Introduction on International business@ 1st Oct 2008

What is International Business? Any Commercial transaction between two or more countries is known as International Business. The parties of the transaction could be either companies or Governments. Necessity of International Business:

Raw Materials re uired from abroad !rocesses ac uired from abroad. "#$%alMart Advanced technolo#ies re uired from abroad Competition$There will always be competition. "ven if the company does not enter into forei#n territory& forei#n companies will enter into the host country.

'o barin# some very local businesses& it is not possible to stay insulated from international business because of the above mentioned reasons. Features of International Business (Distinction b/w Domestic and IB):

%orld is the Market Global scale of operation Ample number of opportunities %orld class products(services International level of productivity Efficient/Productive value chain

International Business by its very nature is a primary determinant of International Trade. )ne of the reasons of the increasin# success of international business ventures is #lobali*ation. Com etitions due to !lobal " ortunities There are four level of competitions due to #lobal opportunities +. From host country su liers# If a company from india wants to manufacture or e,port its products to -' then the e,istin# -' suppliers will have advanta#e over the indian company in terms of *ero custom ta,& minimum transportation cost and a popular brand name. .. From domestic layers of home countries $ In home country multiple companies with similar products havin# same pricin# start competin#. /. Free trade a!reements/ trade bloc$s $ The advanta#es of Manufacturers belon#in# to a trade block is they don0t have to pay any custom duty. The only cost incurred by them is the transportation cost. "#$1A2TA.

3. International %layers $ apart from the company from home country& a number of other companies across the world would also like to sell their product in a particular host country. 'o there e,ists competition from international players. Why Com anies en!a!e in International Business? The followin# are the factors for companies en#a#in# in International Business +. &o increase sales / 'ales () ansion

4ar#er canvas 5 convention of 'cale "conomy Companies 4evera#e International !roduct 4ife Cycle6 as stage in product PLC changes around the world the place of production changes. I!4C sta#es followed by a product are different in different countries. These differences provide different market opportunities in different countries. 4ead Market$$companies want to be leaders in some market and 7ust want to present in some other lead markets. If a company wants to be #lobal& then it has to know what is happenin# in the lead market for its product. 2or this the compny needs to have a presence in the lead market. 2ollowin# the Customer $$ "very company has some core customers. Companies follow their core customers where ever they #o in the international arena.

.. &o ac*uire resources

Better uality or competitive resources at lower cost Global sourcin#$$ not to depend on a few countries. Companies want to spread risks in ac uirin# resources. low cost , quality of resources , technology, hr

/. +educin! +is$ $$ companies try to reduce risk by spreadin# operations around the world. 'imple #eo#raphic risk & Industry cycle &Cross patrollin# ,odes of International Business There are basically two aspects of international business +. 'upplyin# to host country .. Manufacturin# in host country 1. Supplying to host country -- In this case the products are manufactured in home country and then exported to host country. It is feasible when the labor costs are low in

home country, transportation costs are not high and no tariff barriers to exports. The advantage of this method is scale economy and excess capacity utilization. -. ,anufacturin! in host country ## The manufacturin# in the host country can be done either by contract manufacturin# or by licensin#.

contract Manufacturin#$$ In contract manufacturin# the company #ives a contract to local manufacturers instead of settin# up a factory. The advanta#e is the companies will have low level of involvement and in turn #et a taste of the market first. The disadvanta#es bein# sharin# of profits and the manufacturers mi#ht take over the market. 4icensin#$$ In licensin# the licensor permits the use of technolo#y for a certain period of time to the licenseefor the manufacturin# of licensed products and sale in the licensed territories. 8ere the licensor owns the technolo#y. The licensee is permitted to use the technolo#y. 2or this the licensee pays down payment as well as royalty to the licensor.

FDI B !"D and non FDI B !"D Non FDI##### exports, contract manufacturing$ licensing, management contract, %&D tur'ey pro(ects, )ontract %& D * )ritical part of %&D at home . no technology diffusion. !tand alone modules ++++ r&d contract. )ountry should be compliant with I,% Turn'ey pro(ects * )lient in host country. "ntire responsibility from concept to commission is given to the expert company. "g design, global procurement, testing ,stage upto product being switched -.. /lobal bidding. )lient is normally in the host country. ,ublic private partnerships come under this0 FDI based ### local assembly, 12, wholly owned subsidiary, ac3uisition, merger. In order of ris'

Forei!n Country (ntry 'trate!ies +. .. /. 3. 9. <. =. ",ports Contract Manufacturin# 4icensin# Assembly :oint ;enture %holly owned subsidiary Ac uisition

/.() orts The company #oes for e,ports because it has hi#her competitive advanta#e. The transportation costs are low. The tariff rates are also low. -. Contract ,anufacturin! no mar$etin! s done In contract manufacturin# the parent(hirin# company approaches a firm known as contract manufacturer with a desi#n(formula. )nce the contract is finalised then the contract manufacturer manufactures the components(products for the hirin# company. Freedom frm mana!in! the labour 0 tech/desi!n diffusion wil occur but only for manufacturin! art1 2. 3icensin! In licensin#& first the licensor searches for a potential licensee. Then the licensor permits the use of technolo#y for manufacturin# a component(product to the licensee for a definite eriod at a certain location. +ole 4 manufacture 5 mar$et A contract manufacturer only produces products where as a licensee produces as well as sells for the licensor. The advanta#e in licensin# bein# the licensor #ets tie ups with best distributors& knows local market and has cost advanta#e.Can co6er many countries in the world at faster s eed and lesser in6estment. The disadvanta#e is diffusion of technolo!y 7 loosin! the mar$et to liscensee. 8lso at the e,piry of the licensin# a#reement the licensee will become the competitor to the licensor. 'o the market presence increases with licensin#. Franchising ser!ices" trade#ar$ being used

9.8ssembly In case of assembly& different parts of the product are manufactured in different countries. The assembly of the parts takes place in the host country. )ver a period of time the product becomes local to the host country. 4ocal labour Beco* in other country when u start business customi*ation becomes e,pensive :.;oint <enture In a :oint ;enture& both the parties contribute a certain amount of e uity and form a new company. Main>>>>Risk cost sharin# with local partner

Advanta#e > local market familiarity & labor mana#ement & host country relation ( relation with banks& reduces risk as sharin# risk in unknown market ?isadvanta#e > cultural differences due to environmental chan#es & #uard technolo#y MI@"? ;"1T-R" > when one partner is #overnment +easons for formin! ;oint <enture:

To enter into a forei#n country 'harin# risks as well as costs Good brand name and relations 'uppliers& distributors and established channel partners Cultural brid#e -nable to #et +AAB 2?I since #overnment restrictions :oint ventures are a necessity by #overnment !rofit sharin#(market sharin#

Why ;oint <entures Fail

Chan#e in e,ternal environment Conflict of vision(interest Both parties not contributin# e ually sharin# of market& there by Market contraction Global competitiveness re uires control& which is not entirely present with either party. :; mi#ht be due to #ovt. re#ulations so mi#ht be a compulsion.

=.Wholly "wned 'ubsidiary A wholly owned subsidiary is a subsidiary whose parent company owns +AA percent of its common stock and there are no minority owners. +AAB control & no local partners. Risk involved as no local partner and political risk is hi#h 8d6anta!es

2reedom in desi#nin# the plant 1o dilution of brand ima#e 1o dilution of profits Total control over operations 1o dilution of system processes !rocesses are standardised

Disad6anta!es

Total risk ownership. 1o risk sharin# 4ess knowled#e of the market ?e#ree of competition increases

>. 8c*uisition Ac uisition may be defined as a corporate action in which a company buys most& if not all& of the tar#et companyCs ownership stakes in order to assume the control of the tar#et firm. 8d6anta!es

Ac uirin# the entire tar#et company 'aves time( uicker to market Duick to the market$due to well established distribution and sales channel The competition in the market remains unchan#ed 'uppliers inherit

Disad6anta!es

)bsolete technolo#y Resources mi#ht not be best in class !rocesses and practices mi#ht not be world class

In :; $$$choose ur location Mer#er$$$$ u choose only the time of it () ro riation 6s. Nationalisation If the #overnment of any country takes over any forei#n company& then it is known as e,propriation where as if the #overnment takes over any localised company& then it is known as 1ationalisation. %holly owned subsidiaries are e,posed to e,propriation where as 7oint venture a#reements protect firms from e,propriation.

International Business 6s. Domestic Business The followin# factors distin#uish International business from domestic business

%orld market !olitical environment 4e#al system Cultural difference Communication ?istance are hi#her ?iversity -ncertainty$!olitical& economical and currency risks -ncontrollability$The de#ree of -ncontrollability is hi#her in host countries Competitions Competence$people in different countries are at different levels of competence.

,ultinational (nter rises (,N() Multinational "nterprise is a firm that has en#a#ed in forei#n direct investment E2?IF. " uivalently& an M1" is a company that owns Ea si#nificant part ofF and operates facilities in nations other than the one in which it is based. Multinational company EM1CF A M1C is a company which has its own presence in at least two countries. M1"s are partnerships. M1"s include M1Cs but not viceversa. &y es of ,N(s

Global Multi$domestic Transnational

?lobal Com any

Inte#rates its operations around the world !roduces for the world market -tilises best resrouces )perates on scale economies It has a #lobal brand The dark side is$ no customi*ation of #lobal brands so mi#ht lose some se#ment of the market "#$Mc ?onalds& intel

,ulti Domestic Com any

)perates in different countries Customises its product for different countries Better customer loyalty 4ar#er scales and better mar#ins(profitability.

