy objectives such as growth and full employment without external constraints.

Absence of crises - Fixed rates are often characterised by crises as pressure mounts on a currency to devalue or revalue. The fact that, with a floating rate, such changes are automatic should remove the element of crisis from international relations.

Flexibility - Post-1973 there were great changes in the pattern of world trade as well as a major change in world economics as a result of the OPEC oil shock. A fixed exchange rate would have caused major problems at this time as some countries would be uncompetitive given their inflation rate. The floating rate allows a country to re-adjust more flexibly to external shocks.

Lower foreign exchange reserves - A country with a fixed rate usually has to hold large amounts of foreign currency in order to prepare for a time when they have to defend that fixed rate. These reserves have an opportunity cost.

Demerits

Uncertainty - The fact that a currency changes in value from day to day introduces instability or uncertainty into trade. Sellers may be unsure of how much money they will receive when they sell abroad or what their price actually is abroad. Of course the rate changing will affect price and thus sales. In a similar way importers never know how much it is going to cost them to import a given amount of foreign goods. This uncertainty can be reduced by hedging the foreign exchange risk on the forward market.

Lack of investment - The uncertainty can lead to a lack of investment internally as well as from abroad.

Speculation - Speculation will tend to be an inherent part of a floating system and it can be damaging and destabilising for the economy, as the speculative flows may often differ from the underlying pattern of trade flows.

Lack of discipline in economic management - As inflation is not punished there is a danger that governments will follow inflationary economic policies that then lead to a level of inflation that can cause problems for the economy. The presence of an inflation target should help overcome this.

Does a floating rate automatically remedy a deficit? - UK experience indicates that a floating exchange rate probably does not automatically cure a balance of payments deficit. Much depends on the price elasticity of demand for imports and exports. The Marshall-Lerner condition says that a depreciation in the exchange rate will help improve the balance of payments if the sum of the price elasticities for imports and exports is greater than one.

Inflation - The floating exchange rate can be inflationary. Apart from not punishing inflationary economies, which, in itself, encourages inflation, the float can cause inflation by allowing import prices to rise as the exchange rate falls. This is, undoubtedly, the case for countries such as UK where we are dependent on imports of food and raw materials

Q. 5 b. Distinguish between fixed and flexible exchange rates.

Ans:- An exchange rate is the price at which one country's currency trades for another on the foreign exchange market There are 2 extreme regimes of exchange rates – floating exchange rate and fixed foreign exchange rate.

Floating Exchange Rate : The floating exchange rate is a market-driven price for currency, whereby the exchange rate is determined entirely by the free market forces of demand and supply of currencies with no government intervention whatsoever.

Broadly, the floating exchange rate regime consists of the independent floating system and the managed floating system. The former is where exchange rate is strictly determined by the free movement of demand and supply. For managed floating system, exchange rate is also determined by free movement of demand and supply but the monetary authorities intervene at certain times to "manage" the exchange rate to prevent high volatilities.

Pros & Cons of Floating Exchange Rate

The floating exchange rate boasts various merits. Firstly, there is automatic correction in the floating exchange rate as the country simply lets it move freely to the equilibrium of demand and supply. Secondly, there is insulation from external economic events as the country's currency is not tied to a possibly high world inflation rate as is under a fixed exchange rate. The free movement of demand and supply helps to insulate the domestic economy from world economic fluctuations. Thirdly, governments are free to choose their domestic policy as a floating exchange rate would allow for automatic correction of any balance of payment disequilibrium that might arise from the implementation of domestic policy.

Nonetheless, there are also specific concerns about the exchange rate being unstable and uncertain under the floating exchange rate regime. Also, speculation tends to be higher in the floating exchange rate regime, hence leading to more uncertainty especially for traders and investors.

Fixed Exchange Rate : For a fixed exchange rate, the government is unwilling to let the country's currency float freely, and they state a level at which the exchange rate will stay. The government takes whatever measures that are necessary to maintain the rate and prevent it from fluctuating. There are two methods which exchange rate could be applied to the price of currencies, a fixed exchange rate and a pegged exchange rate.

Under the fixed exchange rate system, a decrease in the exchange rate which is infrequent are called revaluations. While an increase in the exchange rate are called devaluations. A devaluation in a fixed exchange rate will cause the current account balance to rise, making a country's export less expensive for foreigners and also discourage import by making import products more expensive for domestic consumers,. This will leads to an increase in trade surplus or a decrease in trade deficit. The opposite happens in a revaluation

Pros & Cons of Fixed Exchange Rate

Despite its rigidity, the fixed exchange rate regime is still used for several reasons. First, there is certainty in fixed exchange rate. With it, international trade and investment becomes less risky. Second, there is little or no speculation on a fixed exchange rate.

However, a fixed exchange rate contradicts the objective of having free markets and it is not able

to adjust to shocks swiftly like the floating exchange rate.

Q. 6. Discuss the need for HRM Strategies and International employee relations strategies in International business.

Ans:- Human resource management refers to the activities an organization carries out to use its

human resources effectively . These activities include determining the firm 's human resource

strategy , staffing , performance evaluation , management development , compensation , and

labor relations . None of these activities is performed in a vacuum all are related to the strategy

of the firm because , as we will see , HRM has an important strategic component . Through its

influence on the character , development , quality , and productivity of the firm 's human

resources , the HRM function can help the firm achieve its primary strategic goals of reducing

the costs of value creation and adding value by better serving customer needs .

The strategic role of HRM is complex enough in a purely domestic firm , but it is more complex

in an international business , where staffing , management development , performance evaluation

, and compensation activities are complicated by profound differences between countries in

labor markets , culture , legal systems , economic systems , and the like .

Human resources managers are a business organisations ‘people’ managers, responsible for

managing a wide range of employee responsibilities. The human resource manager in a multi-

national company with divisions or subsidiaries in foreign countries has all the normal HR

responsibilities plus a brace of additional tasks that are specific to offshore operations of his

department. He is literally responsible for international human resource management.

International human resource management functions cover many different activities related to a

business organization’s employees and contractors. The first and most important is the staffing

needs of the company whether staff members are company employees or outside contractors.

