INTERNATIONAL BUSINESS

2006
Q 1) State the objectives of international business. Give an overview of various methods of doing international business with suitable practical examples. Ans. There are three main operating objective of international business. To expand sales: the pursuing international sales usually increase the potential market and potential profits. The companies sales are depend on the following two factors. i. The consumers interesting their products ii. Services and the consumers willingness ability to buying them. Higher sales mean higher profits. Eg. Telecasting sport activities internationally will incur only marginal cost. But sponsors more to spend to more potential buyers which is only for a small segment. Therefore increase sales are major motive for a companys expansion in to international business. Many of the worlds largest company derive more than half their sales from outside their home countries. Eg. Volks Wagon head quarters in Germany, Sony Ericson in Sweden, Sony Japan, Michelin in France, Nest lay in Switzerland To Acquire Recourses: Foreign sources may give companies lower cost, new or better products. Additional operating knowledge. Manufactures and distributors in seek out components produced in foreign countries for their products and services. They look for foreign capital, technologies and information that they can use their home countries. This will help to reduce their cost. Eg. Sporting goods companies such as Mass group, Healys garments. Acquiring recourses enable a company to improve its products, quality and differentiate itself from competitors. This increases market share and profits. Acquisition of foreign recourses such as capital or expertise improves domestic operation. Eg. Avon used know how from its Latin American marketing experience to help penetrate the US Hispanic market. Minimizing Risk: - international operations may reduce operation risk by i. smoothing sales and profits ii. preventing competitors from gaining advantages To minimize fluctuation in sales and profit companies seek out foreign market to take advantage of business cycle differences among countries. Eg. Business losses due to an economic resection in a one country can be off set by growth in sale in another country. Eg. Nestle experience in slower growth in Western Europe and the US was offset by higher growth in Asia, Eastern Europe and Latin America. Obtaining supplies of the same products or component from different countries help reduce full impact of price fluctuation or shortages in any one country. Many countries enter in to international business for defensive reasons. Eg. Counter advantages competitors might gain in foreign market could hear them domestically. Modes of International business: i. Importing and exporting ii. Tourism and transportation 1

iii. iv. v. vi.

Licensing and franchising Turn key operations Management contracts Direct portfolio investments Importing and exporting Merchandise are the most common International economic transaction. Merchandise exports are tangible products goods send out to the country. Merchandise imports arte goods brought in to a country. These could call as visible imports and export. Major souses of international revenue of income and expenditure. Service exports are international non product sales purchases. Eg. Travel, Tourism, banking, Insurance, and the use of asset such as trade marks patents and copy rights. These are very important to some countries. They include many specialized international business operating modes. Tourism and transportation This is important souses of airline and shipping companies, travel agenesis and hotels etc. Some countries economies depend heavily on revenue from these economic factors. Eg. Maldives. Earning from foreign tourism more important to Bahamian and Maldives. Licensing and franchising On an international level companies pay fees for engineering services. That is often handling through turn kea operations such as constructions performed under contract of facilities that are transferred to the owner when their ready begging operating. Eg. Management contracts. Disney received managements fee from managing theme parks in France and Japan. Under use of assists licensing agreement when companies allow other to use their assets. Eg. Trade marks, patents. copy rights or expertise under contracts. And also received earnings called royalty. Eg. Sport ware use logos such as Nikey, Fuboo. Franchise is a mode of business in which one party allows to use trade mark that is essential for the franchisees business. This provides component, management services and technology. (Eg. McDonalds Investments A direct investment involves controlling of a foreign company. (Also Direct foreign Investment FDI) This means ownership of foreign property in exchange for a financial return such as interest and dividends. This takes two forms. (Direct and portfolio). FDI is one that gives the investor a controlling interest in a foreign company. Control need not be 100% or even 50% interest. Eg. Ymichis ownership of the Seattle marines baseball team is a Japanese FDI in the US. When Tow more companies share ownership of an FDI call as Joint ventures. Eg. Disney with Hong Kong government. FDI not the domain of only the large companies. Portfolio Investment Key component of the portfolio investments are non contrail of a foreign operation and financial benefits (loans). A portfolio investment is a noncontrolling interest in a company or ownership odf a loan to another party. This could be in one or two forms. (Stock in a company or loan to a company or country in the form of bond, bills and notes. US investments in UK. Foreign Portfolio investments are investments are important for most companies that have extensive international operations.

Q 2) State the advantages and disadvantages of FDI to he home and host country? List down the problem faced by MNEs in the home country and the problem faced by host country due to MNEs. Ans: Benefits of Foreign Direct Investment (Home Country) FDI benefits the home country to a large extent. The home country refers to the country from which the funds originate for onward investment in another foreign country. Listed below are some of the reasons as to why foreign direct investment is beneficial to the home country. 1. 2. 3. 4. Cost Advantages. New Markets. Exposure to other countries. International Relations.

Disadvantages of Foreign Direct Investment (Home Country) Foreign direct investment may be very advantageous to the home country, that is the country which provides the investment flows with respect to the profits, dividends and gains being repatriated to it, however, having operations in another country gives rise to additional risks which at times may prove very costly for the home country. Let us see some of the ways in which foreign direct investment may be disadvantageous to the home country. 1. Loss of Employment. 2. Problem of Repatriation. 3. Possibility of Loosing Competitive Advantage. Benefits of Foreign Direct Investment (Host Country) Foreign Direct Investment (FDI) has become a very popular means of transfer for capital flows from one country to another. In short, FDI refers to an investment in which an entity for another country invests capital in some income generating assets in another country and maintains full or partial control over such assets acquired. There are several benefits of foreign direct investment which accrue to both the home country as well as the host country. However, it must be noted that such benefits accrue only when appropriate regulation and an ethical sense of doing business exists with the home country, the host country as well as the foreign investor. Some benefits of foreign direct investment are mentioned below. 1. 2. 3. 4. Technological Gap. Exploitation of Natural Resources. Employment Generation. Development of Managerial Pool.

Formation of Clusters : Group of similar projects and manufacturing centres are formed in a specific location by way of providing common production , R&D, training and pollution control system to group competing companies. In Italy, Brazil and India, such clusters have made wonders. 3

Disadvantages of Foreign Direct Investment (Host Country) Foreign direct investment may be very advantageous to the host country that is the country which receives the investment flows in terms of helping the country progress economically and financially. However, foreign direct investment can remain beneficial only when the governments of the host countries put in needed regulations so as to prevent the country from being exploited and used as a profit generating machine for such corporate giants. The past has given many examples of how foreign direct investment can also at times be detrimental to the economy of a country, some examples of which are highlighted below: 1. 2. 3. 4. Political Lobbying. Exploitation of Resources. Threaten Small Scale Industries. Technology.

Problems faced by Host country due to MNEs Technology developed by the MNCs may not suit the needs of host country. MNCs may not operate within national autonomy and sovereignty. Monopolistic practices of MNCs may kill the domestic industry. MNCs may adopt ethnocentric approach in staffing. MNCs may use the natural resources of the host country indiscriminately. A large sum of money may flow from the domestic country in the form of dividends and royalty. MNCs normally concentrate on consumer goods and not capital goods and infrastructural goods in host country. MNCs may distort the economic structure of the host country. MNCs normally provide the outdated technology to the host country industry. Pollutes the environment of the host countries.

Problems faced by MNEs in the Home country. Transfer capital to other countries and cause unfavorable balance of payments. May not create employment opportunities to domestic people by following geocentric approach or outsourcing business operations in various countries like USA software companies outsourcing business operation in India. May neglect the industrial development of the home country as the transnational companies follow the secular approach. May cause erosion of the domestic culture. May exploit the natural resources resulting in excessive exploitation of natural resources.

Q 3) Risks are inevitable in international business. The success is totally depending on the techniques of handling risks at every stage- justify with examples. ANS:

Q 4) WTO was formed to foster International Trade. State principle objectives of WTO and list at least 10 activities monitored by WTO. Discuss the impact of WTO on India find other developing nations with special reference to Hong Kong Ministerial Conference. Ans : The World Trade Organisation (WTO) monitors global trade. Its decisions are absolute and every member must abide by its rulings. Extra powers given to the WTO are supposed to ensure that disputes are settled in harmony with international trade principles. It is located in Geneva, Switzerland. At its head is the Director General, who serves a term of four years. Its staff is made up of 500 persons of varying nationalities. The WTO agreements cover: Goods, e.g., all industrial products, FMCGs etc. Services, e.g., banking, insurance, consultancy etc. Intellectual property, e.g., patents, copyrights, designs and trademarks etc. Two important principles that underline most agreements are: a) Most Favoured Nation Clause: No discrimination among member countries. b) National Treatment Clause: Equal treatment to imported and domestic products. These agreements broadly address three concerns: Same rule for all: It restricts governments or organisations from distorting normal trade by way of subsidising, dumping or discriminatory licensing policies. Government policies are framed to eliminate distorting effects. The WTO allows exports to be relieved of all indirect taxes such as excise, sales tax etc. since they have a cascading effect on the cost of the product. Administration of agreements: It has detailed guidelines as to how the agreements should be administered at a national level. These apply to antidumping proceedings, standardization, sanitary and phytosanitary measures, or settlement of disputes. Fair deal to businesses: It ensures rights for the business community e.g., the right to information, the right to present evidence etc. For example, the Agreement on Customs Valuation allows the importer to justify the value of imported goods or requires the customs to give written reasons for rejecting the value disclosed. Dilemma of Developing CountriesIndia is an active Member of the WTO. In the current negotiations, it has submitted proposals relating to, inter alia, agriculture, non-agriculture market access (NAMA), services, disputes, competition policy, trade facilitation, rules, TRIPS, and special and differential treatment. A number of these proposals were made jointly with other Members and in many instances with developing countries, including the G-20, G-33, and NAMA- 11 groups. Indias position prior to the launch of the Doha Round of negotiations 5

placed emphasis on securing the objectives outlined in the mandated negotiations and the implementation issues raised by a number of developing countries. At the Ministerial Conference in Cancun, in September 2003, and in Hong Kong, China in December 2005, India stressed the need to address agricultural subsidies in rich countries and tariff and non-tariff barriers maintained by these countries on products of export interest to developing countries. India believes that the interests of its 650 million rural poor, who are dependent on agriculture for a livelihood, cannot be jeopardized. It is therefore emphasizing special and differential treatment through proportionately lower overall bound tariff reduction commitments by developing countries, coupled with a special safeguard mechanism and a list of special products vital to ensuring livelihoods and food security of farmers in developing countries. CONTRIBUTIONS OF THE WTO It is a tribute to human civilization that sovereign nations have agreed to subordinate their freedom (to act) and have agreed to work within the framework of rules to promote global trade. The Uruguay Round of negotiations resulted in formation of a rule based system, which is expected to lead to smooth and orderly international trade. The WTO and its agreements have an impact on every economic activity, be it agriculture, trading, service or manufacturing. World markets are opening up due to lowering of tariffs and dismantling of other restrictions in developed and developing countries to benefit from their comparative advantages. Domestic markets will be increasingly threatened because of lowering of tariffs leading to freer entry of foreign goods and because of foreign companies establishing local manufacturing bases. Whereas the developing countries will have greater opportunities in sectors in which they have cost bases comparative advantages e.g., textiles, agriculture etc., the developed countries benefit due to the opening of the service sector and tightening of Intellectual Property Regime. Export markets will become more difficult because of competition among developing countries with similar comparative advantages. Products from developing countries will face higher quality standards in developed markets particularly in the areas where they have comparative cost advantage. Every company, whether serving the domestic or international market, will have to undertake an internal exercise to identify factors affecting its international competitiveness in terms of cost as well as quality. It will need to study whether it can remain competitive once the product can be imported freely or tariffs are further lowered or both. The WTO regime will be of greater benefit to those countries that show ability and skill in the ongoing dialogue. The governments that are in constant touch with their industries and affected groups will be able to clearly determine how and what should be negotiated at multilateral negotiations to the best of their advantage. International trade is becoming increasingly trade, deregulation and privatization of internal economy have now been strengthened and legalized under the WTO. Countries have no option but to follow this direction. Countries that have understood this have moved swiftly in fine tuning their domestic and international trade policies, to create a winning environment for industry and business. Those who are still debating the issue or do not understand it clearly will be left behind. Q 5) What is the meaning of globalization? Categorize manufacturing and service sectors of India having global competitive advantages. ANS : Globalisation is the strategy of optimizing the resources available in various countries and catering to customers throughout the world with internationally standardised products, at competitive prices. It advocates that the nation or a company or product involved should be global. A global man is one who is born in India, studies in the UK, wears Reid & Taylor, shops in Marks & Spencer, drives a 6

Lexus, acquires a steel plant in Kazakhstan and ships his hot rolled coil to China. Thus, he becomes a part of globalisation process. Assuming that the trends described here are inevitable the following issues need serious consideration by any medium-sized or large company that is inclined to go global. 1. Size of the market: How extensive do you want your markets to be, particularly the major emerging markets for your products and services? How should you build a necessary global presence? 2. Location advantage: To what extent do you want to capture the cost reducing and quality enhancing potential of locations around the world for the execution of various activities in your companys value chain? How should you deal with the problem of suboptimal locations currently in use? 3. Global competitiveness: How effective do you want to be in exploiting global presence and turning it into a true global competitive company as opposed to global mediocrity? How should you eliminate the existing shortcomings and impediments? 4. Longer local production: The local market is larger than the minimum efficient scale of production. The larger the local market, the more local production will translate into scale economies while holding down tariff and transportation costs. An example is the entry of the Japanese tyre group Bridgestone into the US market by acquiring the local production base of Firestone instead of exporting tyres from Japan. Globalisation has positive impacts on productivity While globalisation has certain negative consequences for particular groups, especially in the short term, it also has important positive effects. The impact on productivity is important, as openness is found to raise productivity and hence average incomes and wages. A number of studies have shown that more open countries typically grow faster than less open countries and have higher income levels. At the economy-wide level, the OECD Growth Study estimated that an increase in openness by 10% points translates over time into an increase of 4% in per capita income in the OECD area. Gains from trade typically arise from the exploitation of comparative advantages and economies of scale. Instead of producing a particular good or service, a country can obtain more of it, indirectly, by exporting goods and services in which it has a comparative advantage. Trade opens foreign markets for goods and services that can be most efficiently produced in the home country. Furthermore, larger markets due to international trade may enable firms to take advantage of economies of scale not available when sales are limited to the domestic market, helping to lower costs. At the same time, trade generally results in lower prices for imported goods and services (final and intermediate) and increases product variety and quality in the home country. Larger markets through trade also allow a deeper division of labour across borders and can accommodate a greater variety of specialised firms. Access to better, cheaper and a wider variety of inputs helps improve the productivity of firms that incorporate these inputs into their products and services. Q 6) Write short notes on a) Explain salient features of any two Regional Trade Agreements (RTA). b) Discuss general characteristics of Intellectual Property Rights (IPR). Ans: a) Although India has been a firm supporter of multilateral liberalization, it has also sought out regional trade agreements in recent years. While India continues to attach primacy to the multilateral 7

trading system to improve living standards, it believes that RTAs are building blocks that supplement the gains from multilateral trade liberalization. i. South Asian Association for Regional Co-operation (SAARC) The SAARC, an agreement for regional cooperation among Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka, was established at the first SAARC Summit in Dhaka on 7 8 December 1985. In April 1993, the members of SAARC signed the SAARC Preferential Trading Arrangement (SAPTA), which provided limited preferential market access. The Agreement on a South Asia Free Trade Area (SAFTA) was signed during the 12th SAARC Summit, held in Islamabad, on 4-6 January 2004. The preferences exchanged under SAPTA will continue to be available to SAPTA members until the tariff liberalization under SAFTA is complete (2008 for non-LDC member preferences for LDCs and 2012 for LDC members). Following three rounds of SAPTA negotiations, in which India offered tariff concessions at the HS sixdigit level on 2,576 lines, additional concessions were given on 364 HS six-digit level lines in the fourth round. Special concessions are granted for least developed country members (Bangladesh, Bhutan, Maldives, and Nepal). Tariff reductions under the SAFTA are expected to be phased in by 2008 for nonLDC member preferences for LDCs (including India) and by 2012 for LDC members of SAFTA. SAFTA members have also excluded certain products from tariff reductions: India has notified 744 imports from LDC members and 865 from non-LDC members. Tariff reduction under SAFTA came effective on 1-72006. ii. Asia Pacific Trade Agreement The Asia Pacific Trade Agreement (APTA), originally known as the Bangkok Agreement, was signed on 31 July 1975 by Bangladesh, India, Lao PDR, Republic of Korea, Philippines, Sri Lanka, and Thailand; China acceded to the Agreement in April 2001. The APTA entered into force on 1 September 2006 under an amendment to the original agreement. India offers tariff preferences on some 570 tariff lines at the sixdigit level, and an additional 48 tariff lines to LDC members. iii. Agreement with Sri Lanka India signed a free-trade agreement with Sri Lanka on 28 December 1998, which entered into effect on 1 March 2000. Under the FTA India reduce tariffs in phases, and eliminate them completely in March 2003, except for a negative list comprising 429 items including garments, plastics and rubber, alcoholic spirits, and coconut oil. India also maintains tariff quotas on tea and garments under the FTA. The tariff quota for tea is currently 15 million kg per year, at a preferential rate of 50% of the MFN duty. The tariff quota for garments is 8 million pieces per year, of which 6 million should be manufactured using fabrics of Indian origin and enter at zero rates of duty; the remaining two million pieces receive a margin of preference of 75% of the MFN rate. In addition, imports of tea may only enter through the ports of Kochi and Kolkata, while garments may be imported only through the ports of Chennai, Mumbai, and Jawaharlal Nehru Port, Mumbai. Furthermore, according to a Public Notice issued by the Directorate General of Foreign Trade on 21 November 2006, imports of vanaspati, including bakery shortening and margarine, are subject to an overall quantitative limit of 250,000 tonnes per year under the IndoSri Lanka Free Trade Agreement. The agreement also has provisions for the use of antidumping and safeguard measures as well as provisional suspension of preferences in case of balance of payments difficulties. India and Sri Lanka are currently negotiating a Comprehensive Economic Partnership Agreement (CEPA), which would include trade in services and economic cooperation in other areas. According to the authorities, no date has been set for completion of the negotiations.

b) General Characteristics Of IPRs

Intellectual property rights are the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time. Intellectual property rights are customarily divided into two main areas: i) ii) Copyright and rights related to copyright. Industrial property

In general terms, intellectual property rights have certain common characteristics. The rights apply only in relation to a sub-set of all innovative/creative emanations from the human intellect this sub-set being specific types of IP subject matter defined in the IPR laws. The rights apply only to those defined subject matters that satisfy a specific innovation/creativity threshold. The rights are not absolute; third parties remain free to engage in certain types of activity with the IP, even without the consent of the IP owner. The rights are generally of limited duration. The rights are generally freely transferable to other IP and Intangible Assets: A Legal Perspective 14 parties. The rights are usually, but not always, created under statute.