Takes into account cultural differences& temperature variations !roducts are customi*ed to the e,tent necessary Advanta#es are$ #reater market share& client loyalty& lon# term market share& better mar#ins "#$-nilever& !GG

&ransnational Com any

%orld is the market 4earns the best practices from anywhere in the worldwide operations 4evera#es learnin# Inte#rates operations worldwide to reduce cost. lower the cost of customi*ation "#$Caterpillar& G"

%ulture
)ulture refers to the shared behaviour patterns based on attitudes, values and beliefs of a group of people.

&le#ents 'Deter#inants o( %ulture The following are the determinants of culture 4. "ducation 5. %eligion 6. 7anguage 8. esthetics 9. ttitudes and Beliefs :. Technology and material culture ;. !ocial <nit =family$tribe> ?. -pinion 7eaders 1.&ducation The education level of a country is one of the determinants of its culture. The more the education level of a country, the more it is adaptable to change. "ducation broadens the perspectives. From business point of view it shapes the 'ind of mar'et we are operating, the 'ind and type of products$services the country is offering. The governance of a country becomes simple with education.In india, "ducation is being given the paramount importance. 2. )eligion %eligion is a ma(or aspect of consumer behaviour. It is a strong shaper of values. @ithin religion there are many many factions whose specific beliefs may affect business. %eligion has also influence on practices. From business perspective, products$services has to be in sync with religion. The largest religion is christianity. *. +anguage 7anguage is a factor that greatly affects cultural stability. @hen people from different areas spea' the same language, culture spreads more easily. Business can be done more easily with other nations that share the same language. Because countries see language is an integral part of their cultures, they sometimes regulate their languages. For advertising the language has a greater impact e.g. Aandarin. ,. -esthetics !ensory perceptions play a ma(or role. There are many aspects from business point of view

Design * how you ma'e your product )olor * ,ac'aging Ausic * dvertising ,roduct ,olicy )onsumer preferences. Brand .ame )ustomization

.. -ttitudes and /elie(s )hanging behaviour is easier but changing attitude is difficult. From company perspective understanding belief is very important. Beliefs are derived from values and history. Beliefs are related to education also. ttitudes are inherent in us. From company perspective predispositions i.e. ris' ta'ing ability, creativity demands compliance are important. 0. 1echnology and 2aterial %ulture It determines how much the culture has adopted technology. "g. %obotics is being used in <! for certain 'ind of (obs. Bowever countries differ in their degree of materialism. 3. Social 4nit In !ome societies the family is the most important group membership. In societies in which there is low trust outside the family, small family run companies are 3uite successful. But these companies have difficulty in growing because of their reluctance to share responsibility with professional managers. 8. Opinion +eaders -pinion 7eaders help in speeding up the acceptance of change. By discovering the local channels of influence an international company may locate opinion leaders. -pinion leaders may emerge in unexpected places. )haracteristics of opinion leaders vary from country to country. 1. -scribed 5s -c6uired group a((iliations ffiliations determined by birth are 'nown as ascribed group affiliations where as affiliations not determined by birth are 'nown as ac3uired group affiliations. scribed group affiliations include gender, family, age, caste, ethnic, racial and national origin. c3uired group affiliations include religion, political and professional associations. personCs importance$ran'ing depends upon both 'inds of affiliations. 2. )ole o( +adies in Society and )espect (or elders There are strong country specific differences in attitudes toward males and females. In wor'places males are generally preferred. Bowever barriers to employment based on gender are easing substantially in many parts of the world. in certain countries ladies are not allowed to choose their profession. for employee engagement we need to 'now the family values and the priority of wor'#life balance. There is tremendous respect for elders in certain countries, not in family but in wor' place also. but age does not matter in some other countries. They go by meritocracy. *. )elationship 7re(erences There are basically three aspects ,ower distance Individualism 2s )ollectivism uthoritative 2s ,articipative

)entralization and decentralization

7o8er Distance ,ower distance is a term describing the relationship between superiors and subordinates. "mployee preferences in how to interact with their bosses, subordinates and peers varies substantially internationally. @here power distance is high, people prefer little consulation between superiors and subordinates. !imilarly where power distance is low, perople prefer and usually have consultative styles. Indi!idualis# 5s %ollecti!is# some societies are individualistic = american society> where the effort is sinlge handed and group effort is to the extent necessary, where as in collective societies =(apanese society> people prefer to wor' in teams but ta'e a longer time to come up with a consensus. ttributes of Invidualism are low dependence on the organization and a desire for personal time, freedom and challenge. The attributes of )ollectivism are dependence on the organization, desire for training, good physical conditions and benefits. -uthoritati!e 5s 7articiapati!e In authoritative societies people prefer being instructed. They li'e authoritative decision. where as in ,articipative societies people wor' in consent with each other. In certain countries people li'e to ta'e decisions where as it is exactly opposite in some other countries. .. 2aslo89s hierarchy o( needs !aries across countries ccording to this theory there are five levels of needs. The needs from lowest to highest level being physiological, security, affiliation, esteem and self actualization. ,eople try to fulfill lower level needs sufficiently before moving on to higher ones. But different countries have different levels of needs. !o this theory is helpful for differentiating the reward preferences of employees in different countries. 0. 2onochronic 5s 7olychronic In monochronic culture people are used to perform tas's se3uentially where as in polychronic culture people are comfortable in doing the tas's simultaneously. some cultures tend to focus first on the whole and then on the parts where as others do the opposite. )ultures such as those in northern europe are called monochronic where as cultures in southern europe are polychronic. 3. +o8 conte:t 5s ;igh conte:t In low context cultures people consider firsthand information that helps directly in decision ma'ing are only relevant. @here as in high context cultures people consider

peripheral information to be valuable in decision ma'ing and infer meaning from things said indirectly. @hen managers from both types of cultures deal with each other, low context individuals believe that the high context individuals are inefficient and waste much time where as high context individuals believe that low context individuals are too aggressive to be trusted. 8. )is$ ta$ing beha!iours. %is' ta'ing behaviours are basically categorized into four categories

<ncertainty avoidance Trust Future -rientation Fatalism

4ncertainty -!oidance In countries with high uncertainty avoidance, employees prefer set rules that are not to be bro'en even if it is for companyCs best interest. In these countries people prioritize (ob security and spend a longer time in a particular company. @here as in countries with low uncertainty avoidance people are adaptable to change easily. They li'e to try new products$services. 1rust The level of trust among people varies across countries. In countries with high trust level the cost of doing business is low because costs incurred in supervision and contingency can be lowered. where as companies have to be more cautious in doing business in low trust level countries. Future Orientation )ountries differ in the extent to which individuals live for present rather than for future. In countries with high future orientation, companies motivate wor'ers through delayed compensation li'e retirement programs where as it is exactly opposite in low future orientation countries. Fatalis# In countries with high degree of fatalism, people plan less for contingencies. They believe unfortunate events are acts of god. ,eople are reluctant to ta'e insurance schemes. Bigh fatalistic people are less swayed by bossesD pursuasive logic. <. Idealis# 5s 7rag#atis# Idealism cultures first determine principle before resolving small issues where as pragmatism cultures focus more on details of the issue rather on principles for resolution.

10. %ulture Shoc$ 5s )e!erse %ulture Shoc$ )ulture shoc' is the frustration that results when a person moves to another country and has to learn and cope with a vast array of cultural cues and expectations.!ome people also encounter culture shoc' while returning to home country because they have learned a different culture abroad. This is 'nown as reverse culture shoc'. 11. -cco#odation o( (oreigners "very country does accomodate foreigners. The principal reason being business, FDI and inturn the country will emerge in the world map. Bowever the local citizens treat local people and foreigners differently. In many countries foreign women are easily accepted as managers as compared to local women. 12. I#ple#entation o( cultural change The various aspects of implementation of cultural change are as follows 5alue Syste#s##The more something counters our value system, the more difficult it becomes to accept. %ost o( change##!ome changes to foreign culture increases the productivity and sales greatly where as some other changes to foreign culture increases the productivity marginally. !o we have to consider the cost in changes to some foreign culture and the benefits associated with the change. 1oo #uch change too soon--,eople are generally reluctant to accept too much changes too soon. so the changes in products$services have to be made in a phased manner. )e8ard sharing##sometimes a proposed change may have no foreseeable benefit to the people who must support it. so in this scenario the profits generated due to the proposed change has to be shared among the people who must support it. 7articipation in change decision##To avoid problems arising from a proposed change, all the sta'eholders are made to participate in change decison. By this method the company may learn how strong the resistance will be if changes are made. Opinion leaders##!ometimes opinion leaders greatly help to speed up the acceptance of change. By discovering the local channels of influence, a company might locate an opinion leader. 1i#ing--Aany good business decisions fall flat because they are ill timed. !o changes should be implemented at the right time so that it can be easily accepted. 1*. %o#pany 2indsets The adaptation of a foreign culture by a company not only depends upon the conditions of the foreign culture but also depends upon the attitudes of managers of the company. so accordingly the attitudes or orientations can be broadly classified into three categories

,olycentrism "thnocentrism /eocentrism

7olycentris#

polycentric organization customizes business practices$processes for different countries. The organization believes that business units in different countries should act very much li'e local companies. It gives better foothold in the mar'et but the downside is the company has to give up its core business practices. "xcessive polycentrism may lead to such extensive imitation of proven host#country practices that the company loses its innovative superiority. &thnocentris# In ethnocentrism the company believes, what wor'ed well in the home country will wor' well in the host country. It might be business practices or retention of employees. !ince cultures and people are different, so ethnocentrism does not necessarily wor'. In ethnocentrism managers overloo' important cultural factors abroad because they have become accustomed to certain cause and effect relationships in the home country. Bere the management recognizes the environmental differences but still focuses on achieving home country ob(ectivees. =eocentris# /eocentrism is a (udicial process. Bere a model is being created ta'ing into consideration the host country needs and own company practices. /eocentrism exists when a company bases its operations on an informed 'nowledge of its organization culture along with home and host country needs, capabilities and constraints.