Other functions include recruiting and training employees, ensuring that they are performing at

expected levels or better, handling performance issues and making certain that personnel and

management policies conform to laws and regulations. IHR management is also involved in how

the company manages employee compensation and benefits, employee records and personnel

policies and practices. (hr-guide.com, 2007).

The primary difference between domestic human resource management and international human

resource management is the added knowledge and responsibilities required due to foreign

operations. These typically include language (in non-English speaking offshore organisations),

the local and national regulations and laws governing business operations within a foreign

country; currency exchange rates, career outlooks, company benefits and incentives and, perhaps

most important. The ethics and etiquette expectations of foreign business contacts. IHR

management people must understand these differences clearly and stand ready to keep other

company people informed of them to prevent embarrassing situations and unintentional

‘affronts’ from occurring

Basic human resources are a management activity while human resources development is

considered a profession. The latter is targeted more specifically to developing personnel inside

organisations through career development, organizational development and training activities.

Both functions have undergone very-significant evolutions during the past several decades so

that they now play major roles in staffing, managing and training people so that the will perform

in an optimum manner for the organisation. Today, international human resource management is

the fastest-growing subset of HR due to the growing trend for global business operations.

Still other international human resource management activities include ensuring workplace

safety through dealing with drugs and drug problems, employee assistance, ergonomics,

spirituality and diversity. In these efforts multiple sets of regulations must be used as guidelines;

those of the company and those arising from being in a foreign nation with different laws,

regulations and etiquettes. (managementhelp.org, 2007).

The multi-national responsibilities of international human resource management require

schooling in psychology as well as the culture and customs of business in offshore nations. MBA

programs at more than seventy universities currently offer International MBA programs carefully

tailored to match the needs of students who plan on careers with multi-national business

organisations. Courses are also offered in international human resource management and

development for the same purpose. It is clear that IHRM is a growing field in multi-national

business operations that will continue to offer excellent employment opportunities for people

well versed in its international operations.

Q.1 Discuss the issues involved in international product policy and International branding with a few examples.

Ans:-   Issues involved in international product policy and International branding

Product Need Satisfaction.  We often take for granted the “obvious” need that products seem to fill in our own culture; however, functions served may be very different in others—for example, while cars have a large transportation role in the U.S., they are impractical to drive in Japan, and thus cars there serve more of a role of being a status symbol or providing for individual indulgence.  In the U.S., fast food and instant drinks such as Tang are intended for convenience; elsewhere, they may represent more of a treat.  Thus, it is important to examine through marketing research consumers’ true motives, desires, and expectations in buying a product.

The International Product Life Cycle (PLC).  Consumers in different countries differ in the speed with which they adopt new products, in part for economic reasons (fewer Malaysian than American consumers can afford to buy VCRs) and in part because of attitudes toward new products (pharmaceuticals upset the power afforded to traditional faith healers, for example).  Thus, it may be possible, when one market has been saturated, to continue growth in another market—e.g., while somewhere between one third and one half of American homes now contain a computer, the corresponding figures for even Europe and Japan are much lower and thus, many computer manufacturers see greater growth potential there.  Note that expensive capital equipment may also cycle between countries—e.g., airlines in economically developed countries will often buy the newest and most desired aircraft and sell off older ones to their counterparts in developing countries.  While in developed countries, “three part” canning machines that solder on the bottom with lead are unacceptable for health reasons, they have found a market in developing countries.

Branding.  While Americans seem to be comfortable with category specific brands, this is not the case for Asian consumers.  American firms observed that their products would be closely examined by Japanese consumers who could not find a major brand name on the packages, which was required as a sign of quality.  Note that Japanese keiretsus span and use their brand name across multiple industries—e.g., Mitsubishi, among other things, sells food, automobiles, electronics, and heavy construction equipment.

 

PROMOTIONAL ISSUES

Promotional objectives.  Promotional objectives involve the question of what the firm hopes to achieve with a campaign—“increasing profits” is too vague an objective, since this has to be achieved through some intermediate outcome (such as increasing market share, which in turn is achieved by some change in consumers which cause them to buy more).  Some common objectives that firms may hold:

Awareness.  Many French consumers do not know that the Gap even exists, so they cannot decide to go shopping there.  This objective is often achieved through advertising, but could also be achieved through favorable point-of-purchase displays.  Note that since advertising and promotional stimuli are often afforded very little attention by consumers, potential buyers may have to be exposed to the promotional stimulus numerous times before it “registers.” Trial. Even when consumers know that a product exists and could possibly satisfy some of their desires, it may take a while before they get around to trying the product—especially when there are so many other products that compete for their attention and wallets.  Thus, the next step is often to try get consumer to try the product at least once, with the hope that they will make repeat purchases.  Coupons are often an effective way of achieving trial, but these are illegal in some countries and in some others, the infrastructure to readily accept coupons  (e.g., clearing houses) does not exist.  Continued advertising and point-of-purchase displays may be effective.  Although Coca Cola is widely known in China, a large part of the population has not yet tried the product. Attitude toward the product.  A high percentage of people in the U.S. and Europe has tried Coca Cola, so a more reasonable objective is to get people to believe positive things about the product—e.g., that it has a superior taste and is better than generics or store brands.  This is often achieved through advertising. Temporary sales increases.  For mature products and categories, attitudes may be fairly well established and not subject to cost-effective change.  Thus, it may be more useful to work on getting temporary increases in sales (which are likely to go away the incentives are removed).  In the U.S. and Japan, for example, fast food restaurants may run temporary price promotions to get people to eat out more or switch from competitors, but when these promotions end, sales are likely to move back down again (in developing countries, in contrast, trial may be a more appropriate objective in this category). 

Legal issues.  Countries differ in their regulations of advertising, and some products are banned from advertising on certain media (large supermarket chains are not allowed to advertise on TV in France, for example).  Other forms of promotion may also be banned or regulated.  In some European countries, for example, it is illegal to price discriminate between consumers, and thus coupons are banned and in some, it is illegal to offer products on sale outside a very narrow seasonal and percentage range.