Q 7) Write short notes on:a) David Ricardo' s Two Country - Two Product Theory, b) Purchasing Power Parity Theory. Ans. a) It was David Ricardo, one of the prominent classical economists, who propounded the theory of comparative cost advantage or the theory of comparative advantage. He argued that it was the comparative difference in cost that led to trade between two nations. According to him, each country would specialize in the production of a commodity in which it has a comparative advantage in cost. The country should export these commodities and import those commodities that it produces at a higher comparative cost. The theory of comparative advantage is based on certain underlined assumptions given below: a) There should be two countries that produce the same two commodities. b) Labour is the only factor applied in production. It is assumed that the supply of labour is given and fixed. Also, the labour force is assumed to be homogeneous. c) Cost of labour, i.e, wages determine the price. d) Production is subject to the law of constant returns. e) There is no change in taste and preference of the people. f) No change in technology in expected. g) Factors of production are perfectly mobile within two countries but are not freely mobile between the countries. h) There is no transportation cost. i) There is full employment of factors in both the countries. j) There is homogeneity in consumption, buying behaviour and affordability. 9

Based on the above assumption, Ricardo showed that two countries could indulge in trade even when one of them has an absolute advantage in production of one of the two commodities vis--vis the other country. Ricardo explained the theory of comparative advantage with the help of the example given below. Suppose the two countries viz. England and Portugal produce two different types of goods say wine and cloth, whose labor costs in terms of man hours required for unit of production are as follows:

Country

Wine

Cloth

England 120 100 Portugal 80 90 It is very clear from the table that Portugal has to expand less labour as compared to England in the production of both the commodities. Thus Portugal has an absolute cost advantage in both the goods while England has an absolute cost disadvantage in both of them. But Portugal would benefit by producing wine and exporting it to England in return for cloth as it has a comparative advantage in the production of wine. This is due to the fact that the relative cost of producing a unit of wine (80/120), is less than the relative cost of producing a unit of cloth (90/100). On the other hand, England has the least comparative disadvantage in the production of cloth, whose relative cost (100/90) is less than relative cost of wine (120/80). Thus Portugal should concentrate more on the production of wine whereas England should concentrate on cloth, thus benefiting both countries. b) PURCHASING POWER PARITY The PPP was formulated by Gustan Cassel in the year 1920, when inflation was high. It represents a synthesis of the work done by economists like David Ricardo, Wheatley and Henry Thorton in the nineteenth century. The theory puts forward the idea that when currencies are exchanged among nations, their purchasing power is only transferred. This means that we should be able to buy the same amount of goods in either country, when expressed in either countrys currency because people value currencies for what they pay. The theory suggests that the principle determinant of exchange rate is the difference in National Inflation Rates. This means, a country, where costs and prices are relatively less than other country will find its currency appreciating. The sole focus on inflation differentials among countries is the dominant factor that explains the movements in the exchange rates and also indicates why the spot rate is what it is at a given point of time. The law of one price is usually the basis to interpret the theory. According to this law, after making allowances for tariff and transport costs, the price of the goods in one country should not significantly differ from that in another country. Mathematically, this can be expressed as: P = e.P* -------------- (1) Where, P is the price of a product in the domestic country. P* is the price of the same product in foreign country. E is the domestic currency price of the foreign currency. Thus if an item costs USD 1 in USA and its price in India is Rs. 45.50 then thus the exchange rate is 45.50 to USD 1. Equation (1) can be written as e = P/P*

10

Further if P and P* can be interpreted as the domestic and foreign index, representing the respective inflation figures; the exchange rate becomes a ratio of the (relative) price level (or inflation rates) in the two countries. An important application of the PPP theory is that the nominal exchange rate must be adjusted significantly and sufficiently so as to reflect/compensate the underlying inflation difference. Once this happens, the international competitiveness of any countrys product in the world market shall be maintained. Thus the PPP theory tries to restore the real exchange rate, which is relevant for international business.

2004
Q 1) Define 'International Business'. Explain fundamental differences between domestic business operation and International business operation using business characteristics. Ans: International business is defined as any commercial transaction-taking place across the boundary lines of a

sovereign entity. It may take place either between countries or companies or both. These transactions include investments, physical movements of goods and services, transfer of technology and manufacturing. Private companies involve themselves in such transactions for revenue, profit and prosperity. If governments are involved, they need to maintain their image, dependency and economic growth. Sometimes economic ties are strengthened through such transactions.
Domestic Business versus International Business: Dimension Domestic Business Operations 1.Environment The economic, political, legal, socio-cultural, competitive and technology environments are known 2. Plan and strategy 3. Competitive forces and their intensity 4. Research Can be worked out for short terms and carried forward to long term The maximum domestic competitive forces operate and one can understand their movements as they are visible It is reasonable and easy to conduct business research, demand analysis and customer surveys. It is also reliable. Narrowed down to work in a single country with a steady growth objective. Each one will understand 11

International Business Operations The environment is not fully known. Innumerable hidden factors which may emerge any time to pose as problems. They will lead to pitfalls Only long term planning and strategy will work. Strategic inputs are required in multiples International competitive forces play a vital role and its difficult to understand their motive and movement Very expensive and difficult to conduct. Reliability criteria depends on individual countries and there is no uniformity in the output and findings Broadened to cover many countries and geographic and cultural diversity may influence the vision and objective.

5.Organizational Vision and objective

6. Pricing strategy

Companies use marginal cost pricing or transfer pricing or competitive pricing to succeed. 7. Logistics International players with advanced technology and systems are involved. Proportionately, the cost is low for physical movements. Some business groups like Adanis started only overseas operations without any linkage with domestic operation right from the beginning. Tata group established a good name at home country and gradually moved to other countries. For companies in IT, such as Wipro or Infosys, the major focus is on overseas operations. All the companies cited as examples above are successful in their own right, but the strategies and operation systems differ from country to country. Organizations like RELIANCE INDUSTRIES have inherent strength in indigenous business such as completing the project prior to stipulated time. This experience enables the company to grab any business opportunity in petrochemicals around the world and build reputation. Gammon India, IRCON (Indian Railway Construction), Larsen & Toubro (L&T) and Sapoorji Pallonji are successful due to their meticulous way of understanding both operations. Q 2) Any indigenous organisation has potential to become global organisation in todays business environment. Explain sequential steps which are prerequisites to emerge as global corporation with practical Illustrations. Ans. Globalization does not take place in a single instance. It takes place gradually through an evolutionary approach. Depending on the industry you are in, and where you intend to seek business, here are 5 considerations before you take that big leap: 1) Dont assume you have to be big to go global. Its largely thanks to inexpensive technology and services designed to help small businesses operate across borders with the same efficiencies as large businesses. 2) Research the legal, HR and tax environment in any countries where you will have a physical presence, before you leap. If you need or plan to have a presence in or ongoing sales to another country such as local employees, local warehouses or exports of goods to that country be sure to investigate all legal, HR and tax implications. Two main considerations: Employment Regulations and Practices. Shipping and Importation.

the vision and objective easily A majority of companies use cost plus margin pricing or competitive pricing. Domestic players are involved in all the activities. The cost of logistics is very high locally

