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Such extensions arise from the movements of people, things and ideas. It cannot be defined in terms of internationalization or integration as some theorists have suggested, though these developments might be an outcome of globalization. Globalization describes the interplay across cultures of macro-social forces. These forces include religion, politics, and economics. Globalization can erode and universalize the characteristics of a local group. Advances in transportation and telecommunications infrastructure, including the rise of the Internet, are major factors in globalization, generating further interdependence of economic and cultural activities. Since the beginning of the 20th century, the pace of globalization has intensified at a rapid rate. Effects of Globalization Industrial - emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies. Also has led to movement of material and goods between and within national boundaries. Financial - emergence of worldwide financial markets and better access to external financing for borrowers. Economic - realization of a global common market, based on the freedom of exchange of goods and capital. The interconnectedness of these markets however meant that an economic collapse in any one given country could not be contained. Political - some use "globalization" to mean the creation of a world government which regulates the relationships among governments and guarantees the rights arising from social and economic globalization. Politically, the United States has enjoyed a position of power among the world powers because of its strong and wealthy economy. Informational - increase in information flows between geographically remote locations. Arguably this is a technological change with the advent of fiber optic communications, satellites, and increased availability of telephone and Internet. Language - the most popular language is English. o About 35% of the world's mail, telexes, and cables are in English. o Approximately 40% of the world's radio programs are in English. o About 50% of all Internet traffic uses English. Competition - Survival in the new global business market calls for improved productivity and increased competition. Due to the market becoming worldwide, companies in various industries have to upgrade their products and use technology skilfully in order to face increased competition. Ecological - the advent of global environmental challenges that might be solved with international cooperation, such as climate change, cross-boundary water and air pollution, over-fishing of the ocean, and the spread of invasive species. Since many 1
factories are built in developing countries with less environmental regulation, globalism and free trade may increase pollution. Cultural There has been growth of cross-cultural contacts; advent of new categories of consciousness and identities which embodies cultural diffusion. o Spreading of multiculturalism, and better individual access to cultural diversity o o o o o (e.g. through the export of Hollywood and Bollywood movies). Greater immigration and greater international travel and tourism Spread of local consumer products to other countries Worldwide fads and pop culture such as Pokmon, Sudoku, YouTube, Facebook, etc. Worldwide sporting events such as FIFA World Cup and the Olympic Games. Incorporation of multinational corporations into new media.
Technical There has been development of a global telecommunications infrastructure and greater transborder data flow, using such technologies as the Internet, communication satellites, submarine fiber optic cable, and wireless telephones. Also there globalization has increased in the number of standards applied globally; e.g., copyright laws, patents and world trade agreements. Legal/Ethical - The creation of the international criminal court and international justice movements. Also it has led to the emergence of Global administrative law. Question 2 - Why do nations trade? Discuss the relevance of Porters diamond model in todays business context. Answer - The answer would be that countries world over are endowed with different natural, human, and capital resources. Each country varies from the other in combining these resources (land, labour and capital). In a globalised set-up, every country cannot be as efficient as the best in producing the goods and services that their residents demand. As a result, they have to trade off their decisions to produce any good or service based on opportunity cost which means the production decision of the country depends on whether it is more efficient to produce the goods and services with lower opportunity cost with increased and specialised production, or to trade those goods, with goods of higher opportunity cost. If a country can produce more of any goods or services with the same resources used by any other country, it is said to have an absolute cost advantage in the production of those goods or services. For example, India has absolute cost advantage in cutting and polishing of diamond. Around 68% of the diamonds from all over the world are cut and polished in India. India is the largest producer of diamond jewellery in the world. On the other hand, India would import items which can be imported at a lower cost than it would take to manufacture these items locally. Trade in globalised set-up has been used as an instrument for enhancing a countrys economic growth and is usually beneficial to both the exporting and importing countries. For example India and Thailand have signed a Free Trade Agreement. Thailand is cost efficient in both auto component and pharmaceuticals. India would like to import auto component and would export pharmaceuticals to Thailand. This will be beneficial to India as it will benefit from economies of scale with higher production of pharmaceuticals. 2