%hapter * %hapter * > 7olitical )is$. Notes %ontributed /y )ashi

7olitical )is$ it is the ris' that political decisions or e!ents in a country negati!ely affect the pro(itability or sustainability o( an in!est#ent. ,olitical ris' is the chance that political decisions? e!ents or conditions in a country will affect the business environment in ways that may adversely affect the business of A."s.

,olitical ris' matters most to any A." in the world. @hen companies choose among the 5EE countries, they consider political ris' to be very important. The lower the political ris', the better the business opportunity and in turn higher the country attracti!eness.

%auses o( 7olitical )is$ 4. 5. 6. 8. 9. /ovt. ctions. )ivil !trife$<nrest$Disorder. International @ar. Barmful actions against people. )hange in political ideology

1. =o!t -ctions /ovt. action can change the countryCs attractiveness. /overnments can put restrictions to the sectors in which business can be done. /ovt puts many acts to impose restrictions on the sectors li'e F"% and A%T, ct. F&)- -ct Foreign &:change )egulation -ct"-1<3* n act to consolidate and amend the law regulating certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of the foreign exchange resources of the country and the proper utilisation theory in the interests of the economic development of the country. 2)17 2onopolistic and )estricti!e 1rade 7ractices -ct"-1<0< A%T, was enacted

To ensure that the operation of the economic system does not result in the concentration of economic power in hands of few. To provide for the control of monopolies. To prohibit monopolistic and restrictive trade.

2. %i!il Stri(e'4nrest'Disorder

It )ould be due to economic unrest. ,eople unrest can also happen because people are unhappy with the present govt. It affects companyDs operations and profits. It can lead to damage of companyDs property. "g* French %evolution

*. International @ar

Damages or destroys the companyDs local assets. "g. @hen Ira3 invaded Fuwait, there were many A."s by virtue of management contracts. Aany Indian companies were also operating. A."s are bound to leave the country during war.

,. ;ar#(ul actions against people

In(urious actions that target the local staff of the companyG often involves 'idnapping, extortion and terrorism. /enerally seen in lesser developed countries.

.. %hange in 7olitical Ideology

,olitical ideology can change with the change in political government. "very government has a different perception about the A."s. In case of Aonarchy, li'e saudi arabia,when a new prince comes in , chances are there will be changes in political environement.

I#pact o( 7olitical )is$ 4. 5. 6. 8. 9. :. "xpropriation or .ationalization. Disruption of property. <nilateral breach of contract. %estrictions on repatriation of profit. Differing points of view. Discriminatory taxation policies.

1. &:propriation or NationaliAation

govt or political faction unilaterally ta'es ownership of the companyDs local assets. )ompensation to the company, if at all forthcoming is generally a trivial percent of the assetDs value. This event was common in the 4H:Es and 4H;E, but is rare today. Bowever in any event the losses are immense. !ometimes the companyDs assets are ta'en over by the host country with or without ade3uate compensation. It is generally a hostile ta'eover, a mandate and not a choice which is given to the company. It generally happens in developing countries for natural resources li'e oil, diamond when the host country feels that there is no value addition. "g. )uba, )hile, 2enezuela, <ganda, Iambia, <thopia, Iran

2. Disruption o( property

Fidnapping, thefts occur.

!tri'es happen resulting loss of profit =opportunity loss> in addition to property getting damaged.

*. 4nilateral breach o( contract

Decision of a government to repudiate the original contract that it had negotiated with the foreign company. The revision penalizes the firm and rewards the nation by reallocating the profits of the local operations. In addition this extends to government approval of a local companyDs choice to breach its contracts with its foreign partner. In some countries the new govt might not honour the previous management contracts $ leases.

,. )estrictions on repatriation o( pro(it The govt arbitrarily set limits on the gross amount of profits a foreign company can remit from its local operation. ..Di((ering points o( !ie8 Differing interpretation of labour rights and environmental obligations create bac'lash problems in the foreign companyDs home mar'et. 0. Discri#inatory ta:ation policies foreign company bears a higher tax burden than the local firm, or in some cases, the more favoured foreign company, due to its nationality. ;o8 to access political ris$ Aanagers use 6 approaches to predict political ris' * 4. nalyzing past trends. 5. Ta'ing expert opinion. 6. "xamining the social and economic conditions that might lead to such political ris' 1. -nalyAing past trends )ompanies cannot help but get influenced by past patterns of political ris'. Aanagement can ma'e predictions based on past patterns. ,redicting ris' using past trends holds many dangers. Bowever political situations may change rapidly for better or worse as far as foreign companies are concerned. "xamples *

FDI into <! fell sharply after 5EE4 terrorist attac' in .J because foreign firms saw the <! as less safe than before. "xpropriation of property occurred fre3uently in the 4H;Es and early 4H?Es, but it has been less important in recent years. In ,a'istan, initially democracy ruled and then dictatorship where as in India it has always been democratic in spite of change in governments.

2. &:pert Opinions )ompanies may rely on expertsD opinion about a countryDs political situation, with the purpose of ascertaining how influential people may sway future political events affecting business. )ompanies read the statements made by political leaders both in and out of office to determine their philosophies on business in general, foreign input to business, the means of affecting economic changes and their feelings toward given foreign countries. Aanagers visit the country and listen to a cross section of opinions. "mbassy officials and foreign and local business people are useful sources of opinions about the probability and direction of change.. 1ournalists, academicians, middle level local govt authorities and labor leaders usually reveal their own attitudes, which often reflect changing political conditions that may affect the business sector. )ompanies may determine opinions more systematically by relying on analysts with experience in a country. These analysts might rate a country on specific political conditions that could lead to problems for foreign businesses. company also may rely on commercial ris' assessment services, such as those published by Business International, "conomist Intelligence <nit, "uro money. In this method companies should examine views of govt decision ma'ers and then get a cross#section of opinions and use expert analysts. *. &cono#ic and Social 7erspecti!e Se#antec 1echni6ue" There are two economic parameters i.e. aspiration le!el and achie!e#ent le!el. spiration level of people spreads with education, T2, Internet where as the achievement level increases with income level. Differences in aspiration level and achievement level leads to frustration. If disparity between the two is very high year after year, then the frustration level increases. Bigher the frustration level, higher the political ris' in terms of unrest. )ompanies may examine countryDs social and economic conditions that could lead to the peoplesD level of aspirations and the countryDs level of welfare and expectations. If there is a great deal of frustration in a country, groups may disrupt business by calling general stri'es and destroying property and supply lines. 1ypes o( 7olitical )is$ There are four types of political ris' 4. !ystematic.

5. ,rocedural 6. Distributive 8. )atastrophic 1. Syste#atic 7olitical )is$ These 'inds of ris's are inherent in system. Domestic and International companies face political ris's created by shifts in public policy or change in political ideology. These regulations alter the business system for all companies, so not necessarily meant for only foreign companies. Then again, a government may target its public policy initiatives toward a specific economic sector that it believes foreign companies unduly dominate. !ystemic changes do not necessarily create political ris's that reduce potential profits. "g. In 4HHE, newly elected rgentina govt. began a radical program of deregulation and privatization of the state centred economy. 2. 7rocedural political ris$ )ompanies procure from best sources from different countries to have comparative advantage. /lobally competent supply chain is re3uired from most competitive$best sources. The three main ob(ectives of supply chain are

7owest cost. !hortest time. Kuality and reliability.

.ormally supply chain is never short term until there is a war situation. s we get raw materials from across the world, it has to cross borders, so the company faces different levels of ris'. !ome countries are more corrupt and the company faces many hurdles. The ris's are higher in less developed countries. "very day people, products and funds move to different locations in the global mar'et. "ach move creates a procedural transaction between units, whether within a company or country. ,olitical actions sometimes create frictions that interfere with these transactions. /overnment corruption, labour disputes and a partisan (udicial system can significantly raise the cost of getting things done. )orruption among custom officials can push a foreign firm to agree to pay for special assistance, if it wants to clear goods through customs. *. Distributi!e 7olitical )is$ A." and host country cannot do without each other. A." is doing a business in host country and thus generating employment. But if the host country feels that the A." is capable of doing much more than at present and mostly much of it is going currently to other countries then host country wants to have a larger share from the A."s economic gain for its own people and their economic growth. Thus taxation changes can come in. Aany countries see foreign investors as agents of prosperity. s foreign investors achieve greater success, some countries 3uestion the distributive (ustice of the rewards, wondering whether they are getting their fair share. )ountries then aim to claim a greater

share of rewards but in ways that do not provo'e the company to leave. They do so by revising their tax codes, regulatory structure and monetary policy to capture greater benefits from foreign companies. "g. <! has highest degree of political ris' in world of cigarette companies on matters of taxation, regulation, business practice and liability. ,. %atastrophic 7olitical )is$ These types of ris's arise from flash points li'e ethnic discord, civil disorder or war. Those random political developments adversely affect the operations of all companies in a country. @hile uncommon, their impact disrupts the business environment for all firms. )ole o( =o!ern#ent

Interest rticulation* <nderstand the interests of all sta'eholders. Interest ggregation* ,utting it all together in the form of budget. ,rior to budget government tal's in a structured form to various groups. ,olicy Aa'ing * 7egislature. Implementation& d(udication * !hould loo' forward for the economic cooperation of other countries. !hould loo' for groups which the country (oins. company which has more membership internationally, is more transparent and predictable about its policies. should loo' for the proper functioning of foreign companies, local companies and small scale industries.

countryDs political environment has enormous implications to managers and companies. political system is the complete set of institutions, political organizations, interest groups, the relationships between those institutions and the political norms and rules that govern their functions. The purpose of a political system must agree, is that it integrates different groups into a functioning, self sustaining and self governing society. <ltimate test of a political system is its ability to unite a society in the face of divisive pressures of competing ideas and outloo's.