Language issues.  Language is an important element of culture.  It should be realized that regional differences may be subtle.  For example, one word may mean one thing in one Latin American country, but something off-color in another.  It should also be kept in mind that much information is carried in non-verbal communication.  In some cultures, we nod to signify “yes” and shake our heads to signify “no;” in other cultures, the practice is reversed.  Within the context of language:

There are often large variations in regional dialects of a given language.  The differences between U.S., Australian, and British English are actually modest compared to differences between dialects of Spanish and German. Idioms involve “figures of speech” that may not be used, literally translated, in other languages.  For example, baseball is a predominantly North and South American sport, so the notion of “in the ball park” makes sense here, but the term does not carry the same meaning in cultures where the sport is less popular. Neologisms involve terms that have come into language relatively recently as technology or society involved.  With the proliferation of computer technology, for example, the idea of an “add-on” became widely known.  It may take longer for such terms to “diffuse” into other regions of the world.  In parts of the World where English is heavily studied in schools, the emphasis is often on grammar and traditional language rather than on current terminology, so neologisms have a wide potential not to be understood.   Slang exists within most languages.  Again, regional variations are common and not all people in a region where slang is used will necessarily understand this.   There are often significant generation gaps in the use of slang.

Writing patterns, or the socially accepted ways of writing, will differs significantly between cultures. 

Pricing Issues in International Marketing

Price can best be defined in ratio terms, giving the equation

resources given upprice  =     ———————————————               

goods received

This implies that there are several ways that the price can be changed:

“Sticker” price changes—the most obvious way to change the price is the price tag— you get the same thing, but for a different (usually larger) amount of money. Change quantity. Often,

consumers respond unfavorably to an increased sticker price, and changes in quantity are sometimes noticed less—e.g., in the 1970s, the wholesale cost of chocolate increased dramatically, and candy manufacturers responded by making smaller candy bars. Note that, for cash flow reasons, consumers in less affluent countries may need to buy smaller packages at any one time (e.g., forking out the money for a large tube of toothpaste is no big deal for most American families, but it introduces a greater strain on the budget of a family closer to the subsistence level). Change quality. Another way candy manufacturers have effectively increased prices is through a reduction in quality. In a candy bar, the “gooey” stuff is much cheaper than chocolate. It is frequently tempting for foreign licensees of a major brand name to use inferior ingredients. Change terms. In the old days, most software manufacturers provided free support for their programs—it used to be possible to call the WordPerfect Corporation on an 800 number to get free help. Nowadays, you either have to call a 900 number or have a credit card handy to get help from many software makers. Another way to change terms is to do away with favorable financing terms.

Reference Prices. Consumers often develop internal reference prices, or expectations about what something should cost, based mostly on their experience. Most drivers with long commutes develop a good feeling of what gasoline should cost, and can tell a bargain or a ripoff.

Reference prices are more likely to be more precise for frequently purchased and highly visible products. Therefore, retailers very often promote soft drinks, since consumers tend to have a good idea of prices and these products are quite visible. The trick, then, is to be more expensive on products where price expectations are muddier.

Marketers often try to influence people’s price perceptions through the use of external reference prices—indicators given to the consumer as to how much something should cost. Examples include:

Manufacturer’s Suggested Retail Price (MSRP). This is often pure fiction. The suggested retail prices in certain categories are deliberately set so high that even full service retailers can sell at a “discount.” Thus, although the consumer may contrast the offering price against the MSRP, this latter figure is quite misleading. “SALE! Now $2.99; Regular Price $5.00.” For this strategy to be used legally in most countries, the claim must be true (consistency of enforcement in some countries is, of course, another matter). However, certain products are put on sale so frequently that the “regular” price is meaningless. In the early 1990s, Sears was reported to sell some 55% of its merchandise on sale. “WAS $10.00, now $6.99.” “Sold elsewhere for $150.00; our price: $99.99

CULTURE OF INTERNATIONAL MARKETING

Culture is part of the external influences that impact the consumer. That is, culture represents influences that are imposed on the consumer by other individuals.

The definition of culture offered one text is “That complex whole which includes knowledge, belief, art, morals, custom, and any other capabilities and habits acquired by man person as a member of society.”  From this definition, we make the following observations:

Culture, as a “complex whole,” is a system of interdependent components. Knowledge and beliefs are important parts.  In the U.S., we know and believe that a person who is skilled and works hard will get ahead. In other countries, it may be believed that differences in outcome result more from luck.  “Chunking,” the name for China in Chinese, literally means “The Middle Kingdom.”  The belief among ancient Chinese that they were in the center of the universe greatly influenced their thinking. Other issues are relevant.  Art, for example, may be reflected in the rather arbitrary practice of wearing ties in some countries and wearing turbans in others.  Morality may be exhibited in the view in the United States that one should not be naked in public.  In Japan, on the other hand, groups of men and women may take steam baths together without perceived as improper.  On the other extreme, women in some Arab countries are not even allowed to reveal their faces.  Notice, by the way, that what at least some countries view as moral may in fact be highly immoral by the standards of another country. 

Culture has several important characteristics: 

Culture is comprehensive.  This means that all parts must fit together in some logical fashion.  For example, bowing and a strong desire to avoid the loss of face are unified in their manifestation of the importance of respect. 

Culture is learned rather than being something we are born with.  We will consider the mechanics of learning later in the course. 

Culture is manifested within boundaries of acceptable behavior.  For example, in American society, one cannot show up to class naked, but wearing anything from a suit and tie to shorts and a T-shirt would usually be acceptable.  Failure to behave within the prescribed norms may lead to sanctions, ranging from being hauled off by the police for indecent exposure to being laughed at by others for wearing a suit at the beach.

Conscious awareness of cultural standards is limited.  One American spy was intercepted by the Germans during World War II simply because of the way he held his knife and fork while eating. 

Cultures fall somewhere on a continuum between static and dynamic depending on how quickly they accept change.  For example, American culture has changed a great deal since the 1950s, while the culture of Saudi Arabia has changed much less.

CONCLUSION

If the exporting departments are becoming successful but the costs of doing business from headquarters plus time differences, language barriers, and cultural ignorance are hindering the company’s competitiveness in the foreign market, then offices could be built in the foreign countries. Sometimes companies buy firms in the foreign countries to take advantage of relationships, storefronts, factories, and personnel already in place. These offices still report to headquarters in the home market but most of the marketing mix decisions are made in the

individual countries since that staff is the most knowledgeable about the target markets. Local product development is based on the needs of local customers. These marketers are considered polycentric because they acknowledge that each market/country has different needs.