3) Invest in technology from the get-go. The right technology, especially cloud based software, can position your business to scale without adding incremental cost or a large staff base. Webbased software services, email, social media and inexpensive telecommunications bring the world to your fingertips, helping bridge wide distances. 4 ) If you plan to export physical goods, get exporting help. There are many considerations tied up in the decision to export. You have to understand your market in the country you are 12

targeting. You have to understand exporting laws and regulations, both here in the United States and in the target country. Sometimes licenses are required. 5) Figure out how youre going to get paid . Doing business internationally used to rely heavily on letters of credit. Letters of credit are still widely used. 6) Determine the Culture of that country. Culture is part of the external influences that impact the consumer. That is, culture represents influences that are imposed on the consumer by other individuals. Therefore, cultural knowledge is necessary. After going through these through considerations we can go through 5 stages. According to Ohamae, globalization has five stages. They are, 1) Domestic company exports to foreign countries directly on its own. 2) In the second stage, the domestic company exports to foreign countries directly on its own. 3) In the third stage, the domestic company becomes an international company by establishing production and marketing operations in various key foreign countries. 4) In the fourth stage, the company replicates a foreign company in the foreign country by having all the facilities including R&D, full-fledged human resources etc. 5) In the fifth stage, the company becomes a true foreign company. Q 3) What are various strategies available for entry and operation in International Business? Give suitable examples for every strategy? Ans: DIFFERENT MODES OF ENTRY IN INTERNATIONAL BUSINESS 1. EXPORTS Export deals with physical movement of goods and services from one place to another through a customs port followings the rules of both the country of origin and country of destination. Depending upon the involvement of the exporter, exports can be classified as direct or indirect. Direct exporters export their goods and services in their own name and the buyer directly remits proceeds, in a proper manner and through a proper channel. The proper channel means that the remittance is made through the banking channel in the currency, which is quoted in the invoice, and the proper channel means that the goods are legally exported through a customs port. 2. CONTRACT MANUFACTURING Many companies outsource their products and concentrate mainly on marketing operations. Contract manufacturing is the strategy of identifying a manufacturing unit to produce items at a competitive price in any part of the world. Nike is procuring its athletic footwear in a number of factories in South East Asia. Mega Toys is sourcing from China. Hundreds of international companies with their origin in European countries have selected manufacturing centers in India, China and South East Asia. Mark and Spencer, J.C. penny, Target and H & M have contract manufacturing arrangements in many parts of the world. 3. MANAGEMENT CONTRACTS Companies with a low level of technology and managerial expertise may seek the assistance of foreign countries. A management contract is an agreement between two companies whereby one company provides managerial and technical assistance for which proper monetary compensation is given, either as a flat lump sum fee or a percentage on the sales or a share in the profits. 13

Delta airlines, Air France and KLM offer such services in developing countries. Exxon is a major operator in Gulf region in the field of oil exploration. 4. COLLABORATION While a joint venture deals with the project in totality, in financial terms and the proportionate partnership commitments, Collaboration deals with only a part of the functions. For example Bajaj Auto has technological collaboration with Kawasaki of Japan, who offers the technology for two wheelers. Others well known technological collaborations are Ind-Suzuki, Kinetic-Honda and Hero-Honda. All the developing countries encourage technology collaborations. 5. MERGERS AND ACQISITIONS In this case the company in the host country selects a foreign company merges itself with it. The foreign company acquires the control of ownership. This mode of entry gives an outstanding competitive edge over others. Such companies strengthen their international manufacturing facilities and marketing network. Proctor & Gamble entered Mexico and became leaders in five years by acquiring Loreto. Tata bearing acquired Metal Box in India. It is an easy and fast method since the cost of acquisition is comparatively low. 6. TURNKEY PROJECTS A turnkey project is a contract under which a company is fully involved from concept to completion. It covers right from supply of manpower, capital, and erection of plant, installation and commissioning up to the trial operation of a project. The turnkey project contractors either get a fixed fee or the cost plus profits are collected over a period of time. Today, infrastructure projects like power plants, airports, refineries, railway lines, highways and dams are undertaken on a turnkey basis. Bechtel, Brown Bovery, Hyundai, Mitsubishi, L&T and Daewoo are turnkey contractors for international projects. They use terms like BOT (Build, Operate and Transfer) and BOOT (Build, Own, Operate and Transfer) depending upon the level of involvement and obligations. Q 4) Multinational Corporations are the necessary evils specially for developing countries. Discuss the above statement with reference to strategic models generally adopted by MNCs. Ans: CRITICISM OF MULTINATIONALS IN DEVELOPING COUNTRIES 1. They do not give enough importance to the society in which they operate. An example in Union Carbide, which did not show concern for the people of Bhopal. In South Africa, HIV medicines are sold at an expensive price irrespective of the cost. When people die out with these dreaded diseases in some region then MNCs consider that place as a huge potential for business prosperity. 2. While many Indian companies, such as the Tatas and Birlas allocate funds for charitable works like hospitals, temples and scholarships for higher studies, not many MNCs do so, though they generate huge revenue. 3. They generate profits when the situation is favourable, but will close their business if any risk is anticipated. E.g., many multinationals pulled out of South East Asia during the currency crisis, especially in Thailand and Indonesia. 4. Active participation is needed in developing countries for infrastructure, especially roads, ports, power plants etc. They enjoy but do not contribute. However, most multinationals in India deal in non-essential products such as soaps, shampoos, lotions and other consumer products. Whether Uniliver, Johnson & Johnson, Colgate or Ricket & Coleman, their contribution is not for the welfare except revenue generation. Hardly any multinational is getting involved in developing activities such as infrastructure. 5. There is a misconception that MNCs generate employment. However the managerial cadre and the sales force personnel do not represent real employment in developing countries. 6. Due to aggressive promotion and money power, MNCs can venture into small towns in all parts of the country, leading to the decline of small industries. 14

7. One Union Carbide could cost the life of thousand of living beings in Bhopal due to sheer negligence and disrespect for the pollution control norms. It shows that just for earning money such a multinational never had a concern for valuable human lives. STRATEGIC APPROACH TO MULTINATIONALS In order to explain new and potentially profitable projects, a good understanding of multinational strategies is necessary. The three broad categories of multinationals and their associated strategies are examined below. A. Innovation Based Multinationals Firms such as IBM, Philips and Apple create barriers to entry for others by continually introducing new products and differentiating existing ones, both domestically and internationally. Firms in this category spend large amounts of money on R&D and have a high ratio of technical to factory personnel. Their products are typically designed to fill a need perceived locally that often exists abroad as well. In the field of chemical and pharmaceuticals Hopkins and E. Merck adopt the same strategy. B. The Mature Multinationals The principal approach in such firms is the presence of economies of scale. It exists whenever there is an increase in the scale of production, marketing and distribution costs could be increased in order to retain in existing position or more aggressive. The existence of economies of scale means there are inherent cost advantages of being large. The more significant these economies of scale are, the greater will be the cost disadvantage faced by a new entrant in the same field in a given market. Philip Morris, Toshiba and Whirlpool are falling under this category C. The Senescent Multinationals There are some product lines where the competitive advantages erode very fast. The strategic followed in such cases are given below. 1. One possibility is to enter new markets where little competition currently exists. For example Crown Cork & Seal, the Philadelphia-based maker of bottle tops and cans, reacted to the slowing of growth and heightened competition in business in the United States by expanding overseas. 2. Another strategy often followed when senescence sets in is to use the firms global scanning capability to seek out lower cost production sites. Costs can then be minimized by integration of the firms manufacturing facilities worldwide. Q 5) State general agreements incorporated in WTO and discuss their impact on India industry and trade with special focus on sectors. Ans: IMPACT OF WTO AGREEMENTS ON INDIAN BUSINESSES: AT A GLANCE AGREEMENTS OBJECTIVE OF IMPACT ON BUSINESS AGREEMENT INDIAN IMPLICATIONS POLICY/ LAWS General Agreement on Prohibits: actions of Import duties down Import on all manufacturers, Tariffs & Trade (GATT) Govt/ organizations form peak 300% to 15% traders and service providers that distort normal Competition to intensify as trade more imported products finds easy access. (a) Agreement on Multi Fibre Agreements (Impact on Textiles/ Opportunity: Important Textiles & Clothing and other QRs usually Garments Export) development for textiles/ imposed by developed Also see : Impact of act Garments countries to be phased on Indian textile Exports from India. Quotas will out by year 2005 (in 4 be phased out in 2005 phases) 15

Agreement on State Recommends that STEs Trading Enterprises conduct their activities commercially

Trade Related Intellectual Property Rights (TRIPS)

Provide protection to IPRS as Patents, copyrights, Trade marks, Ind..Designs, Layout designs for ICs, & Covers new and original Industrial designs & Layout

Industrial Layout

Implications for Indian Designers as well as Garment/ Textiles Industry using protected designs and manufactures of Ics. Undisclosed Does not demand it to Impact on know-how Employees, consultants, information & Trade be intellectual property agreements, Contract licensees, subcontractors, etc. Secrets but stipulates their Act etc. restrained form divulging protection Geographical Prohibits countries to No specific law on Major impact on Agri-food indications Permit trademarks Geographical indication products. Benefits from Containing misleading yet; Being drafted improved system information on Taking up Our not having law on GIs has geographical origin of membership of led to controversies on goods Paris Convention and Basmati, Darjeeling Tea, other important Alphanso Mangoes etc Treaties as Lisbon Treaty for GIs. The WTO and its agreements have an impact on every economic activity, be it agriculture, trading, service or manufacturing. World markets are opening up due to lowering of tariffs and dismantling of other restrictions in developed and developing countries to benefit from their comparative advantages. Domestic markets will be increasingly threatened because of lowering of tariffs leading to freer entry of foreign goods and because of foreign companies establishing local manufacturing bases. Whereas the developing countries will have greater opportunities in sectors in which they have cost bases comparative advantages e.g., textiles, agriculture etc., the developed countries benefit due to the opening of the service sector and tightening of Intellectual Property Regime. Export markets will become more difficult because of competition among developing countries with similar comparative advantages. Q 6) Developing countries welcome FDI as a part of reform process. Discuss the advantages to both the investor and the country of destination. Enumerate the risk factors which an investor takes into account before deciding to invest. Ans: Benefits for Host Countries Capital: Multinational enterprises invest in long-term projects, taking risks and repatriating profits only when the projects yield returns. 16