)hapter 8

%hapter-,-&cono#ic &n!iron#ent o( a %ountry

The following are some of the 'ey macro economic parameters.

4. /D,$/.I 5. ,,, 6. ,opulation and Demographics 8. "xports$Imports =Trade /ap> 9. FDI :. F,I ;. For"x %eserves ?. Inflation H. Interest %ate 4E. "xchange %ate 44. Balance of ,ayment =B-,> 45. Buman Development Index =BDI> 46. <nemployment 48. Income Distribution and ,overty 49. Debt

1. =D7

/D, is the total value of all goods and services produced within a nationBs borders o!er one year, no matter whether domestic or foreign owned companies ma'e the product. For countryDs attractiveness /D, is a more important factor. In addition to the /D,, the sectoral brea' up and growth rate also needs to be 'nown for a country. The three ma(or sectors of India are griculture, manufacturing and services. !ervices sector is the ma(or sector. If we ta'e the growth rate, then developed countries have a stable growth rate but not growing rapidly where as the developing countries are growing at a rapid rate although their economic base is smaller. From an organization point of view, the growth rate of the relevant mar'etDs sector needs to be considered. lso the growth rate of the sector from where the resources are obtained is to be considered. !o compared to absolute growth rate, sectoral brea' up is more important.

=D7 7er %apita > Aanagers divide the /D, to the number of people who live in a country. This ratio leads to a per capita estimator that measures the relative performance of a countryDs economy. It signifies the average income level of the country. It determines which 'inds of products will be bought by the people of that country. It is a good indicator for consumer goods where as for industrial goods sectoral brea' up is a good indicator.

2. 7urchasing 7o8er 7arity 777"

The ,urchasing power parity is the number of units of a countryDs currency re3uired to buy the same amounts of goods and services in the domestic mar'et that one unit of income would buy in the other country. It is useful to compare the purchasing power of different countries. The most common ,,, exchange rate comes from comparing a bas'et of goods and services in a country with an e3uivalent bas'et in the <nited !tates.

*. 7opulation and De#ographics

India and )hina are countries with 4 billion plus population where as the average population of a country is 4E million. There are several parameters li'e age, gender, level of education, literacy, urban$rural distribution. -ge * ,opulation of the wor'ing class wor'force, and consumer groups based on age. =ender * )ertain professions are restricted to gents only. ="g* !audi rabia> &ducation* The reach of advertisements will be determined by the literacy and education level of the country. 4rban')ural 7opulation* the nature of mar'et is different whether it is urban populated or rural populated.

,. &:ports'I#ports 1rade =ap"

The companies opt for exports when the cost of labor in home country is low, transportation costs and tariff barriers are also low. country can export goods when it has comparative advantage as compared to the host country. @hen a country is in disadvantage regarding some specific goods and services, it opts for imports. 1rade gap* The difference between the exports and imports of a country is 'nown as trade gap. If exports is greater than imports then the country is said to have trade surplus where as if the imports are greater than exports then the country is said to have trade deficit.

.. FDI

companies adopt FDI route in order to get a controlling sta'e in a host country for a long term purpose. It might not be only for manufacturing. It can also be a part of the overall supply chain. FDI helps the home country to a great extent in terms of controlling other mar'ets.

In8ard FDI * FDI, what comes to home country is 'nown as inward FDI. The inward FDI for India is 49 Billion dollars. Inward FDI indicates, how the country is being perceived by other countries and A."s. The Inward FDI tells about the competitive sectors of the country. Out8ard FDI * FDI what goes out of home country is 'nown as outward FDI. -utward FDI indicates that, the country has certain strengths of world class level =technology, s'ills> in certain sectors for which they are venturing outside. It indicates the economic development of the host country. )ountries go for outward FDI, when there is mar'et opportunity or staying closer to the customer as re3uired by the customer. For outward FDI, the country should have economic strength as well as domain 'nowledge and capabilities.

0. F7I
Foreign portfolio investments are meant for only short term purpose. Bere the main motive is to get a good return at a moderate ris' with high li3uidity. )ountries canDt get any controlling sta'e by investing through F,I.

3. For&: )eser!es

It indicates the economic health and sustainability of the country. For"x reserves are re3uired for payment of interests, debts for imports. The for"x reserve of a country should be high.

8. In(lation

Inflation is the pervasive and sustained rise in the aggregate level of prices measured by an index of the cost of various goods and services. In(lation results 8hen aggregate de#and gro8s (aster than aggregate supply. From A."Ds perspective it determines the pricing and long term strategy. It is a large measure of A."Ds confidence. moderate rate of inflation brings stability which is attractive to the A."s. It is a measure of the governmentDs success in the economy. Inflation also puts great pressure on governments to control it. -ften governments try to reduce inflation by raising interest rates and imposing protectionist trade policies and currency controls.

<. Interest )ate

Interest rate is the indicator of cost of raising capital. Ideally interest rates should be low and stable. )ountries try to have interest rates which is close to 7IB-% =7ondon Inter Ban' -ffer %ate>. For a country? ha!ing stability in in(lation? interest rate and e:change rate are the (actors 8hich attract other co#panies to in!est in the country. The stability in these rates helps in predicting the uncertainty in the business. Both interest rates and inflation move in the same direction. @hen inflation goes up, the interest rates also go up to ad(ust the return for the lender.

10. &:change )ate

"xchange rates between two currencies specifies how much one currency is worth as compared to other. The foreign exchange mar'et is one of the largest mar'ets of the world. The daily transactions in foreign exchange mar'et is about L6.5 trillion dollars. @hen inflation is high, export competitiveness go down and exchange rates also go down.

11. /alance o( 7ay#ent /O7"

It records a countryDs international transactions that ta'e place between companies, governments or individuals. In doing so the B-, reports the total of all the money that comes into a country from abroad less all the money going out of the country to any other country during the same period. B-, is also officially 'nown as the statement of International transactions. B-, has two main accounts namely current account and capital account. %urrent -ccount* It trac's all trade activity in merchandise. The components of )urrent account are a. 2alue of exports and imports of physical goods. b. %eceipts and payments for services and intangible goods c. ,rivate transfers such as money sent home by expatriate wor'ers d. -fficial transfers. %apital -ccount * It trac's both loans given to foreigners and loans received by citizens. The components of capital account are a. 7ong term capital flows. b. !hort term capital flows. )urrent accounts indicate trade balance, dividends, interests for investments, unilateral transfers where as )apital accounts indicate FII, Investments, loans, repayments, real estate. B-, is an important measure for long term stability of a country. The B-, should be moderate.

12. ;u#an De!elop#ent Inde: ;DI"

BDI measures the average achievements in a country on three dimensions. +onge!ity * as measured by life expectancy at birth Cno8ledge * as measured by the adult literacy rate and the combined primary, secondary and tertiary gross enrolment ratio. Standard o( li!ing * as measured by /.I per capita expressed in ,,, for <! dollars. <nited .ations refined the BDI by adding two more dimensions i.e. =ender * a gender related development index that ad(usts for gender ine3ualities. 7o!erty * a measure of poverty to ad(ust for human deprivations and the denial of choices and opportunities. BDI aims to capture long#term progress in human development rather than short term changes. BDI is scaled in between E and 4. )ountries scoring less than E.9 are having low BDI. From E.9 to E.? are having moderate and from E.? to 4 have high BDI.BDI measures both economic and social parameters to estimate its current and future economic activity. It indicates a countryDs long term potential.

1*. 4ne#ploy#ent

If the country has high level of unemployment, then it triggers political ris'. The proportion of unemployed wor'ers in a country shows how well a nationDs human resources are used and serves as a measure of economic activity.Aanagers access the situation of a country by chec'ing the misery Index. Aisery Index is the sum of countryDs inflation and unemployment rates. The higher the misery, the lower are the chances that foreign companies will invest in the country.

1,. Inco#e distribution and 7o!erty

The top 5EM of the world population account for the ?:M of the income where as the bottom 5EM account for only 4M. In India ?E percent of the population earn less than L5 a day and 8E percent of the population earn L4 a day. Therefore managers loo' for the economic potential of a country by ad(usting their analyses to reflect the actual distribution of income. The s'ewness of the income distribution is very high in India as well as sian countries. If income distribution is une3ual, then it will lead to poverty. !o only a part of the population will be relevant. ,overty impacts the economic environment and analyses to a huge extent. International companies facing such situations must deal with their implications to virtually every feature of the economic environment. In countries with high poverty levels customary mar'et systems may not exist, national infrastructure may not wor', criminal behaviours may be pervasive. !o companies have to deal with all such situations.