Q.2 a. Why do you think International quality standards are essential in International business?

Ans:-Importance of quality and the need for continuous improvement in all sectors, covering

manufacturing and service; health; education; the Government sector; the non-profit sector of the

various associations, and voluntary organizations, etc. striving to promote quality, continuous

improvement, and organizational excellence.

In a global economy where success depends on quality, innovation and sustainability, National

Quality Week is an opportunity to reinforce these as the foundations of any organization and

focus on the importance of Quality.

Quality movement’s origins can be traced back to W. Edward Deming, Joseph M. Juran and

Philip B. Crosby, and even further back, to Frederick Taylor in the 1920s.

Taylor is the “father of scientific management.” As manufacturing moved into larger plants,

between the 1920s and the 1950s, the terms and processes of quality control developed.

During this time productivity was emphasized and quality was checked at the end of the line. As

industrial plants became larger, post-production checks became more difficult and statistical

methods began to be used to control quality.

After World War 11, with its industries in ruin, Japan to reconstruct its economy, the Japanese

set out in earnest to improve quality and as a result in the year 1950, they sought the help of

American advisors, notably Drs Deming and Juran.

Japanese senior managers started to master total quality control and they began to integrate

broader management principles of quality values throughout all business activities.

The strategies used involved high-level managers as leaders, all levels and functions were trained

in managing for quality, continuous progress was undertaken, quality circles were used, and the

entire workforce was enlisted.

As a result of this approach, Japanese quality caught up with that of the West in the 1970s, as

improved Japanese products flooded the marketplace.

This lesson has not gone unnoticed as United States and Western countries started to use

“Quality” as part of their organizations and country’s top agenda. It took twenty years of

concerted effort to revamp Japan’s industrial system. With growing global competition,

“Quality” is becoming increasingly important to all organizations as rapid evolution in markets is

fueled by changing customer needs.

In the future the customer and not the manufacturer would define quality. The whole workforce

from the CEO to the line worker must be involved in a shared commitment to improving quality

of products or services of any organization.

In other words, it is an integration of all functions of a business to achieve high quality of

products or service through continuous improvement efforts of all employees. It involves every

aspect of the company: processes, environment and people.

Quality revolves around the concept of meeting or exceeding customer expectation applied to the

product and service. Achieving high quality is an ever changing, or continuous, process therefore

quality management emphasizes the ideas of working constantly toward improved quality.

If your product and service quality is not consistent with the market requirements you may lose

customers, thereby losing sales and having difficulty in building or recovering your brand image.

Quality is considered to be one of the management’s important priorities in any organization in

view of the stiff competition taking place in the local and international markets. It is an accepted

fact that managing quality right throughout the organization is essential for any organization

success and growth.

Managing “Quality” is not an easy task due to the diversity of customer needs and requirements

taking place in the ever changing markets. As such organizations need to understand the basis of

quality management, including quality control and assurance, in manufacturing and service

businesses. Maintaining quality isn’t enough.

It is important to have a continuous quality improvement program integrated with the strategic

business plan to make any organization a successful one.

Over the years, to help the organizations to go in this direction many important concepts coupled

with management have been introduced to world.

Those well-known systems are ISO 9001, Total Quality Management (TQM), Baldrige Award,

Six sigma, Lean Manufacturing and Toyota Way and these concepts and tools are practiced by

many organizations in Sri Lanka.

In fact, the Sri Lanka Standards Institution has introduced the Sri Lanka National Quality

Awards (SLNQA) in line with the Baldrige to pass the benefits to local organizations. However,

the successful implementation of the above models relies on the Implementers’ knowledge and

understanding of the concepts and the application of the concepts considering the unique

situation of the organization.

Since the approach of all above models is process-oriented management, it is worthwhile to

indicate that if any of the above models are practiced in the right manner within any organization

those organizations are in the direction of results-oriented management.

But to apply sound quality management, the producer requires full support from many

specialized fields such as standards, calibration, training, testing, and certification and

accreditation.

Standardization

Standards are documents approved by a recognized body, that provides, for common and

repeated use, rules, guidelines or characteristics for products or related processes and production

methods, and related management system practices with which compliance is not mandatory.

Standards become a vehicle for sharing of knowledge, technology and good practices, an

essential component of the worldwide industrial and post industrialist infrastructure, supporting

economic activities, societal needs and more equitable opportunities - in other words, sustained

development.

The main features of standardization revolve round interchangeability, variety reduction;

improved communication of technical criteria, commonly agreed safety and performance

parameters.

Standardization applies to:

Raw materials, parts and components, sub-assemblies and finished products

Processes

Testing methods

Calibration of instruments

Sampling methods

Standards provide many benefits to all sectors of the economy, for example:

Business - Standards ensure that businesses become sustainable as standards help to

ensure the efficiency and quality output. In other words standards impact the bottom

line.

Consumer - Standards serve as protection for public health and safety, guaranteeing

quality products.

Trade - Standards facilitate trade by making products competitive in international

markets.

Governments - Standards enable Governments to implement technical regulations.

Society - Standards offer protection and contribute positively to economic prosperity and

growth.

It is important to note that the standards provide guidance to trade and therefore every

organization that focuses at serious business to have its own set of standards that are perhaps

more stringent than the national standards so as to gain competitive edge in the marketplace.

Q.2 b. Give a note on Robotics and flexible manufacturing.

Ans:- When most engineers think about “flexibility,” they imagine robots. Because of programmable controls, end-of-arm tooling and machine vision systems, the devices can perform a wide variety of repeatable tasks.

“Robotics is a key component of flexible manufacturing,” claims Ted Wodoslawsky, vice president of marketing at ABB Robotics Inc. (Auburn Hills, MI). “Any applications that involve high-mix, high-volume assembly require flexible automation. Manufacturers need the ability to run different products on the same line. That’s much more difficult to do with hard automation.”

The automotive industry is still considered to be the role model for robotic flexibility. However, Wodoslawsky says many of the lessons learned by automakers and suppliers can easily be applied to other industries and processes.