Design

Restructuring of STEs like MMTC, STC etc. Commercialization on of their activities Immediate change required in Patents Act (1970), Trade and Merchandise Marks Act (1958), Designs Act (1957) etc New amendment bill Contains changes as per agreement; includes service marks

Currently the agreement has limited scope. In the coming negotiations it is likely that monopoly/canalizing agency Impact will be on all businesses Main source of technology for SMEs reverse engineering will be difficult

 Market access: Investors can provide access to export markets. The growth of exports itself offers benefits in terms of technological learning, competitive stimulus, etc. They can transform normal customers to intellectual customers. Increase in domestic investment: The increase in FDI inflow is associated with a manifold increase in the investment by national investors. Export promotion: It seems that FDI could be related with export trade in goods, and the hosting country can benefit from an FDI-led export growth. Generating employment: It leads to generation of both direct and indirect employment opportunities in the host country. Benefits for Home Country Inwards flow of earnings on a long term basis. High salaries for employees. Exposure to foreign market. Costs for the Home Country Initial capital outflow is extremely large. Exports may decrease. Imports may increase if FDI is intended to serve the home country. Employment loss to the home country population. Profits are repatriated abroad. They may not stay in the country for reinvestment. Major tax heavens will enjoy the money at the cost of home country. Criteria considered by investors prior to selecting a destination. 1. Political stability and a strong policy to protect investors. 2. Safety and security for life, money and output. 3. Investment protection through legal provisions. 4. Good governance as compared to other countries. 5. Proactive government policies and implementing authorities, bureaucrats. 6. Continuous infrastructural development.. 7. Banking system with updated technology. 8. High productivity of the labour force and unhindered working conditions. Even though the developed and developing countries are extending schemes of tax holidays and many other incentives, very few countries are capable of attracting FDIs. Still, China is an attractive destination because it ranks on a higher scale as compared to others on all the parameters mentioned above. India, could not attract an expected investment in the last and early part of current decade though the scenario is changing gradually now. The reasons are: 1. Poor infrastructure, which does not match international standards. 2. Political instability, but now it is not a major constraint. 3. High levels of corruption, which are deep-rooted at all levels. 4. Bureaucratic red tape, which the investor does not have to face in other destinations in the world. 5. Interpretation of policies and their implementation are quite complex. 6. Heterogeneous society with different states, cultures and languages. 7. Inordinate delay in projects. 8. Draconian labour legislation. 9. Lack of transparency in regulatory bodies. 10. High cost of production due to expensive power and other inputs and transportation.

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Q 7) "Classical international trade theories are losing their relevance in today's international trade". Discuss. Ans: Many renowned economists have carried out considerable research on scale of economies, productivity of the work force and advantages of resources, which certain countries are endowed with. The theories formulated by them were accepted by the contemporary economies. European industrialization, the emergence of the United State as a major power and rapid colonization were the three major international developments during the era of classical economic theories. Today, these factors have lost their relevance. The revolution taking place in communications, transportation and banking makes every country resourceful if they formulate proactive policies. The diminishing importance of borders between countries has enabled many entrepreneurs to shift their manufacturing base anywhere in the world, invest their money in safe destinations and explore the resources at any point of time. Therefore, the theories of absolute advantage, comparative advantage are not really applicable in current international business operations. Classical theories are One factor model (labor) Comparative advantage is determined by the production condition alone and it leads to export. Classical theory of international trade is totally different from internal trade and hence requires a separate theory to explain the causes the trade Ricardian theory does not take factor prices in to account. It takes the price of goods as being determined by the production condition alone It takes no note of production factor in the two countries Porter believes standard classical theories on comparative advantage are inadequate (or

even wrong). The classical theories do not go into country-by-country differences in size to deal with the lines of specialization.

The largest area of weakness in classical theory is that while we considered all resource units used in production, the only costs considered by classical economists were those associated with labor. The theorists did not account for other resources used in the production of commodities or manufactured goods for export, such as transportation costs, the use of land, and capital. This failing was addressed by subsequent trade theorists, who, in modern theory, include all factors of production in looking at theories of comparative advantage.

2008
Q 1) What is Globalization? How do global organizations emerge to enjoy global leadership in their Business? Give relevant illustrations from Global Organization? Ans: Globalisation is the strategy of optimizing the resources available in various countries and catering to customers throughout the world with internationally standardised products, at competitive prices. It advocates that the nation or a company or product involved should be global. A global man is one who is born in India, studies in the UK, wears Reid & Taylor, shops in Marks & Spencer, drives a Lexus, acquires a steel plant in Kazakhstan and ships his hot rolled coil to China. Thus, he becomes a part of globalisation process. SOME LESSONS FROM GLOBAL COMPANIES Toyota is a good example of a highly globalised company. At the end of 1995 one-third of Toyotas global output came from wholly or partially owned affiliates located in twenty-five foreign countries spread over North and South America, Europe and Asia. 18

Furthermore, Toyota exported 38 percent of its domestic production from Japan to foreign markets and engaged in significant intro-firm flows among its affiliates. Within its South East Asian regional network Toyota exported diesel engines from Thailand, transmissions from the Philippines, steering gears from Malaysia and engines from Indonesia. In effect units were set up by Toyota in the whole of South East Asia, to assemble different automobile parts, depending on the competency and resources of the country. Key indicators of the globalisation of a company are international dispersion of its sales revenue and asset base, intra-firm trade in intermediate and finished goods, and intra-firm flows of technology. These all lead to its physical presence, scattered investments, global image, brand promotion and building borderless customer patronage. STAGES OF GLOBAL ORGANISATIONS Globalization process does not take place instantly. It is a deliberate and cautious move for several companies. Nike and Addidas took more than a decade to move to other countries from their origin. Apple, HP and Dell are fast globalizing their operations due to technology advantages. if they are not quick then technology obsolescence will crop up and finally they have to lose their current status to their competitors. However, in the normal process, a complete globalization has to pass through several stages as described in the following table: Stages Purpose Action End Result Stage # 1 Make the presence feel Physically export and establish One market established. the move for product or one strong contact overseas Trial and errors are service overcome, confidence is built Stage # 2 Study the whole nation and Find out a right partner. Jointly Awareness is created in explore the avenues for promote the product/s. one territory. The demand production establish brand in one market. level is known for the production. Stage # 3 Set up production facility Identify location or develop a Becoming close to the with a local or alone complete network. Reduce the customer at a reduced cost cost and service the mark and part of the local Stage # 4 Expanding to neighboring Take the products from the The whole region is aware. areas through production unit and spread in nearby Loyalty is built. The network countries and build brand members become patrons name Stage # 5 Review all the pitfalls and Analyse the potential in Comparing and selection gear up to other regions various regions. Evaluate of right locations, right the partners, investment partners and right markets climate and Socio-Cultural background Stage # 6 Emerging as global Produce, distribute, invest Global production enterprise and build corporate image Global investments and face competition Global brand name Status of global company

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Q 2) Why do companies & the countries enter into International business, when the opportunities exist in the domestic business?

Ans: A mode of entry into an international market is the channel which your organization employs to
gain entry to a new international market. This lesson considers a number of key alternatives, but recognizes that alternatives are many and diverse. Here you will be consider modes of entry into international markets such as the Internet, Exporting, Licensing, International Agents, International Distributors, Strategic Alliances, Joint Ventures, Overseas Manufacture and International Sales Subsidiaries. Finally we consider the Stages of Internationalization. It is worth noting that not all authorities on international marketing agree as to which mode of entry sits where. For example, some see franchising as a stand alone mode, whilst others see franchising as part of licensing. In reality, the most important point is that you consider all useful modes of entry into international markets - over and above which pigeon-hole it fits into. If in doubt, always clarify your tutor's preferred view. The International Marketing Entry Evaluation Process is a five stage process, and its purpose is to gauge which international market or markets offer the best opportunities for our products or services to succeed. The five steps are Country Identification, Preliminary Screening, In-Depth Screening, Final Selection and Direct Experience. There are two types of indicators / variables that most companies consider when deciding where to operate abroad i.e. Opportunities & Risks A) i. Opportunities Market Size Expectation of a large market and sales growth is probably a potential locations major attraction. This depends on the economic variables. Some of the main things to consider when examining economic variables are : a) b) c) d) e) f) g) ii. Obsolescence and leapfrogging of products Prices Income elasticity Substitution Income inequality Cultural factors and taste Existing of trading blocs