1.. Debt
It is the sum total of governmentDs financial obligations. It measure the stateDs borrowing from its population, foreign organization, foreign governments and international institutions. The larger the total debt, the more unstable the countryDs economy becomes. countryDs debt has two parts * Internal and "xternal debt. Internal Debt * Internal debt results when the government spends more than it collects in revenues. Internal deficit occurs due to imperfect taxing system, state owned enterprises run deficits. &:ternal Debt* "xternal debt results when a government borrows money from foreign

lenders. Foreign investors monitor debt levels to gauge debt pressures on the government to revise its economic policies.

1ypes o( &cono#ic Syste#s

n economic system is the set of structures and processes that guides the allocation of resources and shapes the conduct of business activities. -n one end there is capitalism and on the other hand there is communism. )apitalism is a free mar'et system built on private ownership and control. )ommunism is a centrally planned system built on state ownership of all economic factors of production and control of economic activity. !o basically there are three types of economic systems.

Aar'et "conomy )ommand "conomy Aixed "conomy

2ar$et &cono#y
It is basically a capitalist economy. In mar'et economy individuals, rather than government, ma'e the ma(ority of economic decisions. The theoretical principles that define free#mar'et economies are based on the principle of laissez#faire =non#intervention by government in economic matters>. This principle is credited to dam !mith and his proposition that a mar'et economy has two general features

,roducers efficiently ma'e products that consumers want in a profit ma'ing motive. )onsumers determine the relationships among price, 3uantity, supply and demand so that capital and labor are allocated productively.

!o the consumer sovereignty, where by consumers influence the allocation of resources through their demand of products is the essence of mar'et economy. mar'et is very less dependent upon government rules and restrictions. Bowever for some public goods li'e traffic systems or national defence, government intervenes to enforce contracts, property rights to ensure fair and free competition and to regulate certain economic activities and provide general security. "g* Bong Fong, /reat Britain, )anada, <nited !tates are ma(or mar'et economies.

%o##and &cono#y
lso 'nown as centrally planned economy. It is the exact opposite of mar'et economy. Bere the government owns and controls all resources. Bere the government decides the type, 3uantity, price, production and distribution of goods. In a centrally planned economy, the government owns the means of production i.e. land, farms, factories, ban's, stores and are managed by the employees of the state. Bere the price of the goods and

services usually remains constant however the 3uality deteriorates over a time period because

@hatever product is made is usually in short supply. )onsumers typically have few to no other choices. There is not much incentive for companies to innovate and little profits to invest.

)ommand economies are traditionally found in communist countries. In communist countries, the state economic planners give highest priority to industrial investments and military spending where as consumer goods and food products are given little or no priority. Bowever centrally planned economies sometimes allowed free mar'et forces to play in the informal gray mar'ets where scarce consumer goods are exchanged at mar'et determined rates. )ommand economies can perform well in terms of growth rates for short periods of time by mobilizing unemployed or underemployed resources to generate growth. Bowever the products produced are not competitive with global standards, often achieved marginal rates of efficiency while ma'ing acceptable products. )urrently very fewer countries are practicing command economies li'e .orth Forea and )uba. Aany )ountries are transiting from command economies to mar'et economies, thereby creating business opportunities.

2i:ed &cono#y
Aost of the economies are neither purely mar'et nor command economies. Aost of them fall in the midway of the capitalism#communism spectrum. In a mixed economy the public sector, private sector and private sector co#exist simultaneously. mixed economy is a system where economic decisions are largely mar'et driven and ownership is largely private, but the government intervenes in many private economic decisions. Bere the government owns 'ey factors of production, yet consumers and private producers still influence price and 3uantity. The proponents of mixed economies concede that an economic system should aspire to achieve the efficiencies endemic to free mar'ets. But an economic system must also protect the society from the excesses of individualism and greed and ideally apply policies needed to achieve low employment, low poverty, steady economic growth and an e3uitable distribution of wealth. -perationally government intervention in the economy ta'es various forms.

)entral, regional, local governments may actually own some means of production. The government can influence private production or consumption decisions. The government can redistribute income and wealth in pursuit of some e3uity ob(ective.

The extent and nature of government intervention varies from country to country and changes over time based on a countryDs political, social, cultural and institutional traditions and trends.

1ransition to a #ar$et econo#y

!ince the mar'et economies outperformed command and mixed economies, therefore it is apparent that government ownership and control of the factors of production constrained growth and prosperity due to operational inefficiency and strategic ineffectiveness. lso due to globalization, there is free flow of products, people and ideas among nations. Together these developments aggravate a fundamental limitation of mixed and command economies. Aar'et economies create powerful individual incentives that stimulate innovation, whereas mixed and command economies seemed to create wea' or no incentives. The process of transition to a mar'et economy varies from country to country. It largely depends on how well the countryDs government can dismantle its central planning system and consumer sovereignty in its economic environment. The success of transition appears to be intricately lin'ed to how well the government deals with privatizing the means of production, deregulating the economy, protecting property rights, reforming fiscal and monetary policies and applying antitrust regulation. 7ri!atiAation It is the process of transfer of ownership and control of factors of production from government to private owners. It will lead to a certain level of unemployment. ,rivatization improves general mar'et efficiency and shapes the relationship between supply and demand. ,rivatization reduces govt debt by eliminating the need to subsidize typically inefficient, money loosing state owned enterprises. ,rivatization leads to up gradation of technologies, improvisation of business practices and creation of innovations. Deregulation Deregulation involves relaxing or removing restrictions on the free operation of mar'ets and business practices. The country, by deregulating, ma'es it more attractive for A."s. The result will be employee generation, exports, infrastructure development, 'nowledge growth, sectoral growth. The govt gains taxes in the form of =income taxes, company taxes, and indirect taxes>. It increases the productivity due to less regulation compliance. Therefore the resulting freedom and savings encourage managers to ma'e the investments into the innovations that then lead to economic growth. The disadvantage in deregulation is, the control remains elsewhere instead of the host country. 7roperty )ights ,rotection of property rights means that entrepreneurs who come up with an innovation can legally claim the present and future rewards of their idea, effort and ris'. The protection also supports a competitive economic environment by assuring investors and entrepreneurs that they will prosper from their hard wor'. Fiscal and 2onetary )e(or#

dopting free mar'et principles re3uires a government to rely on mar'et#oriented instruments for macroeconomic stabilization, set strict budget limits, and use mar'et based policies to manage the supply. <sing the mar'et to enforce fiscal and monetary discipline leads to stable economic environments that attract the investors, companies and capital needed to start and finance growth. -ntitrust +a8s By enforcing antitrust laws, governments can prevent monopolies from exploiting consumers and restraining mar'et growth. The governmentDs intent on liberalizing its economic system must legislate antitrust laws that encourage the development of industries with as many competing businesses as the mar'et will sustain. In such industries, prices are 'ept low by the forces of competition.

%hapter 0-International 1rade and Factor 2obility 1heory

4tility o( International 1rade 1heories (or countries and co#panies

Trade theory in India comes from the ministry of commerce. It is based on the factors basically framed by @T- li'e who should be your trading partners, specifying trade bloc's etc. 7i'e India, other countries wrestle with the 3uestions of what, how much and with whom their country should import and export. The decisions ta'en by countries in this matter greatly affect their business because they affect which countries can produce given products more efficiently and whether countries will permit imports to compete against their own domestically produced goods and services. Trade theories tell how or whether governments should intervene directly to affect their countriesD trade with other countries. Trade theories tell countries about what products should be exported and imported or what should be the total foreign trade as a percentage of the /D,.-nce countries ma'e decisions about what, how much and with whom to trade, officials enact trade policies to achieve the desired results. There are two aspects of trade policies. ,olicy boo' which specifies the policies Bandboo' of proceedings which specifies as an exporter or importer what should be your duties. )ompanies need to understand trade theories so that they can find where to locate the production$distribution unit. the second reason being sourcing i.e. where to import from

and where to export. These different trade theories provide insights about favourable locales as well as potentially successful export products. The theories also increase understanding about government trade policies and predict how those policies might affect companiesD competitiveness.

7rescripti!e 1heory
There are two prescriptive theories namely Aercantilism and .eomercantilism

2ercantilis#
It is a trade theory which formed the foundation of economic thought from about 49EE to 4?EE. It says all theories are related to countries not companies. ccording to this theory a country should export more than it imports and if successful, receive gold from countries that run deficits. !o employment will be there and excess production will occur in the country. In this process the country will become stronger and popular. To export more than import, governments imposed restriction on most imports and they subsidized production of many products that could otherwise not complete in domestic or export mar'ets. s the influence of the mercantilist philosophy wea'ened after 4?EE, the governments of colonial powers seldom aimed directly to limit the development of the industrial capabilities within their colonies. favourable balance of trade indicates that a country is exporting more than it is importing, where as an unfavourable balance of trade indicates the opposite. Bowever it is not necessarily beneficial to run a trade surplus or disadvantageous to run a trade deficit. country that is running a surplus for the time being, imports goods and services of less value than those it is exporting. In mercantilist period the difference in trade was made up by a transfer of gold, but today it is made up by holding the deficit countryDs currency or investments denominated in that currency.

Neo#ercantilis#
It is an extension of Aerc' theory. ccording to this theory the countries try to run a favourable balance of trade i.e. export more than they import. The ob(ective is not purely economical, rather social and political. By exporting they ac3uire political good will of the countries to whom they export. Developed countries do this to developing countries. In addition by doing excessive production and export, they generate employment in the home country and increase the sphere of influence among the host countries.

1heories o( SpecialiAation
The theory of specialization states that nations should neither artificially limit imports nor promote exports. There are three theories of specialization.