Opportunity cost and efficiency in production varies from country to country as countries have different endowments of productive resources like land, labour and capital. For example, US, a capital rich country will specialise in production of aeroplanes and India, rich in labour pool will specialise in rendering of information technology services. Trade is also affected as different countries are endowed with different natural resources and climate zones, longer growing seasons for a produce, abundance of natural resources, highly educated and skilled workers, and larger quantities of sophisticated machinery. For example Saudi Arabia will export oil, India will export mica, iron ore and information technology, Brazil will export coffee and Thailand will export rice. Porters diamond model In 1990, Michael Porter analysed the reason behind some nations success and others failure in international competition. His thesis outlined four broad attributes that shape the environment in which local firms compete and these attributes promote the creation of competitive advantage. They are explained as follows: Factor endowments Characteristics of production were analysed in detail. There are basic factors like natural resources, climate, and location and so on and advanced factors like communications infrastructure, research facilities. Demand conditions The role of home demand in improving competitive advantage is emphasised since firms are most sensitive about the needs of their closest customers. For example, the Japanese camera industry which caters to a sophisticated and knowledgeable local market. Relating and supporting industries The presence of suppliers or related industries is advantageous since the benefits of investment in advanced factors of production spill over to these supporting industries. Successful industries within a country tend to be grouped into clusters of related industries. For example Silicon Valley. Firm strategy, structure and rivalry Domestic rivalry creates pressure to innovate, improve quality, and reduce costs which in turn helps create worldclass competitors. He said that these four attributes constituted the diamond and he argued that firms are most likely to succeed in industries where the diamond is most favourable. He also stated that the diamond is a mutually reinforcing system and the effect of one attribute depends on the state of others. For example, favourable demand conditions will not result in a competitive advantage unless the state of rivalry is enough to elicit a response from the firms. Figure below gives you an illustration of Porters diamond model.
Question 3 - Why do firms pay so much attention to economic factors while entering in particular market? Justify your answer with practical examples. Answer - International Business managers need to understand and assess international economic forces at work. Key variables that need to be examined include Gross Domestic Product (GDP) per capita, regional distribution of GDP, levels of investment, consumer expenditure, labour costs, inflation and unemployment. Variables that are examined when assessing national economic environments include: Economic structure The structure of a nations economy is determined by the size and rate of its population growth, income levels and distribution of income, natural resources, agricultural, manufacturing and services sector. Economic infrastructure is the sum of all the external facilities and services that support the work of firms including communication, transportation, electricity supply, banking and financial services. Industry structure The structure of an industry is determined by factors such as: Entry and exit barriers. Number of competing firms. Market share among firms in that sector. Average size of competing units.
Market growth It is measured in terms of local currency and adjusted for inflation. Local currency is used because conversions into other currencies are affected by exchange rate fluctuations. Income levels It is taken as the GDP per capita and GDP is directly proportional to the productivity of the country. Net income is another important variable and is without tax payments from individual gross incomes. Sector wise trends Growth activity in a country might vary significantly among certain industries. For example, India has a vibrant software services industry. Openness of the economy The ratio of a countrys imports and exports to its Gross National Product (GNP) indicates its vulnerability to fluctuations in international trade. A nation with a high foreign trade or GNP depends heavily on the economic wellbeing of the nations it exports to. Conversely, closed economies have a high degree of control over the economy. International debt An outstanding loan that one country owes to another country or institutions within that country. Foreign debt also includes due payments to international organisations. Foreign exchange reserves should not be less than outstanding short-term foreign debts. On the other hand, a high foreign debt servicing requirement maybe a positive indicator, suggesting that a country has borrowed heavily to invest in its future. Degree of urbanisation This is an important factor because there are major differences in incomes and lifestyles between urban and rural areas in most countries such as: Shopping patterns shopping frequency, average purchase value. 4
Nature of goods bought. Expectations in quality and technical sophistication. Education levels. Ease of distribution.