Ease and Compatibility of Operations: Companies are highly attracted to countries that Are located nearby Share the same language Have market conditions similar to those in their home countries Companies often pare down proposals to those countries that Offer size, technology and other advantages familiar to company personnel. 20

Allow an acceptable percentage of ownership. Have resources they need.

iii. Costs and Resource availability : Cost especially labour costs are an important factor in companies production location decisions. Ease and cost of transporting goods depends on Infrastructure Absence of trade restrictions Companies should consider different ways to produce the same product. iv. Red Tapes and Corruptions Red tape and corruption add to operating costs. Q 3) Write short notes on A) Foreign exchange risks Foreign exchange risk is defined as, the variance of the real domestic currency value of assets, liabilities or operating income attributed to unanticipated changes in exchange rates. In other words, risk is a measure of the extent of variability in the values of assets etc. due to unanticipated changes in exchange rates.All forex exposures need not necessarily lead to forex risk, because compensating movements in exchange rates with different currencies might offset loss in deal from gain in the other. Further to qualify as forex risk, only the effect of unanticipated changes in exchange rates on the domestic currency values of assets, liabilities, etc is to be considered. Types of Forex Risks Forex risks are of three types. These are: i Accounting or Translation Risk ii Transaction risk iii Operating risk. i. TRANSLATION OR ACCOUNTING RISK Translation risk is a measure of variation of home currency value of assets and liabilities appearing in balance sheet denominated in foreign currency. It is also called as balance sheet or accounting risk. It is also referred to as accounting risk. It arises while consolidation of accounts (financial statements) involving foreign currency denominated assets and liabilities is prepared. Firms having foreign subsidiaries, require preparing the groups financial statements. ii. TRANSACTION RISK Transaction Risk is the measure of variation of home currency value of receivables and payables denominated in foreign currencies due to unanticipated changes in exchange rate. Transactions which give rise to forex receivables or payables in future create transaction exposure. A US firm has exported

21

to UK, goods valued at 1 million n UK pound, payable 3 months from now. In the three months period, fluctuations in US Dollar value of UK Pound exposes the US firm to transaction exposure. iii. OPERATING OR ECONOMIC RISK In the case of transaction risk the operations pertaining to cash flow are all executed. Only the financial exchange has to be given effect. In operating risk, the manufacturing trading and financial transactions activities- are to fulfill an export of obligation. The prices of inputs might exchange. Operational uncertainties in production may take place. Yet the export price and obligation which are already freed cannot be changed, even if there is cost escalation. All these change the cost side of the operation. The revenue side of the operation, which is the amount of export earnings receivable, is also subject to change in exchange value. The expected home currency value of profit from the particular operation changes. B) Trade barriers A trade barrier is defined as any hurdle, impediment or road block that hampers the smooth flow of goods, services and payments from one destination to another. They arise from the rules and regulations governing trade either from home country or host country or intermediary. Trade barriers are man-made obstacles to the free movement of goods between different countries, and impose artificial restrictions on trading activities between countries. Despite the fact that all international organisations such as GATT, WTO and UNCTAD advocate reduction or elimination of barriers, they still continue in different forms. Objectives of trade barriers: 1. To protect domestic industries from foreign goods. 2. To promote new industries and research and development activities by providing a home market for domestic industries. 3. To maintain favorable balance of payment, by restricting imports from foreign countries. 4. To conserve foreign exchange reserves of the country by restricting imports from foreign countries. 5. To protect the national economy from dumping by other countries with surplus production. 6. To mobilize additional revenue by imposing heavy duties on imports. This also restricts conspicuous consumption within the country. 7. To counteract trade barriers imposed by other countries. 8. To encourage domestic production in the domestic market and thereby make the country strong and self-sufficient. Since trade barriers are harmful for the growth of free trade, efforts were made to reduce such trade barriers, and international organisations initiated collective efforts of all countries involved in trade. Types of trade barriers: Broadly, Trade barriers are classified as tariff barriers and non-tariff barriers. A country may use both tariff and non-tariff barriers order to restrict the entry of foreign goods. Tariff Barriers A tariff is a special tax on imported goods (and sometimes, imported products), raising their price. To try to overcome this price handicap, the foreign exporter may try several different approaches. It may use marginal cost pricing. 22

It may try to get a more favorable tariff classification with a lower duty. It may ship unassembled products. If none of these is sufficient, the firm may produce in the local market to get behind the tariff wall

Non-tariff Barriers Specific Limitations on Trade: o Quotas - specific quantitative restrictions - much more rigid than tariffs and give the foreign exporter fewer options. It can accept the limited sales available under the quota, or it can choose to produce inside the country. o Import Licensing requirements o Proportion restrictions of foreign to domestic goods (local content requirements) o Minimum import price limits o Embargoes Customs and Administrative Entry Procedures: o Valuation systems o Antidumping practices o Tariff classifications o Documentation requirements o Fees Standards: o Standard disparities o Intergovernmental acceptances of testing methods and standards o Packaging, labeling, marking and safety standards Government Participation in Trade: o Government procurement policies o Export subsidies o Countervailing duties o Domestic assistance programs Charges on imports: o Prior import deposit subsidies o Administrative fees o Special supplementary duties o Import credit discriminations o Variable levies o Border taxes Others: o Voluntary export restraints o Orderly marketing agreements Monetary Barriers This is the most extensive tool of trade regulation because it involves restrictions on both trade and foreign exchange. It is practiced especially by former communist and developing countries. 23

The international firm may have difficulty getting exchange to import products and supplies or components. It usually has greater difficulty getting exchange to remit profits. It is tempted to use transfer pricing to avoid these negative effects.

C) Intellectual Property Rights The term Intellectual Property Rights (IPR) is often shortened further to Intellectual Property (IP). Intellectual property is a series of legal rights that afford, in most cases temporary protection for different types of inventions, designs, brand names or original creations. The legal rights given are the rights to prevent unauthorized use of the invention, design, brand name or creation for the period of protection. The right given can be an absolute monopoly right or simply a right to prevent reproduction. Components of IPR in current context Patents: New and inventive technical innovations can enjoy an absolute monopoly for twenty years. Supplementary Protection Certificate: This is an extension of up to five years on the absolute monopoly given by a patent, where the invention consists of a medicinal product for which approval by the relevant authority has yet to be given. Trademarks: The owner of a trademark has an absolute monopoly for ten years. The legal protection of any brand name has the title of trademark and it is shown on any product as TM. Designs: This is an absolute monopoly for twenty-five years, given for a new design of a manufactured article. Unregistered Design Right: This prevents reproduction of an original design, which lasts for a maximum of fifteen years. Copyright: Copyright prevents reproduction of an original literary, artistic, musical or dramatic work. It is valid for a period of seventy years after the death of the author. Confidentiality and Trade Secrets: This prevents misuse of confidential or secret information. Plant Variety Right: This relates to a new horticultural genus or species. It gives the monopoly rights of the new variety of plant to the scientist. THE PROCEDURE TO OBTAIN IPR PROTECTION Intellectual property rights can be obtained in one of two ways, by application or by automatic derivation. Where an application procedure is involved, it usually follows the steps set out in the following sequence: 1. File application 2. Search carried out to ascertain originality 3. Examination carried out 4. Objections raised/No objections raised 5. Dealing with objections 6. Grant/Registration Q 4) Modern trade theories are essential for formulating business strategies at macro level in companies Discuss in detail only relevant three trade theories. Ans: MODERN THEORY OF INTERNATIONAL TRADE: THE HECKSCHER-OHILIN THEORY The Heckscher-Ohlin theory explains why countries trade goods and services with each other, the emphasize being on the difference of resources between two countries. This model shows that the 24

comparative advantage is actually influenced by the interaction between the resources countries have (relative abundance of production factors) and production technology (which influences the relative intensity by which the different production factors are being utilized during the production cycle. The model starts with the presumption that country A produces two products: food (X) and textiles (Y). These two kinds of production need two different inputs, territory (T) and labour (L), which are available in limited quantities. In the same time, food production (X) requires more land, so it can be said it is territory intensive and textile (Y) production requires more labour, being in this way labour intensive. Beginning with these presumptions, the Heckscher-Ohlin model explains the implications trade between two countries A and B has, if the countries produce the same products: food (X) and textiles (Y). The relative resource abundance, factors intensity and trade specialization Country Inputs and production without trade The relative abundance and trade specialization in the product for which there is a factor intensity L/T T/L

Product

Labour (L)

Territory (T)

A X Y Total B 3 X 10 Y 13 Total
A country having a bigger offer in a resource than in another is relative abundant in that resource and tends to produce more products that use that resource. Countries are more efficient in producing goods for which they have a relative abundant resource. According to the Heckscher-Ohlin theory, trade makes it possible for each country to specialize. Each country exports the product the country is most suited to produce in exchange for products it is less suited to produce. In our case, country A is relative abundant in territory (T) and will specialize in producing food (X) and country B is relative abundant in labour (L) so it will specialize in producing textiles (Y). In this case, trade may benefit both countries involved. The changes in relative prices of goods have a powerful effect on the relative income obtained from the different resources. International trade also has an important effect on the distribution of incomes.