Theory of absolute advantage. )omparative advantage. Factor proportions theory.

1heory o( absolute ad!antage

In 4;;: dam smith said the wealth of the country depend on its goods and services. Be first tal'ed about free trade. ccording to him some countries can produce certain goods more efficiently =competitively> because of their natural advantage =natural resources>. These countries should produce these goods and export it to countries having less or no advantage of these goods. -n the contrary, the goods that could not be produced competitively should be obtained from other countries that have competitive advantage over the same. It will lead to the optimal utilisation of resources throughout the world. By doing this countries will have large production units for certain products. Based on this theory, he 3uestioned why the citizens of any country should have to buy domestically produced goods when they could buy these goods more cheaply abroad. Through specialization, countries could increase their efficiency because of three reasons.

7abor could become more s'illed by repeating the same tas's. 7abor would not loose time in switching from the production of one 'ind of product to another. 7ong production runs would provide incentives for the development of more effective wor'ing methods

country can have either natural advantage or ac3uired advantage. Natural ad!antage* country may have a natural advantage in producing a product because of climatic conditions, access to certain natural resources, or availability of certain labor forces. .o country is sufficiently rich in natural resources to be independent of the rest of the world. !o most countries import ores, metals and fuels from other countries. -c6uired -d!antage* )ountries that produce manufactured goods and services competitively have an ac3uired advantage, usually either in product or process technology. n advantage of product technology is that it enables a country to produce a uni3ue product or one that is easily distinguished from those of competitors. n advantage in process technology is a countryDs ability to produce a homogeneous product =one not easily distinguished from that of competitors> efficiently.

1heory o( co#parati!e ad!antage

In 4?4;, David %icardo developed the theory of comparative advantage. This theory says that global efficiency gains may still result from trade if a country specializes in those products that it can produce more efficiently than other productsNregardless of whether

other countries can produce those same products even more efficiently. !o a country will gain if it concentrates its resources on producing the commodities it can produce most efficiently. It will then trade some of those commodities for those commodities it has relin3uished. This theory is accepted by most economists and is influential in promoting policies for free trade.

-ssu#ptions and +i#itations o( 1heories o( SpecialiAation

Full e#ploy#ent> The specialization theories assume that resources are fully employed. Bowever when countries have many unemployed or unused resources, they may see' to restrict imports to employ or use idle resources. &cono#ic &((iciency ObDecti!e> )ountries also often pursue ob(ectives other than output efficiency. They may avoid overspecialization because of the vulnerability created by changes in technology and by price fluctuations. Di!ision o( =ains> lthough specialization brings potential benefits to all countries that trade, the earlier discussion did not indicate how countries will divide increased output. 18o %ountries? 18o %o##odities> the theory assumes a simple world composed of only two countries and two commodities. 1ransportation costs> If transportation costs more than what is saved through specialization, then the advantages of trade are negated. Statics and Dyna#ics> The theories view the advantages statically. Bowever the relative conditions that give countries advantages or disadvantages in the production of given products are dynamic. Ser!ices> The theories of absolute and comparative advantage deal with commodities rather than services. Bowever an increasing portion of world trade is in services. 2obility> The theory assumes that resources can move domestically from the production of one good to another and at no cost. But this assumption is not completely valid.

Factor 7roportions 1heory

Bec'scher and ohlin developed factor proportions theory. This theory is based on countriesD production factors li'e land, labor and capital. This theory says that differences in countriesD endowments of labor compared to their endowments of land or capital explained the differences in the cost of production of factors. If labor were abundant in comparison to land and capital, then labor cost would be low. These relative factor costs lead countries to excel in the production and export of products that used their abundant production factors. In countries where there is little capital available for investment per wor'er is low, managers might expect to find cheap labor rates and export competitiveness in products that re3uire large amounts of labor relative to capital. Bowever, because the factor#proportions theory assumes production factors to be homogeneous, tests to substantiate the theory have been mixed. 7abor s'ills in fact vary within and among countries because people have different training and education.

International 7roduct +i(e %ycle

The international product life cycle theory of trade states that the location of production

of certain 'inds of products shifts as they go through their life cycles, which consist of four stages namely introduction, growth, maturity and decline.

Introductory phase
-nce a company has created a new product, theoretically it can manufacture that product anywhere in the world. In practice, however, the early production generally occurs in domestic location so that the company can obtain rapid mar'et feedbac' as well as save on transport costs. In this stage, the production process is more labor intensive because the product is not yet standardized and its production process must permit rapid changes in product characteristics as mar'et feedbac' dictates. lthough the early production is most apt to occur in high income countries, which have high labor rates, this labor tends to be highly educated and s'illed so that it is adept and efficient when production is not yet standardized. "ven if production costs are high because of expensive labor, companies can often pass costs onto consumers who are unwilling to wait for possible price reductions later.

=ro8th 7hase
In this phase, as the sales of new product grow, competitors enter the mar'et and demand grows substantially in foreign mar'ets, particularly in other high income countries. Because sales are growing rapidly at home and abroad, there are incentives for companies to develop process technology. Bowever product technology may not yet be well developed because of the number of product variations introduced by competitors that are also trying to gain mar'et share. !o the production process may still be labor intensive during this stage, although it is becoming less so.

2aturity phase
In this stage the overall worldwide demand begins to level off, although it may be growing in some countries and declining in some countries. There is often a sha'eout of products such that product models become highly standardized, ma'ing cost an important competitive weapon. 7onger production runs become possible for foreign plants, which in turn reduce per unit cost, thus creating more demand in emerging economies. Because mar'ets and technologies are widespread, the innovating country no longer commands a production advantage. ,roducers have incentives to shift production to emerging economies where they can employ uns'illed, inexpensive labor efficiently for standardized production.

Decline 7hase
In this phase the mar'ets in high income countries decline more rapidly than those in low#income economies as affluent customers demand ever newer products. By this time, mar'et and cost factors have dictated that almost all production is in emerging economies, which export to the declining or small niche mar'ets in high income countries.

1heory o( %ountry siAe

The theory of country size holds that large countries usually depend less on trade than small countries. )ountries with large land areas are apt to have varied climates and an assortment of natural resources, ma'ing them more self sufficient than smaller countries. Further transport costs in trade affect large and small countries differently. mong countries that border each other, the smaller country tends to depend more on trade than the larger country because of transportation costs. The distances for neighbouring countries for small countries are less and hence less transportation cost.

%ountry si#ilarity
!imilar countries engage in trade among themselves because

%e3uirements are similar !imilar income levels, needs "ase and comfort of operations

7orterBs dia#ond theory

For diagra# please re(er at the top o( this post.

ccording to porterDs diamond theory, companiesD development of internationally competitive products and for being supremacy depends on four domestic factors namely

Demand conditions Factor conditions %elated and supporting industries Firm strategy, structure and rivalry

Demand conditions are the first condition in the theory. )ompanies come up with new products only when they observe a need or demand for the same in the mar'et. )ompanies then start up production near the observed mar'et. The demand conditions loo' for the 3uality of people i.e. how demanding the customers are. If the customers are more demanding, then industry players try to outperform each other and this leads to more competition and thus better products. The second condition is the Factor conditions. Bere the companies loo' for the natural advantage available in the domestic mar'et in terms of s'illed labor, capital, technology and e3uipment. If certain factor conditions are not available then the companies refer the host country diamond. It is possible due to international trade. The third condition is the existence of related and supporting industries. These industries are re3uired in the country for the components of the main product. The ability of the companies to develop and sustain a competitive advantage

re3uires favourable circumstances for the fourth condition i.e. firm strategy, structure and rivalry. %ivalry brings out the best in the companies. ll earlier theories loo'ed at comparative advantage while porterDs diamond focuses on competitive advantage. Implications of ,orterDs diamond

For country go!ern#ent

/overnment should focus on Ospecialized factor conditionsP eg#education for growth of IT. /overnment should not allow companies to have strategic alliance between companies of the same country because it will reduce competition. If alliance is to ta'e place, then it has to ta'e place with foreign players. /overnments should be open for foreign country mar'et through negotiation with other countries.

For %o#panies

!elect and tap the host country diamond. <tilize the specialized factor conditions and enhance$compliment them with their own capabilities. Focus on innovation i.e. committed %QD

+i#itations o( porterBs dia#ond

%esources may be channelled to sectors where there is comparative advantage based industries and in turn those industries where innovation is due, may not get resources. @hat is comparative advantage today may not be there tomorrow due to the ongoing globalization. The sectors are competitive across the world and are not restricted to a single country. The existence of four favourable conditions does not guarantee that an industry will develop in a given locale. t the same time the absence of any of the four onditions from the diamond domestically may not inhibit companies and industries from becoming globally competitive. If related and supporting industries are not available locally, materials and components are now more easily brought in from abroad due to advancement in transportation and relaxation of import restrictions. )ompanies react not only to domestic rivals but also to foreign based rivals with whom they compete at home and abroad.

Factor 2obility

Factor conditions change in both 3uality and 3uantity. The relative capabilities of countries also change. The changes are important in understanding and predicting changes in export production and import mar'et locations. t the same time the mobility of capital, technology and people affect trade and relative competitive positions.

@hy production (actors #o!e

)apital, especially short term capital, is the most internationally mobile production factor. )ompanies and private individuals primarily transfer capital because of differences in expected return. !hort term capital is more mobile than long term capital because there is more li'ely to be an active mar'et through which investors can 3uic'ly buy foreign holdings and sell them if they want to transfer capital bac' home or to another country. Bowever companies invest in long#term abroad to tap mar'ets and lower operating costs. nother reason for capital mobility is because governments give foreign aid and loans. .on profit organizations donate money abroad to relieve worrisome economic and social conditions. Individuals remit funds to help their families and friends in foreign countries.