“Automotive manufacturers are faced with producing a greater mix of vehicles in a shrinking number of plants,” adds Walter Saxe, automotive business development manager at Applied Robotics Inc. (Glenville, NY). “This practice is driving the need for higher payloads, faster tool changeover and greater control of data to achieve maximum flexibility and exacting production details. This in turn is challenging the makers of robots and tools to stay ahead of the ever-increasing market needs by advancing technologies before they are needed.

” For instance, state-of-the-art robots feature force control, which offers an extra degree of flexibility for critical applications such as powertrain assembly. Other new tools and features that make robots more suitable for flexible production applications include open architecture that allows easy integration with commonly used PLC platforms and offline simulation from desktop computers.

“[Manufacturing engineers should ensure their] controls platform has the ability to manage, manipulate and store all the data that is required with flexible implementation schemes,” says David Huffstetler, market manager at Staubli Robotics (Duncan, SC). “It can become a critical issue in places where you least expect it to happen.

Q.3 a. What is transfer pricing?

Ans:- Transfer pricing is the rates or prices that are utilized when selling goods or services between company divisions and departments, or between a parent company and a subsidiary. The transfer pricing that is set for the exchange may be the original purchase price of the goods in question, or a rate that is reduced due to internal depreciation. When used properly, transfer pricing can help to more efficiently manage profit and loss ratios within the company. Generally, transfer pricing is considered to be a relatively simple method of moving goods and services among the overall corporate family.

In situations where the transportation of goods is involved in the transaction, the transfer pricing may include both a fixed price per unit transferred, plus additional charges to cover the cost of shipping. This model is especially helpful when the transfer takes place between a parent company and a subsidiary. The larger entity can arrange the shipping through a discounted shipping plan that the smaller entity may not be able to access. The end result is that the transfer

pricing makes it possible to move the goods with the smallest amount of expense to the company as a whole.

In addition, transfer pricing is a great way to move goods from one company division or department to another without generating a lot of postings on the Accounts Receivable and Accounts Payable books. The value of the goods is simply moved from one division to the other, a process that greatly simplifies the process. Normally, there is a simple form that accompanies the physical transfer of the goods, and is used by both the sender and the recipient to make appropriate posts in company accounting records. This process eliminates the necessity for invoices, tariffs, internal bills of lading, and other documents that would normally apply to a new purchase using an outside vendor.

While the main purpose of transfer pricing is to enhance the overall value of the corporate family of companies, there are instances when this type of transaction can be abused. This is especially true when transfers to international locations are conducted. Today, many countries have regulations to help prevent the use of transfer pricing as a means of evading taxes or similar unethical and illegal activities.

Q.3 b. Write a short note on Bills of Exchange and Letters of credit.

Ans:- Bills of Exchange

Bills of exchange are financial documents that require the individual or business that is addressed in the document to pay a specified amount of money on a date that is cited within the text of the document. Considered to be a negotiable instrument, the date for the demand to pay generally ranges from the current date to a date within the next six calendar months. A bill of exchange will also require the authorized signature of the debtor in order to be considered legal and binding.

As an unconditional order to pay a fixed sum of money to a creditor, the bill of exchange can take on many different forms. One of the most common examples of the bill of exchange is the common bank check. A check specifies who is to receive the funds, with the order to pay the face value of the check to the order of the creditor. The exact amount of the payment is specified. The date specified on the check is often the issue date for the check, but may also be the date that the bank is to honor the payment. This process is referred to as post dating a check, since the creditor will physically receive the check at some time before it will be honored.

It is also possible to establish a bill of exchange in the form of a bank draft. Like the bank check, drafts are normally set up with a fixed sum of payment, and with specific instructions of when to issue the payment to the creditor.

The bill of exchange can be a very simplistic document, or one that is very detailed. In many countries around the world, the use of a bill of exchange is a common means of conducting business, and is often accompanied by an allonge. In situations where the bill of exchange is not

honored, the holder of the document is free to take legal action against the debtor according to local laws, or to sell the bill of exchange to a collector at a discounted rate of exchange.

Letters of credit

A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be

received on time and for the correct amount. In the event that the buyer is unable to make

payment on the purchase, the bank is required to cover the full or remaining amount of the

purchase. A letter of credit is often abbreviated as LOC or LC, and is also referred to as a

documentary credit. The parties to a letter of credit are usually an applicant who wants to send

money, a beneficiary who will receive the money, the issuing bank and the advising bank.

Letters of credit are often used for international transactions to ensure that payment will be received. They have become an important aspect of international trade, due to differing laws in each country and the difficulty of knowing each party personally. The bank also acts on behalf of the buyer, or holder of the letter of credit, by ensuring that the supplier will not be paid until the bank receives confirmation that the goods have been shipped.

A letter of credit is often confused with a bank guarantee, which is similar in many ways but not the same thing. The main difference is the bank's position relative to the buyer and seller of a good or service in the event of the buyer's default of payment. With a letter of credit, a seller may request that a buyer provide them with a letter obtained from a bank which substitutes the bank's credit for their client's.

In the event of the borrower defaulting, the seller can go to the buyer's bank for the payment. Instead of the risk that the buyer will not pay, the seller only faces the risk that the bank will be unable to pay, which is unlikely. This means that if the applicant obtaining the letter of credit fails to perform his or her obligations, the bank must pay. The letter of credit can also be the source of payment for a transaction, meaning that an exporter will get paid by redeeming the letter of credit. A letter of credit is less risky for the merchant, but even riskier for a bank.

Q. 5 a. Make a note of the functions and achievements of UNCTAD.

Ans:- The United Nations Conference for Trade and Development was established in the

year 1964.

The sole aim of the organization is to integrate the developing economies into the world

economy. It's an organization to ensure that the domestic policies and international actions are

supportive for maintaining sustainable development.

Functions of UNCTAD

The secretariat of the United States work with the member Governments by interacting with the

organizations of the United Nations system, Government Institutions, research institutes and

NGOs.

The Important key functions of UNCTAD are as follows:

It aims at building consensus among the nations by exchanging experiences.

It deals with research, policy and data collection.

Helps to the developing nations of the world by providing technical assistance.