X 20 10 30 X

Y 95 5 100 Y 5 2 7

X 0.21 2.00 0.30 0.60 5.00 1.85

4.75 0.50 3.33 Y 1.66 1.20 0.53

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NATIONAL COMPETITIVE ADVANTAGE It is a fact that Porter (1990) never focused primarily on the factors determining the pattern of trade, yet his theory of national competitive advantage does explain why a particular country is more competitive in a particular industry. If, for example, Italy maintains competitive advantage in the production of ceramic tiles and Switzerland possesses the competitive advantage in watched, it can be interpreted that the former will export ceramic tiles and the latter will export watches and both of them will import goods in which their own industry is not competitive. Why is this there a difference? Porter explains that there are four factors responsible for such diversity. He calls those factors the diamond of national advantage. The diamond includes: 1. Factor conditions 2. Demand conditions 3. Related and supporting industries 4. Firm strategy, structure and rivalry These factors have been more or less taken into account by earlier economists. What is crucial in Porters thesis is that it is the interaction among these factors that shapes the competitive advantage. Factor conditions show how far the factor of production in a country can be utilized successfully in a particular industry. This concept goes beyond the factor proportions theory and explains that availability of the factors of production per se is not important, rather their contribution to the creation and upgradation of product is crucial for competitive advantage. If one says that Japan possesses competitive advantage in the production of automobiles, it is not simply because Japan has easy access to iron ore, but because the country has skilled labour force for making this industry competitive.

Secondly, the demand for product must be present in the domestic market from the very beginning of production. Porter is of the view that it is not merely the size of the market that is important, but it is the intensity and sophistication of the demand that is significant for competitive advantage. If consumers are sophisticated, they will make demands for sophisticated products and that, in turn, will help the production of sophisticated products. Gradually, the country will achieve competitive advantage in such production. Thirdly, the firm operating along with its competitors as well as its complementary firms gathers benefit through a close working relationship in form of competition or backward and forward linkages. If competition is acute, every firm will like to produce better quality goods at a lower cost in order to survive in the market. Again, if there is agglomeration of complementary units in a particular region, there may be strong backward and forward linkages. All this will help attain national competitive advantage.

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Figure 1: Porters Diamond of National Advantage Fourthly, the firms own strategy helps in augmenting export. There is no fixed rule regarding the adoption of a particular strategy. It depends upon a number of factors present in the home country or the importing country and it differs from time to time. Nevertheless, the strategic decisions of the firm have lasting effects on their future competitiveness. Again, equally important is the industry structure and rivalry among different companies. The greater the rivalry, the greater the competitive strength of the industry. Besides the four factors, Porter gives weightage to a couple of factors, such as governmental policy and the role of chance of events. Governmental policy influences all the four factors through various regulatory/deregulatory measures. It can control the availability of various resources of change the pattern of demand through taxes and so on. It can encourage/discourage supportive industries through various incentives/disincentives. Similarly, chance of events, such as war or some unforeseen events like inventions/innovations; discontinuities in the supply of inputs; and so forth can eliminate the advantages possessed by competitors. However, there are various criticisms put forth against Porters theory. First, there are cases when the absence of any of the factors embodies in Porters diamond does not affect the competitive advantage. For example, when a firm is exporting its entire output, the intensity of demand at home does not matter. Secondly, if the domestic suppliers of inputs are not available, the backward linkage will be meaningless. Thirdly, Porters theory is based on empirical findings covering 10 countries and four industries. A majority of the countries in the sample have different economic backgrounds and do not necessarily support the finding. Fourthly, availability of natural resources, according to Porter, is not the only condition for attaining competitive advantage and there must be other factors too for it. But the study of Rugman and McIlveen (1985) shows that some Canadian industries emerged on the global map only on the basis of natural resource availability. Fifthly, Porter feels that sizeable domestic demand must be present for attaining competitive advantage. But there are industries that have flourished because of demand from foreign consumers. For example, a lions share of Nestles earnings comes from foreign sales. Nevertheless, these limitations do not undermine the significance of Porters theory. 27

THEORY OF PRODUCT LIFE CYCLE

Theory of international product life cycle propounded by Raymond Vernon emphasizes that every product has to pass through different stages. Conceptually, the life cycle consists of four stagesintroduction, growth, maturity and decline. 1. Introductory Stage New products are generally developed after observation of demand, utility and benefits a group of a group of customers enjoy in a given market. It is a normal practice that Japanese company develops a new product for Japanese market first and US Company develops a product for US market first. The Research and Development group creates a new product and predominantly the company concentrates on the domestic market and gradually starts export to other countries. By way of getting constant market feed back the company modifies or alters or adds new features to match international markets. 2. Growth stage Growth stage has few salient features: 1. It increases in export to many countries by which the company generates huge revenue. 2. More competitive forces crop up from a country by innovation, country of entry and any other third country. 3. The organization becomes high capital intensive. 4. The innovator resorts to foreign production units in order to bring down the cost and come closer to customer. Since the customers are aware of the products and the demand is likely to grow substantially, setting up manufacturing units become inevitable. While Sony products have huge demand in South East Asia and Middle East, the company started manufacturing products in Malaysia. Hewlett Packard started setting up units in South East Asia due to rapid growth in sales in the whole region. The innovating company will increase its quantum of exports and is prepared to incur small loss in the export markets where the manufacturing subsidiary unit will commence its operations. 3. Maturity stage This stage has following features: 1. There is a gradual fall in quantum of exports from innovating country. 2. Standardization and quality aspects are pre-requisites. 3. Sophisticated machineries are used, hence is huge. 4. Price war is inevitable due to many players. 5. Production facilities are available in many developing countries at a low labors cost. It is a general trend that innovating countries no longer enjoy production advantage. Since many physical, fiscal and infrastructural incentives are offered by the developing countries, such innovators are lured and increase there production in developing countries. Today, we see such manufacturing units in 28

Indonesia, Thailand, Malaysia and Brazil. India is also emerging as a strong production centre for automobiles, health care and consumer products. 4. Declining stage 1. The main feature of the declining stage is that maximum production takes place in less developed countries. 2. The innovating country starts importing from other countries. 3. The days of keeping high margins are over. 4. It is the stage of survival and no prosperity for the innovator. 5. The innovator may completely deviate from a specific product and go in for a completely new product. The industrial countries disappoint the innovator because the affluent customer demands more and more. New products are flooded in the market with so many features. Since cost factor is the only weapon, production from less developed countries will win. The innovator of the product cannot depend on the first production unit which gave the first product for launching. Q 5) Discuss major objectives, agreements & achievements of WTO & the issues encountered by WTO at the end of Doha round? Ans: The WTO has six key objectives: (1) to set and enforce rules for international trade, (2) to provide a forum for negotiating and monitoring further trade liberalization, (3) to resolve trade disputes, (4) to increase the transparency of decision-making processes, (5) to cooperate with other major international economic institutions involved in global economic management, and (6) to help developing countries benefit fully from the global trading system. Although shared by the GATT, in practice these goals have been pursued more comprehensively by the WTO. For example, whereas the GATT focused almost exclusively on goodsthough much of agriculture The WTOs rules the agreements are the result of negotiations between the members. The current set were the outcome of the 198694 Uruguay Round negotiations which included a major revision of the original General Agreement on Tariffs and Trade (GATT). The WTO agreements cover: Goods It all began with trade in goods. From 1947 to 1994, GATT was the forum for negotiating lower customs duty rates and other trade barriers; the text of the General Agreement spelt out important rules, particularly non-discrimination. Since 1995, the updated GATT has become the WTOs umbrella agreement for trade in goods. It has annexes dealing with specific sectors such as agriculture and textiles, and with specific issues such as state trading, product standards, subsidies and actions taken against dumping.

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Services Banks, insurance firms, telecommunications companies, tour operators, hotel chains and transport companies looking to do business abroad can now enjoy the same principles of freer and fairer trade that originally only applied to trade in goods. These principles appear in the new General Agreement on Trade in Services (GATS). WTO members have also made individual commitments under GATS stating which of their services sectors they are willing to open to foreign competition, and how open those markets are. Intellectual property The WTOs intellectual property agreement amounts to rules for trade and investment in ideas and creativity. The rules state how copyrights, patents, trademarks, geographical names used to identify products, industrial designs, integrated circuit layout-designs and undisclosed information such as trade secrets intellectual property should be protected when trade is involved. Dispute settlement The WTOs procedure for resolving trade quarrels under the Dispute Settlement Understanding is vital for enforcing the rules and therefore for ensuring that trade flows smoothly. Countries bring disputes to the WTO if they think their rights under the agreements are being infringed. Judgements by speciallyappointed independent experts are based on interpretations of the agreements and individual countries commitments. Policy review The Trade Policy Review Mechanisms purpose is to improve transparency, to create a greater understanding of the policies that countries are adopting, and to assess their impact. Many members also see the reviews as constructive feedback on their policies. ACHIEVEMENTS OF WTO 1. Trade Liberalisation WTOs trade liberalization measures are embodied in a variety of agreements, No.60,which each country has to sign for becoming member of WTO. 2. Agreement on Agriculture (AOA) Tariffs on agricultural products are bound Non Tariff barriers such as Quotas for Import have been converted to tariff (Tariffication) to give predictability to trade in agriculture commodities. Developed countries have agreed to cut export subsidies by 36% (24% cut for developing countries). 3. Trade Related Investment Masures Agreement (TRIMS) Applies to measures that affect trade in goods. No country shall apply any measure that discriminates against foreigners or foreign products (Principle of National treatment). However, permits utilization of local resources through Local Content Requirements.