,eople are also internationally mobile. ,eople move from the area of abundance to area of scarcity. ,eople who travel to another country as tourists, students and retirees do not constitute labor mobility unless they wor' there. bout 5 percent of the worldDs population has migrated to another country. ,eople whether professionals or uns'illed wor'ers, largely wor' in another country for economic reasons. ,eople also move for political reasons also li'e persecution or war dangers. ,eople move for short term when they are allocated in turn'ey onsite pro(ects, or overseas positions. Bowever people move for long term through migration and ta'e citizenship.

&((ects o( (actor #o!e#ents

Immigrants bring human capital with them, thus adding to the base of s'ills that enabled countries to be newly competitive in an array of products they might otherwise have imported.

)ountries receive foreign capital to develop infrastructure and natural resources, which further altered their competitive structures and international trade. )ountries lose potentially productive resources when educated people leave, a situation 'nown as a brain drain, but they may gain from the foreign earnings on those factors.

)elationship o( trade and Factor #obility

Free trade when coupled with freedom of factor mobility internationally will usually result in the most efficient allocation of resources.

Substitution

@hen the factor proportions vary widely among countries, pressures exist for the most abundant factors to move to countries with greater scarcity# where they can command a better return. If finished goods and production factors were both free to move internationally, the comparative costs of transferring goods and factors would determine the location of production. Bowever there are restrictions on factor movements that ma'e them only partially mobile internationally. The inability to gain sufficient access to foreign production factors may stimulate efficient methods of substitution, such as development of alternatives for traditional production methods.

%o#ple#entarity

Trade and investments are complementary. @hen companies invest abroad, the investments often stimulate exports from their home countries. ny investment in terms of trade made by a foreign country leads to import of capital e3uipment, import of components, local players also reduce cost, improve technology, import goods and may also export in the long run. bout a third of world trade =exports> is among controlled entities such as from parent to subsidiary, subsidiary to parent, subsidiary to subsidiary of the same company. Aany of the exports would not occur if overseas investments did not exist. nother reason might be domestic operating units may export materials and components to their foreign facilities for use in a finished product.

%hapter 3- =o!ern#ental In(luence on 1rade

7rotectionis#
The governmental restrictions and incentives to trade are 'nown as protectionism. /overnments want to protect their own industries. /overnments also want to promote exports at the same time. fter ;Es, India changed from Import substitution to export oriented. /overnmental measures may limit your ability to sell abroad, such as by prohibiting the export of certain products to certain countries, or by ma'ing it difficult for you to buy what you need from foreign suppliers. /overnments routinely influence the flow of imports and exports. lso governments directly or indirectly subsidize domestic industries to help them engage foreign producers at home or challenge them abroad. ll nations interfere with international trade to varying degrees. /overnments intervene in trade to attain economic, social or political ob(ectives. /overnments pursue political rationality when trying to regulate trade. /overnmental officials apply trade policies that they reason have the best chance to benefit the nation and its citizen and in some case their personal political longevity. )ole o( =o!ern#ent Interest articulation* since different interest groups co#exist, so different interests need to be put forward. Interest aggregation* ta'e all sta'eholders view into account ,olicy ma'ing Implementation and ad(udication

1he &cono#ic )ationales (or go!ern#ental inter!ention 1.4ne#ploy#ent

-ne of the social ob(ectives of government is to prevent unemployment. The government can do that through import restriction. -ne difficulty with restricting imports to create (obs is that other countries normally retaliate with their own restrictions. Two factors can ease the effects of retaliation

!mall trading countries are less important in the retaliation process. %etaliation that decreases employment in a capital#intensive industry may not affect employment as much as the value of the trade loss would imply.

If import restrictions do increase domestic employment, then fellow citizens will have to bear the cost of higher prices or higher taxes. /overnment officials should compare the costs of higher prices with the costs of unemployment and displaced production that would result from freer trade. In addition, they must consider the costs of policies to ease the plight of displaced employees, such as for unemployment benefits or retraining. The employment issue can slow trade liberalization because displaced wor'ers are often the ones who are least able to find alternative wor' at a comparable salary. !o persistent

unemployment pushes many groups to call for protectionism. Bowever, evidence suggests that efforts to reduce unemployment through import restrictions are usually ineffective. <nemployment, in and of itself, is better dealt with through fiscal and monetary policies.

2.In(ant industry protection

In 4;H5, lexander Bamilton presented infant industry argument. This theory holds that a government should shield an emerging industry from foreign competition by guaranteeing it a large share of the domestic mar'et until it is able to compete on its own. /overnment protects these industries through subsidies. The govt protects infant industries where the country has either comparative or competitive advantage. !o the companies of those industries will become ma(or exporters. They become strong in the home mar'et also. /ovt needs to protect its potential stars. The infant industry argument presumes that the initial output costs for a small scale industry in given country may be so high as to ma'e its output non competitive in world mar'ets. -nce the infant industry becomes globally competitive, the government can then recoup the costs of trade protection through benefits li'e higher domestic employment, lower social costs and higher tax revenues. It is reasonable to expect production costs to decrease over time, but they may never fall enough to create internationally competitive products. !o there are two ris's for protecting an infant industry.

/overnments must identify those industries that have a high probability of success. "ven if policy ma'ers can determine those infant industries li'ely to succeed, it does not necessarily follow that companies in those industries should receive governmental assistance.

Infant industry protection re3uires some segment of the economy to incur the higher cost of inefficient local production. Typically either consumers or tax payers ta'e the burden. <ltimately the validity of the infant industry argument rests on the expectation that the future benefits of an internationally competitive industry will exceed the costs of the associated protectionism.

*. 7ro#ote IndustrialiAation
)ountries with a large manufacturing base generally have higher per capita incomes than those that do not. Bence many emerging economies try to develop an industrial base by largely regulating imports from foreign producers using trade protection to spur local industrialization. The following are the effects of promoting industrialization

<se of surplus wor'ers. ,romoting investment inflows. Diversification

/reater growth for manufactured products Import substitution versus export promotion .ation building

4se o( surplus 8or$ers !urplus wor'ers can more easily increase manufacturing output than agricultural output. !ince agricultural output per person is low, so many people can migrate from agricultural sectors to industrial sectors and in turn increase industrial output. The industrialization argument presumes that the unregulated importation of lower priced products prevents the development of a domestic industry. Bowever the industrialization rationale asserts that the industrial output will increase, even if the prices are not globally competitive, because local consumers must buy local goods from local producers. 7ro#oting in!est#ent in(lo8s Inflows of foreign investment in the industrial area promote sustainable growth. Import restrictions, applied to spur industrialization, may also increase foreign direct investment. Foreign investment inflows may also add to local employment, which is attractive to policyma'ers. Di!ersi(ication ,rices and sales of agricultural products and raw materials fluctuate very much, which is a detriment to economies that depend on few of them. ,rice variations due to uncontrollable factors, such as weather affecting supply or business cycles abroad affecting demand, can wrea' havoc on economies that depend on the export of primary products. greater dependence on manufacturing does not either guarantee diversification of export earnings. =reater gro8th o( #anu(actured products Aar'ets for industrial products grow faster than mar'ets for agricultural products. The terms of trade are the 3uantity of imports that a given 3uantity of a countryDs exports can buy. The prices of raw materials and agricultural commodities do not rise as fast as the prices of finished products. Bence, overtime it ta'es more low priced primary products to buy the same amount of high priced manufactured goods. !o, emerging nations that depend on primary products have become increasingly poorer relative to industrial countries. I#port substitution !ersus e:port pro#otion Traditionally emerging economies promoted industrialization by restricting imports in order to boost local production for local consumption. !ome countries have achieved rapid economic growth by promoting the development of industries that export their output. This approach is 'nown as export led development. Industrialization may result

initially in import substitution, yet export development of the same products may be feasible later. Nation /uilding Industrial activity helps the nation building process. The performance of free mar'ets suggests a strong relationship between industrialization and aspects of the nation building process. Industrialization helps countries to build infrastructure, advance rural development, enhance rural proplesD social life and boost the s'ills of the wor'force.

,. Increasing countryBs econo#ic po8er relati!e to other countries

)ountries monitor their absolute economic welfare as well as trac' how their performance compares to other countries. /overnments impose trade restrictions to improve their relative trade positions. They also try to charge higher export and lower import prices. To remain competitive and perform better economically, the countries adopt the following five methods.

Improving Balance of payments =B-,> through Balance of Trade %estrictions as a .egotiating tool ,rice control on exports Fair access$%eciprocity -ptimal tariff theory

I#pro!ing /alance o( pay#ents through /O1 /overnments can improve B-, by improving their balance of trade. If B-, difficulties arise and persist, a government may restrict imports or encourage exports to balance its trade account. -ne way to do this is to devalue the currency of the country, which ma'es all the products cheaper in relation to foreign products. )estrictions as a Negotiating tool The imposition of import restriction may be used as a means to persuade other countries to lower their import barriers. To successfully use restriction as a bargaining tool re3uired careful consideration of what products to target. Basically the restrictions need to be believable and important to the influential parties in the other country. Believable implies that there are either alternative sources to buy the same product or that consumers are willing to do without it. 7rice control on e:ports )ountries sometimes withhold goods from international mar'ets in an effort to raise prices abroad. This policy may also encourage other countries to develop technology that will provide either substitute products or different ways of producing the same product.

country may limit exports of a product that is in short supply worldwide in order to favour domestic consumers. )ompanies sometimes export below cost or below their home country price, a practice called dumping. )ompanies do dumping to build a mar'et abroad. Fair access')eciprocity )ompanies and industries often argue that they are entitled to the same access to foreign mar'ets as foreign industries and companies have to their mar'ets. "conomic theory supports this idea, reasoning that producers operating in industries where increased production leads to steep cost decreases, but which lac' e3ual access to a competitorDs mar'et will struggle to gain enough sales to be cost competitive. Opti#al tari(( theory This theory states that a foreign producer will lower its prices if the importing country places a tax on its products. If this occurs, benefits shift to the importing country because the foreign producer lowers its profits on the export sales.