Achievements of UNCTAD

During its 40 years of existence, UNCTAD has to its credit, a formidable array of often trail blazing achievements. These have been well-documented in the relevant literature. To name only a few of its significant achievements, UNCTAD prompted IMF to expand its compensatory financing facility. It helped in keeping alive the issue of creating additional liquidity under IMF, by linking it to the provision of additional resources for development. It simulated discussion in the World Bank on Supplementary Financing which had far-reaching implications for the strategy the Bank subsequently adopted for supporting development in developing countries. Its decisions helped in operationalizing the ODA target, while its work on external debt led to the creation of the Paris Club and measures to alleviate the debt burden. The first ever generalised system of preferences (GSP) was negotiated in UNCTAD. It provided a forum for negotiating some very significant international commodity agreements, and through its Integrated Programme for Commodities (IPC), it put in place the structure of an ambitious programme for negotiating and implementing such agreements, including buffer stock financing, for practically all the commodities of export interest to developing countries. It is a different matter that IPC never got going.

Through its research and policy analysis work, UNCTAD became the breeding ground for new ideas. Through this work, it highlighted the inequities and anomalies prevailing in hitherto secluded and unexplored recesses of the world economy like insurance, shipping, technology transfer etc. Its studies documented declining terms of trade of the developing countries, the cost of tied aid for the beneficiary countries, the importance of non-tariff barriers, and the gap between the effective and nominal tariff rates. If there is today a greater transparency in the world economic system, it is in no small measure due to the relentless manner in which UNCTAD, particularly in its initial years, went about exposing the unfairness of the system. According to a Northern commentator writing barely four years after the operationalization of

UNCTAD, “UNCTAD has impressed the rich with the problems of the poor, has given impetus to new proposals and has stimulated other international agencies to re-examine and intensify their efforts”.

Its achievements have therefore been of different kinds and of varying impact. Among the most

significant achievements reported to the Inspector by the UNCTAD secretariat could be

included:

The agreement on the Generalized System of Preferences (GSP) (1971), under which

over $70 billion worth of developing countries' exports receive preferential treatment in

most developed country markets every year;

The setting up of the Global System of Trade Preferences among Developing Countries

(1989);

Tthe adoption of the Set of Multilaterally Agreed Principles for the Control of Restrictive

Business Practices (1980);

Negotiations of International Commodity Agreements, including those for cocoa, sugar,

natural rubber, jute and jute products, tropical timber, tin, olive oil and wheat;

The establishment of transparent market mechanisms in the form of intergovernmental

commodity expert and study groups, involving consumers and producers, including those

for iron ore, tungsten, copper and nickel;

The negotiation of the Common Fund for Commodities (1989), set up to provide

financial backing for the operation of international stocks and for research and

development projects in the field of commodities, and which did not fulfil many

expectations of the developing countries;

The adoption of the resolution on the retroactive adjustment of terms of Official

Development Assistance (ODA) debt of low-income developing countries under which

more than fifty of the poorer developing countries have benefited from debt relief of over

$6.5 billion;

The establishment of guidelines for international action in the area of debt rescheduling

(1980);

The Agreement on a Special New Programme of Action for the Least Developed

Countries (1981);

The Programme of Action for the Least Developed Countries for the 1990s (1990);

The negotiation of conventions in the area of maritime transport: United Nations Convention on a

Code of Conduct for Linear Conferences (1974), United Nations Convention on International

Carriage of Goods by Sea (1978), United Nations Convention on International Multimodal

Transport of Goods (1980), United Nations Convention on Conditions for Registration of Ships

(1986), United Nations Convention on Maritime Liens and Mortgages (1993).

Q. 5 b. Give reasons for the slow growth towards achieving international accounting

standards.

Ans: - IFRS has been adopted by more than 12,000 companies in over 100 nations and is becoming the global standard for the preparation of financial statements of public companies throughout the world. However, in the U.S., GAAP (General Accepted Accounting Principles) is applied. Recently, the G20 leaders have called for significant progress towards moving to one set of high-quality global accounting standards. President Obama also called for one set of standards and substantial progress to be made in 2009. Now SEC is working on an updated "roadmap" that will layout a schedule and major milestones for moving U.S. towards its adoption by all U.S. public companies. There are advantages and disadvantages of converting to IFRS, and various arguments have made for and against its adoption.

A single set of accounting standards will provide comparability, and enable companies from different parts of the world to apply the same standards. It increases transparency, allowing easier cross-border investment with greater liquidity and low cost of capital. It will also cut down the time and costs of preparing financial statements according to different standards and regulations, achieving enormous savings of capital in the longer term. The transition cost is estimated to be 8 billion dollars for the entire U.S. economy, with average one-time cost of $3.24 million dollars for multinational corporations. Since the financial reports were reduced from three to one, they will save money in the long run. The adoption of IFRS and use of uniform accounting standards will also eliminate the possible different accounting results from applying different standards and help investors to pursue various strategies including global investment diversification.Many companies may soon be required to report in multiple accounting standards if the US does not either accept or move toward IFRS. Maintaining multiple standards reporting

only increases accounting and auditing costs and provides no value to any country. Over 100 countries have adopted or in the process of adopting IFRS. Delays in adopting IFRS by the US will make multi-national companies to report their primary reports in IFRS, resulting in parallel reports in US GAAP.

This will create more auditing fees and possible errors. The US should move towards the IFRS standards as a matter of urgency. As more and more countries adopt IFRS, it is in the U.S. interests to apply the same accounting standards. Most of the U.S. companies will benefit from one set of accounting standards since are multinational companies and they operating globally. IFRS will make it easier to control and monitor their subsidiaries in foreign countries and achieve cost savings from maintaining several accounting standards. It can also help to eliminate potential financial misunderstandings and simplify investment decisions. With its strong moral standard, intolerance for unethical behavior, the US has been a world leader for centuries. Its financial and accounting standards have been used by other countries as a yardstick to measure their economic and financial success until recently. We need to be a leader and the driving force in establishing and adopting international standards.