Question 4 - How has India reacted towards regional integration? Discuss briefly trade agreements signed by India. Answer - India considers Regional Trading Arrangements (RTA's) as the building blocks towards the objective of trade liberalisation. Therefore, India participates in a number of RTAs, which include Free Trade Agreements (FTAs), Preferential Trade Agreements (PTAs) and so on. These agreements take place bilaterally or in a regional grouping. We shall now discuss some of the major agreements signed by India. 1. Asia-Pacific Trade Agreement (APTA) The Asia-Pacific Trade Agreement (APTA), previously known as the Bangkok Agreement, was signed on 31st of July 1975, as an initiative of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). ESCAP is the regional development arm of the United Nations for the Asia-Pacific region. It focuses on issues that are most effectively addressed through regional cooperation and includes issues oft: All or a group of countries in the region face, for which it is necessary to learn from each other. Benefit from regional or multi-country involvement. Cut across boundaries, or that would benefit from collaborative inter-country approaches. Are sensitive or emerging and require further advocacy and negotiation. 2. Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Bangladesh India Myanmar Sri Lanka and Thailand Technical and Economic Cooperation (BIMSTEC), a sub-regional economic cooperation grouping, was formed in Bangkok in June 1997. Five members of SAARC (India, Bangladesh, Bhutan, Nepal and Sri Lanka) and two members of ASEAN (Thailand, Myanmar) are members of this agreement. Thus, it is considered as a bridging link' between the two major regional groupings that is, ASEAN and SAARC. The chairmanship of BIMSTEC rotates among the member countries in alphabetical order. The immediate priority of the grouping is to merge its activities to make it attractive for economic cooperation. The areas of cooperation have been assigned to 13 sectors and each sector will be led by members in a voluntary manner. The member countries proposed cooperation in the following sectors: Trade and Investment (Bangladesh). Technology (Sri Lanka). Energy (Myanmar). Transport and Communication (India). Tourism (India). Fisheries (Thailand). Agriculture (Myanmar). Cultural Co-operation (Bhutan). Environment and Disaster Management (India). Public Health (Thailand). People-to-People Contact (Thailand). 5
3. Framework Agreement on Comprehensive Economic Co-operation between India and the Association of South East Asian Nations The Association of South East Asian Nations (ASEAN) political economic and strategic importance in the larger Asia-Pacific Region and its capability to become a major partner of India in trade and investment made India to join association with ASEAN. While, ASEAN looks to utilise and access Indias technical and professional wealth, India and ASEAN look forward to strengthen the security in the region. ASEAN was established on 8th August 1967 in Bangkok by the five original member countries. Now it has a membership of 10 countries namely Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. An agreement on Comprehensive Economic Cooperation between ASEAN and India was signed on 8th October 2003 in Bali (Indonesia). The objectives of this agreement are to: Promote and strengthen trade, economic and investment co-operation between the parties. Progressively liberalise and promote trade in goods and services as well as create a transparent, liberal and facilitative investment regime. Explore new areas and develop appropriate measures for closer economic cooperation between the parties. Facilitate the more effective economic integration of the new ASEAN Member States and bridge the development gap among the parties. 4. India-MERCOSUR Preferential Trade Agreement (PTA) India and MERCOSUR signed a framework agreement on 17th June 2003. The objective of this agreement is to create an environment for negotiations in the first stage, by granting mutual tariff preferences, and in the second stage, to negotiate a FTA between the two parties in conformity with the rules of the WTO. As a follow up to the framework agreement, a Preferential Trade Agreement (PTA) was signed in New Delhi on January 25, 2004. The aim of this PTA is to expand and strengthen the existing relations between MERCOSUR and India and promote the expansion of trade by granting mutual fixed tariff preferences with the ultimate objective of creating a free trade area between the parties.