Nonecono#ic rationales (or go!ern#ent inter!ention

/overnments are involved in the following noneconomic rationales.

Aaintenance of essential industries ,revention of shipment to unfriendly countries Aaintenance or extension of spheres of influence ,rotecting activities that help preserve the national identity

2aintenance o( essential industries The essential industries include defence, education. !ome of these industries need to be controlled through government. /overnments apply trade restriction to protect essential domestic industries during peacetime so that a country is not dependent on foreign sources of supply during war. This is called the essential industry argument. Because of the high cost of protecting an inefficient industry or a higher cost domestic substitute, the essential industry argument should not be accepted without a careful evaluation of costs, real needs and alternatives. -nce an industry receives protection, it is difficult to remove the protection. 7re!ention o( ship#ent to un(riendly countries Bere the governmentDs is not to supply goods to rival countries. )ountries achieve these political goals using economic means i.e. trade controls. )ountries also start blac'listing other countries who supply to their rival countries. )ountries concerned about security often use national defence arguments to prevent the export, even to friendly countries, of strategic goods that might fall into the hands of potential enemies or that might be in

short supply domestically. "xport constraints may be valid if the exporting country assumes there will be no retaliation that prevents it from securing even more essential goods from the potential importing country. Trade controls on nondefense goods also may be used as a weapon of foreign policy to try to prevent another country from meeting its political ob(ectives. 2aintenance or e:tension o( spheres o( in(luence /overnments give aid and credits to, and encourage imports from countries that (oin a political alliance or vote a preferred way within international bodies. It is about exporting to another country and in turn generating employment and B-,. countryDs trade restrictions may coerce governments to follow certain political actions or punish companies whose governments do not. 7rotecting acti!ities that help preser!e the national identity /ovtCs role is not only to govern the country but also to protect the country and put it together. For this the country re3uires national identity and a sense of belongingness. )ountries are held together partially through a unifying sense of identity that sets their citizens apart from those in other nations. To sustain this collective identity, countries limit foreign products and services in certain sectors.

Instru#ents o( 1rade %ontrol

The following are some of the instruments of trade control 4. Tariffs 5. !ubsidies 6. Tied id to countries 8. )ustom valuation 9. )onsular fees :. Kuotas ;. OBuy 7ocalP 7egislation ?. !tandards and 7abels H. !pecific permission re3uirements 4E. dministrative delays 44. %eciprocal %e3uirements 45. %estrictions on services

1. 1ari((s
tariff =duty> is the most common type of trade control and is a tax that governments levy on a good shipped internationally. /overnments charge a tariff when a good crosses its official boundary. Trade bloc's also charge common tariff rates to non member countries.

&:port 1ari((* Tariffs collected by the exporting country are called an export tariff. "xport tariffs are imposed because these items going out would affect local industries. "xport tariffs put essential items useful locally. 1ransit 1ari((* Tariffs collected by a country through which the goods have passed are called a transit tariff. I#port 1ari((* Tariffs collected by an importing country are called import tariff. Import tariffs are imposed to ma'e local production more attractive and competitive.

Import tariffs raise the price of imported goods, thereby giving domestically produced goods a relative price advantage. Tariffs also serve as a source of governmental revenue. lthough, revenue tariffs are most commonly collected on imports, many countries that export raw materials charge export tariffs. Tariffs are basically three types namely specific duty, ad valorem duty and compound duty.

@hen the government assess a tariff on a per unit basis, then it is called specific duty. @hen the government assesses a tariff as a percentage of the value of the item, then it is called ad valorem duty. @hen the government assesses a tariff based on both specific and ad valorem duty, then it is called compound duty.

2. Subsidies
/ovt pays in various ways to local players in order to ma'e them competitive globally and in turn expect them to become exporters. /overnments sometimes also provide other types of assistance li'e business development services =mar'et information, trade expositions and foreign contacts> to ma'e it cheaper or more profitable to sell overseas. Bowever trade frictions result from disagreement on the definition of a subsidy. !ubsidies ma'e local players compete domestically as well as in foreign mar'ets. <ltimately public pays for these subsidies in terms of taxes subsidizing less efficient$less competitive industries.

*. 1ied -id to countries

@hen governments give aid and loans to other countries with precondition that the recipient is re3uired to spend the funds in the donor country, then it is 'nown as tied aid or tied loan. Tied aid helps win large contracts for infrastructure, such as telecommunications, electric power pro(ects etc. Tied aid can slow the development of local suppliers in developing countries and shield suppliers in the donor countries from competition.

,. %usto# !aluation

@hile imposing tariffs on exports or imports, custom officials first use the declared invoice price. If officials doubt the authenticity, then they impose tariff on the basis of the value of identical goods. If not possible, then officials may compute a value based on final sales value or on reasonable cost. !ometimes officials use their discretionary power to assess the value too high, thereby preventing the importation of foreign made products.

.. %onsular Fees
!ome countries re3uire consular fees. It is a very high amount and delays the proceedings. It ma'es the import to the country less attractive.

0. Euotas
The 3uota is the most common type of 3uantitative import or export restriction. BJ implementing 3uotas the countries increase B-, and B-T by decreasing imports and increasing exports. n import 3uota prohibits or limits the 3uantity of a product that can be imported in a given year. Kuotas usually increase the consumer price because there is little incentive to use price competition to increase sales. Tariffs generate revenue for the government. Bowever 3uotas generate revenues for the companies that are able to obtain and sell the intentionally limited supply. There are different variations of 3uotas. 5oluntary e:port restraint 5&)" Bere the government of country as's the government of country B to reduce its companiesD exports to country voluntarily. Bere either country B volunteers to reduce its exports or country may impose tougher trade regulations. -d!antages o( 5&)

2"% is much easier to switch off than an import 3uota. The appearance of OvoluntaryP choice by a country, does not damage the political relations between those countries as much as an import 3uota does.

&:port Euotas country may establish export 3uotas to assure domestic consumers of a sufficient supply of goods at a low price to attempt to raise export prices by restricting supply in foreign mar'ets. The typical goal of an export 3uota is to raise prices to importing countries. &#bargo It is a specific type of 3uota that prohibits all forms of trade between the countries. )ountries or group of countries may place embargoes on either imports or exports, on whole categories of products or specific products with specific countries. /overnments impose embargoes in the effort to use economic means to achieve political goals.

3. F/uy +ocalG +egislation

!ometimes governments specify a domestic content restriction#that is , a certain percentage of the product must be of local origin. /ovt has the option of buying locally as well as internationally. !o by buying locally, the govt gives protection to the local players. !ometimes they favour domestic producers through price mechanisms. Aany nations prescribe a minimum percentage of domestic content that a given product must have for it to be sold legally in their country. By doing this the local mar'et develops. Technology up gradation happens in the local mar'et. "xports also happen on the component parts.

8. Standards and +abels

)ountries devise classification, labelling and testing standards to allow the sale of domestic products but obstruct that of foreign made ones. In case of labels, the companies have to indicate on a product where it is made. 7abels provide information to consumers who may prefer to buy products from certain nations. The purpose of standards is to protect the safety or health of the domestic population. Bowever some foreign companies argue that standards are (ust another means to protect domestic producers.

<. Speci(ic per#ission re6uire#ents

!ome countries re3uire that potential importers or exporters secure permission from governmental authorities before conducting trade transactions. This re3uirement is 'nown as import license. This procedure can restrict imports or exports directly by denying permission or indirectly because of the cost, time and uncertainty involved in the process. foreign exchange control is a similar type of control.

10. -d#inistrati!e delays

International administrative delays create uncertainty and raise the cost of carrying inventory. )ompetitive pressure, however, moves countries to improve their administrative systems.

11. )eciprocal )e6uire#ents

/overnments sometimes re3uire that exporters ta'e merchandise in lieu of money or they promise to buy merchandise or services, in place of cash payment, in the country to which they export. These sorts of barter transactions are called countertrade or offsets. Aore fre3uently, however, reciprocal re3uirements are made between countries with ample access to foreign currency that want to secure (obs or technology as part of the transaction.

12. )estrictions on ser!ices

!ervices are the fastest growing sector in international trade. )ountries restrict trade in services for three reasons &ssentiality )ountries sometimes prohibit private companies, foreign or domestic, in some sectors because they feel the services should not be sold for profit. In other cases they set price controls for private competitors or subsidize government owned service organizations, creating disincentives for foreign private participation. Aail, education, hospital, media are often not for profit sectors. Standards /overnments limit foreign entry into many service professions to ensure practice by 3ualified personnel. I##igration /overnmental regulations often re3uire that an organization, domestic or foreign, search extensively for 3ualified personnel locally before it can even apply for wor' permits for personnel it would li'e to bring in from abroad. "ven if no one is available, hiring a foreigner is still difficult.