It is the time for us to get involved and play an important role in shaping the international standards. Otherwise, it will hurt us in the long run. Competition works and is a good thing because it will ensure better quality with lower price. Competition between different sets of standards will offer the advantage of getting better information. There is really no one size fits all standards. The uniform single accounting standard can stifle innovation, ingenuity, competition, creativity and capitalism entrepreneurship. The differences between GAAP and other countries' standards can be very useful and provide insight into the reasons and values they conduct financial reporting in a particular way. By focusing on our differences, we will benefit from increased productivity, higher quality, technological innovation, thus better meet the demands of the marketplace. Switching to IFSB will give IASB monopoly status, with the potential to compromise the quality of the IASB standards. A recent survey shows that to convert to IFRS, U.S. companies have to pay more than their European counterparts. The added benefits of comparability versus cost to implement IFRS will not justify the adoption.

According to the SEC, it will cost.12% of revenues to implement the standards nationwide, which means the cost can be as high as several billion dollars. The cost to achieve the additional comparability is not worth several billion dollars. It will drain on our slowly recovering economy. From a cost benefit perspective, convergence is obviously superior to adoption. Transition to IFRS itself can present be a lot of challenges. The economy of the U.S. is the largest in the world and nobody knows exactly the scope and magnitude of applying IFRS to such a large economy. IFRS has not been tested in any country like the U.S. On the other hand, U.S. GAAP has been evolving with various changes in the U.S. and stands the test of time, especially the frauds such as Enron and Tyco International.

Enforcement can also create some problems. While the U.S. has effective enforcement, it is very challenging to implement stringent enforcement among those member countries due to the differences in economic and political system among the adopting nations and their financial

reporting practices. In summary, adopting IFRS will provide comparability, increased audit efficiency, reduced information misunderstanding and cost savings as more and more economic activities become globalized. The flip side is it will eliminate competition and incentives to innovate. The quality will suffer since compromises have to be made to achieve consensus due to various political pressures and economic interest. However many support for a move to a single set global accounting standards and it is believed that the U.S. will ultimately IFRS or have IFRS and U.S. GAAP coexist.

Q. 6 a. Give a note on the Japanese approach to HRM.

Ans:- Human resource management (HRM) has been perceived by many observers as a key ingredient accounting for the success of Japanese companies on world markets during the 1980s. Suggestions of how Western managers could learn from Japanese HRM practices were plentiful. Only one decade later, however, Japan went into a recession from which it has not yet fully recovered. Paradoxically, these same HRM practices are now being viewed by a series of authors as the root of the malaise. This chapter investigates whether Japanese HR managers are now planning to learn from the West. More specifically, it explores whether Japanese HR managers are keen to learn from Western (in this case American and German) HRM and what they intend to adopt. In order to find answers to these questions we study Japanese HR managers intentions and practices at two levels: at headquarters (HQ) and at subsidiary level.

As the ‘traditional’ Japanese HRM modelii is increasingly regarded to be in crisis and subject to major change (Dalton and Benson, 2002), this issue is of particular significance for Japanese companies. Indeed, one can argue that the question of whether, or to what extent, Japan should incorporate Western management practices, is standing now for the last one and a half decades at the centre of Japanese management research. Frenkel (1994) observed a convergence toward Western HRM practices, Ornatowski (1998) even discussed the end of Japanese-style HRM, Matanle (2003) noted a part convergence in the direction of Western management and Aoki, Jackson and Miyajima (2007) and Schaede (2008) described irreversible tendencies toward an adaptation of Western management concepts. Yet despite this research focus, there is little empirical work on managers’ knowledge of practices elsewhere, and on their views on cross-national adoption. This seems to be a serious omission: such adoption processes are implemented by managers rather than academics; and it is surprising that little empirical research has been done in order to understand better those perceptions and judgments upon which adoption decisions ultimately rely.iii This viewpoint guides the empirical focus of the research.

One obvious difficulty we are presented with if we wish to answer the question what Japan can learn from ‘the West’ is the selection of countries that are representative of ‘the West’. In this study we limit our empirical research to the inspirations Japan might receive from the USA and Germany. This selection has some merit, in representing the largest and the third largest developed economies in the world (with Japan being the second largest economy), and the economically dominant nations of North America and Europe (with Japan being the leading economy in Asia). In addition, the USA and Germany each embody the prime example of two of

the three main varieties of market economies: the USA representing the free market economy of Anglo-Saxon countries and Germany the social market economy of continental Europe (with Japan embodying the third main variety of market economies, the government-induced market economy of East-Asia). Furthermore, according to Smith & Meiksins (1995: 243) the USA, Japan and Germany are most frequently referred to as role models, “as they provide ‘best practice’ ideals from which other societies can borrow and learn.” Consequently, these country models have been subject to numerous comparative analysis (Thurow, 1992; Garten, 1993; Yamamura and Streeck, 2003; Pascha, 2004; Jacoby, 2005). As economic performance and growth paths vary over time the role of a ‘dominant’ economy also rotates among countries. In the 1950s, 1960s and most of the 1970s the American management style clearly was dominant and a common expectation was that it would spread around the world, gaining application in many foreign countries. From the late 1970s to the early 1990s, this argument increasingly was applied to Japan (Mueller, 1994), and to a lesser extent and limited to the European context, to Germany (Albert, 1991; Thurow, 1992). Since the implosion of the Japanese economy, the stagnation of the German economy, and with the advent of globalization, the conventional wisdom over the last one and a half decades up to the current economic crisis has been that the American management model is particularly well suited to provide the necessary flexibility to cope with rapidly evolving economic and technological conditions. Consequently, the USA became again the dominant role model (Edwards et al., 2005).

Japanese firms are compelled to compete in global markets. Severe competition in the global markets means that participants are forced to accept the low market rate of returns and high risks of the markets’ growth. The issue of how to manage their human resources in the global competition age is a salient challenge for Japanese management.

In the successful three decades, the domestic and foreign market had been continuously growing. In that period, Japanese employers provided long term employment and paid employees on a seniority basis, which drove employees to work hard. Growing markets enabled the employers to make a benevolent cycle in which increased pay based on good firm performance led to high commitment by employees, and in turn, this high commitment led to more pay based on the good performances of firms. In fact, this benevolent cycle, however, just depended on a continuous expansion of markets. Therefore, with the collapse of the ‘bubble economy’ in the beginning of the 1990s, these traditional HRM arrangements required transformation.