Question 5 - What is global sourcing? What has made India so attractive for global sourcing? Answer - Global sourcing is described as the practice of sourcing cost effective and best goods and services across geopolitical boundaries in order to cater to global markets. Global sourcing strategy is aimed at exploiting global efficiencie in all areas of manufacturing, trading and services to enable offering clients and customer the best possible product or service. Usually, efficiencies that prompt firms for global sourcing are low cost skilled labour, low cost raw material, proximity to key markets, time zone differences and other economic factors such as tax exemption and low trade tariffs. Indian industries have successfully levered global sourcing strategies in their global trade operations and sourcing has been the driving force behind the development and expansion of Indian foreign trade in the recent past. Global sourcing strategy has made Indian industry more globalised as buyers from all over the world are bidding 6
for Indian goods, particularly services, to enable executing their contracts on time, reduce prices and generate efficiency in the system through increased competition. Indian industries, in order to reap the benefits of sourcing opportunities, has opened global offices and subsidiaries to tap opportunities on all fronts, i.e., manufacturing, trading, skilled services and call centres. As we know, manufacturing costs vary from country to country due to factors such as currency conversion and cost of living. Due to different factor endowments of countries, the costs of labour and materials may differ, for example, labour cost is far lower in developing countries like India than in North America and Europe. For companies that have labour intensive work, this difference in costing results into significant savings in terms of salaries, wages, post retirement benefits, fringe benefits and other benefits. In a globalised set up, trade and commerce of skilled services such as IT enabled services, software development and testing, purchasing, engineering and integrated chip designing, knowledge process outsourcing (KPO), off shoring and home shoring is growing much faster than trade in merchandise. India, with its demographic dividends has been benefitted from all such developments as the level of skill and knowledge held by Indian professional allows them to provide high quality services to their clients in developed countries. The main reasons for skills sourcing to India are represented pictorially below: Cost Restructuring Labour Arbitrage Focus on Core business Skilled and knowledgeable manpower Reasons why India is preferred in skill sourcing Better capacity management Catalyst for change Improved service quality Operational expertise Scalability and commoditization Question 6 - Write short notes on: (a) Cross cultural management (b) WTO (a) Cross cultural management In international management, where people are from different cultures, you have to develop and apply your knowledge about cultures and not use a standard process for everyone. This is called cross cultural management. In a global market even if you do not have a diverse workgroup you may have to deal with clients abroad or vendors or service providers of different countries. So knowledge about different cultures is a must. The factors to be considered in cross cultural management are: Cross cultural management skills. Handling cultural diversity. Factors controlling group creativity. Ignoring diversity. 7
Cross cultural management skills The ability to demonstrate a series of behaviour is called a skill. It is functionally linked to achieving a performance goal. The most important aspect to qualify as a manager for positions of international responsibility is communication skills. The managers must adapt to other cultures and have the ability to lead its members. The managers cannot expect to force members of other culture to fit into their cultural customs. This is the main assumption of cross cultural skills learning. Any organisation that tries to enforce its behavioural customs on unwilling workers from another culture faces conflict. The manager has to possess the skills linked with the following: Providing inspiration and appraisal systems. Establishing and applying formal structures. Identifying the importance of informal structures. Formulating and applying plans for modification. Identifying and solving disagreements.
(b) WTO: World Trade Organization (WTO) is an international agency which encourages trade between member nations, administers global trade agreements and resolves disputes when they arise. The WTO came into being on 1 January 1995, and is the successor to the General Agreement on Tariffs and Trade (GATT), which was created in 1947, and continued to operate for almost five decades as a de facto international organization. The World Trade Organization deals with the rules of trade between nations at a nearglobal level. It is responsible for negotiating and implementing new trade agreements, and is in charge of policing member countries' adherence to all the WTO agreements, signed by the majority of the world's trading nations and ratified in their parliaments. Most of the issues that the WTO focuses on derive from previous trade negotiations, especially from the Uruguay Round. The organization is currently working with its members on a new trade negotiation called the Doha Development Agenda (Doha round), launched in 2001. The WTO has 153 members, which represents more than 95% of total world trade. The WTO is governed by a Ministerial Conference, which meets every two years; a General Council, which implements the conference's policy decisions and is responsible for day-to-day administration; and a director-general, who is appointed by the Ministerial Conference. The WTO's headquarters is in Geneva, Switzerland. The key objective of WTO is to promote and ensure international trade in developing countries. The other major functions include: o o o o o Helping trade flows by encouraging nations to adopt discriminatory trade policies. Promoting employment, expanding productions and trade and raising standard of living and income and utilising the worlds resources. Ensuring that developing countries secure a better share of growth in world trade. Providing forum for trade negotiations. Resolving trade disputes.