A demise of the steady growing market meant an exhaustion of the available funds for distribution. Consequently, Japanese employers introduced the performance oriented HRM system in which they paid more money to those who contributed more to the firms and paid less to those who did less. The Japanese employers naively believed that the principle to pay more for a good job and less for a poor job should work well to motivate employees. Their expectation, however, was completely unfounded. The issue that they should have learnt from the previous fifteen years of workplace experience was not understood. Indeed, a majority of Japanese employees worked hard and performed their jobs well, but most of them were not evaluated proficiently and not paid accordingly to their performance, because the number of the employees to be rated excellently was limited. As a result, most of employees lost their enthusiasm for their

jobs and the company performance worsened. In other words, the benevolent cycle in the past successful three decades turned into a vicious cycle in the following fifteen years.

The relative evaluation for employees was certainly one of the factors that prevented the performance oriented HRM from creating another benevolent cycle. Nonetheless, the most important reason why the performance oriented HRM system had a functional failure was that the employers transferred market risk to the employees. Many employers linked the funds to pay to employees as bonuses (lump sum payment) to the performance of the firms. In fact, some employers changed the proportion of excellent employees according to the firm’s performance, and other employers paid employees directly based on their contribution to the performance of firms. The linkage between a firm’s performance and the employee’s wage meant that employees as well as stockholders and corporate managers had to take their share of risk of a company’s performance. However, agency theory explains that an employee, who usually is risk averse, would not take share of risk because a risk averter exerts less effort and performs less if risks are imposed on him or her (Milgrom & Roberts 1992).

Additionally, Japanese employers downsized surplus manpower concomitantly with introduction of a pay for performance scheme. Some employers dismissed people based on their job performance. As a result, employees were exposed to two kinds of risks: the income variable risk and the unemployment risk. Employees were forced to work hard for the fear that they might be paid less next time, or they might be fired some day. The employees left in the firms who luckily survived downsizing could not help, but undertake the work of others who quit their jobs. Currently, many overworked Japanese employees are exhausted and hate the performance oriented HRM system. Most workers cannot work comfortably, efficiently and effectively under the fear of unemployment and sudden reduction of wage.

Two hypotheses are proposed. First, Japanese employers adopted a new type of HR initiative with the expectation that these frameworks would lead to more favourable outcomes. Second, their decision to change the HRM system from people oriented to performance oriented was theoretically justified, but poorly operated. Judging from the observations and analyses so far, a reasonable conclusion is that the Japanese employers embraced a system that did not realise their desired objectives.

A performance oriented HRM system was less compatible with Japanese people or a Japanese organisation. The introduced performance oriented HRM system threatened employees into hard work with the exposure to the risks of unemployment and sudden reduction of salary. A system like this is unlikely to either promote the institutional cohesiveness of the group or develop organisational skills. It follows that the Japanese firms are likely to consider changing the HRM from people oriented to job oriented in the future, although this change might be the result of elimination of an unpopular scheme, there are reasons that are more positive. A reason why Japanese management may inevitably change the HRM system to job oriented is that such an arrangement has the potential to provide fairer and clearer criterion to the management of human resources in the global labour market.

Motivating employees is a major challenge for contemporary Japanese managers. Japanese employees now are frightened by exposure to HRM systems with a high risk of dismissal and avenues for payroll trimming. Moreover, in the current Japanese economic climate job security is highly valued. If the employers promise to secure employment, most employees are likely to work very hard for the company. While job security can be a great incentive to make majority of employees committed to their work, what can be an incentive to motivate a few super performers? Although money can be an incentive, it is just one necessary condition but it is not sufficient reason to make employees committed to their work. Most employees need and appreciate money, but they will not work just for money. Many employees, especially younger employees who will forge the future of firms, expect to get a feeling of accomplishment or fulfilment through jobs well done. Such organisational members long for a solid job through which they can develop themselves. Therefore, the freedom or power to choose a job they want to do can be a greater incentive for those who perform an excellent job. Traditionally, many Japanese people work to get an intrinsic value of work as well as money. Such people are very happy to work enthusiastically if they can make themselves fulfilled through working even if their remuneration is small. The impending challenge for the Japanese manager is how to champion a balance of employer expectations with organisational exigencies.

Q. 6 b. Explain briefly the Purchasing power parity theory.

Ans:- Purchasing Power Parity Theory of Exchange Rate is a theory, which establishes the

fact that the exchange rates between currencies are in equilibrium in the event of equality in the

purchasing power of each of the countries. This precisely means that the ratio of the price level

of a fixed amount of goods and services of the two countries and the exchange rate between

those two countries must be equivalent. PPP is based on the ‘Law of One Price’. If the inflation

rate within a country’s economy increases then the value of the currency needs to depreciate to

revive the PPP. In the absence of transportation and other similar expenses, the competitive

market will equalize the price of an identical object in two countries when the prices are

expressed by the same currency. However, one has to be careful with the Law of one Price. The

application of the Law of One Price is contingent upon certain conditions. They are:

A competitive market must be present in both the countries for the goods and services

The law is only applicable to the goods that can be traded between the countries.

Transport expenses and other transaction expenses must be checked since they are

considered hindrances in trading.

Types of PPP

There are two types of PPP. They are:

Absolute Purchasing Power Parity that is based on the maintenance of equal prices in two

concerned countries.

Relative PPP describes the inflation rate. This describes the appreciation rate of a

currency, which is decided by calculating the difference between the exchange rates of

two countries.

Calculation of PPP

The purchasing power parity (PPP) theory is based on an extension and variation of the law of one price as applied to the aggregate economy. It is calculated as:

       cost of goods in currency 1PPP = --------------------------------       cost of goods in currency 2

where PPP represents the exchange rate of currency 1 to currency 2.

In other words, the exchange rate adjusts in a way so that an identical good or a service in two different countries has the same price when expressed in the same currency.

For example, on a single good level, a McDonald's Big Mac that sells for C$3.63 in Canada should cost US$3.22 in a U.S. city when the exchange rate between Canada and the U.S. is 1.13 USD/CND.

This calculation is simplified to the Big Mac index level to illustrate the concept. The purchasing power parity applies the same concept just on a higher level, that is on a representative basket of goods and services.

If we look at this from another angle, the 1.13 USD/CND is the purchasing power parity in this case. Since exchange rates are volatile and influenced by many factors, the real market exchange rate can be higher or lower than the 1.13 USD/CND.