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Discourages trade belonging requirements of countries by restricting import & pushing exports. Deadlines for implementation Developed Countries - 1996 Developing Countries 1999 (extended) LDC - 2001 (extended) 4. SPS Agreement (Sanitary & Phyto Sanitary Agreement ) Anti Dumping Agreement Member Countries can resort to anti dumping measures if they can establish that goods are being dumped at price lower than the price prevailing in the exporting country. Extension of Import Duty can be levied to prevent dumping 5. Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) Enjoins on the member countries to protect the rights of the creators/invention of products or ideas. Copyrights, trademarks, geographical indications, Industrial designs, patterns etc. are covered. e.g. Computer programs, films, wires & spirits are protected. 6. General Agreement on Trade in Services (GATS) Lays down obligations of member countries to provide access to import of services on the basis of MFN principle. Exclusions permitted but to be notified by respective Govts. eg. Air Transport Services are excluded. ISSUES OF DOHA ROUND The fourth round was Doha round of negotiations which was held in Doha, Qatar in 2001. Many of the Seattle issues, covering unfinished agenda of Uruguay Round, were reconvened in Doha. This round is also known as Doha Development Round because it is mentioned in the Ministerial Declaration that this round seeks to place developing countries needs and interests at the heart of the Work Programme adopted in this declaration. In every negotiable issue of the round, special concessions for developing countries were mentioned. The declaration stated that We commit ourselves to the objective of dutyfree, quota-free market access for products originating from LDCs. However, there was no mention about the policies that involve use of domestic instruments in creating a protective environment and achieving the end result of restricting exports from LDCs. One such example is farm subsidies. The final resolution on Doha issues has still not been achieved, even after more than 8 years since its introduction. The reason is lack of forward movement by major negotiators on agriculture subsidy and tariff reduction, the two most intractable issues in the Round. Negotiations aimed at a world that no longer exists Neither the collapse of the Round, nor the recriminations to follow, should be taken too seriously. The mandate for negotiations under the auspices of the Doha Round has fallen further and further behind the pace of change in the world economy Success requires a different game, with different rules and different players Consider agriculture the proximate cause of the Doha collapse. According to World Bank commodity price indexes, in 2001 grain prices were only 70 % of their nominal 1995 levels. In defining the 31

negotiating agenda for the Doha Round, the focus of commodity exporters in the WTO (Brazil, Argentina, Australia, etc.) has been to raise these prices by eliminating price-distorting policies. At the same time, major importers (India, China) have also been concerned about the impact of low prices on their farmers. Impasses over agriculture are as much an excuse as a cause of the breakdown In a sense, developing countries are collectively asking that food prices go up and down at the same time. The inconsistency reflects divergent interests across the newer, non-OECD members of the WTO. It also highlights the fact that remaining impasses over agriculture are as much an excuse as a cause. The problem is irreconcilable differences in views on trade policy, linked to differences in stages of economic development. Non-agricultural issues Moving past agriculture to NAMA and services, developing country gains at this point really require South-South dialog and South-South initiatives at liberalization. This is the message from much of the policy modeling literature. Indeed, model-based analysis of recent NAMA proposals simply reinforces the message from earlier research on the impacts of multilateral trade liberalization, namely: active developing country participation in terms of market access concessions is critical to their prospects Q 6) NAFTA is emerging as an effective trade partner for India despite of global slowdown if so, categories major sectors & business opportunities for Indian business houses to prosper in future in the NAFTA bloc. Ans: NAFTA- The north American free trade agreement (NAFTA) came into being on January 1,1994.the most affluent nations of the world ,i.e. the USA and Canada along with Mexico a developing country joined together to form a trade block. A free trade agreement was signed by the USA and Canada in 1989.this was extended to Mexico in 1994.NAFTA is expected to eliminates all tariffs and trade barriers amng these countries by 2009.However internal tariffs on a large number of product categories were removed already. NAFTA has a population of 363 million and hence it is one of the significant trading areas in the globe. Objectives To create new business opportunities particularly in the Mexico To enhance the competitive advantage of the companies operating in the USA,Canada and Mexico in wider international markets. To reduce the prices f the products and services by enhancing the competition To enhance industrial development and thereby employment throughout the region. To provide stable and predictable political environment for the investors. To develop industries in Mexico in order to create employment and to reduce migration from Mexico to the USA. To assist Mexico in earning additional foreign exchange to meet its foreign debt burden. To improve and consolidate political relationship among member countries. There are tremendous opportunities in Canada and globally for Canadian banks. Domestically, we are positioned as an alternative to the Canadian financial institutions; our model can be best 32

identified as a full-service direct bank. In addition, our structure is flat and our size allows us to be close to our customers. Indian engineering exports and Free Trade Agreement amongst the three countries i.e. Canada, USA and Mexico, provided enormous opportunities for bilateral trade. Q 7) Emunerate all the challenges encountered by global human resources division operating in a cross border business environment. Ans: challenges related to managing people in management an internationally oriented business. Driving force for globalization 1. Foreign direct investment (FDI) flows 2. Cross-border inter-firm agreements Organizations expand beyond domestic boundaries to achieve 1. Satisfied employees 2. Competitive products and services 3. Searching for new or broader markets 4. Acquiring new, more efficient manufacturing technology 5. Large, inexpensive labor forces Global human resource management (GHRM) includes the same functions as domestic HRM, plus several aspects unique to international management 1. people challenge the most difficult for firms becoming international 2. Most critical to success, acquiring a competent workforce (survey of top execs.) The top HR challenges include 1. Finding suitable candidates 2. Intercultural understanding 3. Career management 4. Employee retention 5. Adjusting to environment 6. Partner dissatisfaction 7. Relocation reluctance The cultural nature of global human resource management cultural differences 1. Individualism versus collectivism 2. Power distance 3. Uncertainty avoidance 4. Masculinity versus femininity The concept of "fit" in global human resource management 1. Fit (congruence among HR policies, firms plan & values of foreign culture) 2. Internal fit (HR policies that allow for smooth work flow: HQ & local) 3. External fit (HR to consider the local cultural/socioeconomic environment) The legal and ethical climate of global human resource management 1. Foreign Corrupt Practices Act (1977) forbids in conducting to give the firm an unfair advantage 2. There exists varying degrees of employment discrimination in other countries which may cause problems/dilemmas for PCNs managers 33

3. Civil Rights Act of 1991 applies to US firms operations overseas 4. Sullivan Principles

2007
Q 1) Discuss the economic, cultural, social, political and technological environment of international business as it prevails today. Draw lessons for Indian companies wishing to go global. Ans: An international business entry or operation depends upon multiple environmental factors. They may change the direction, strategy and every moment of international business operations. An international marketer is required to understand, evaluate and work out various parameters before venturing into any country. These Parameters are called environmental factors and they determine the direction and purpose of the international business operation. Many decisions depend upon environmental factors right from selection of the country, location of the plant, liaison with the government, and entry of investment from local bodies, product launch, channel management, promotion and opening of outlets. The first challenge for an organization is to navigate from its home country to the host country. Thereafter it has to develop a proper system so that the venture is successful in the host country; learn all about the regulatory bodies both in the host country and home country; understand the customers changing tastes and attitude towards foreign goods and finally obtain revenue and make the business effective with right people. Prior to entry or investing millions of dollars, the experts gather all the relevant information about the country and interpret those facts to facilitate the company. By such risk analysis, companies can safeguard themselves from future dangers. The major risks are: 1. Political 2. Economic 3. Exchange 4. Socio culture 5. Financial 6. Legal 7. Technological 8. Competitive 9. Infrastructural and 10. Labour. An organization can overcome the effects of all the risks by taking into account the different environmental factors. Since the home environment is known, one can understand and overcome the pitfalls in the event that any action goes wrong. 1. ECONOMIC ENVIRONMENT: The economic environment can be classified into three categories: a) Economy in the home country b) Economy in the host country c) Economy at a global level. a) Home country Economy In order to encourage the business community to venture overseas, it is necessary for a country to have liberal economic and trade policies. b) Host Country Economy. 34

1. 2. 3. 4. 5. 6. 7. 8.

When a firm from one country enters any other country, the following major criteria are taken into account: Size of the market Gross Domestic Product (GDP) Industrialization Banking Purchasing Power Foreign Exchange Income Levels Economic diversity c) Economy at a Global level Organizations such as the World Trade Organization, World Bank, International Monetary Fund, Asian development bank and the organization of petroleum Exporting countries (OPEC) can affect international business. The preferential treatment given to the members of NAFTA, ASEAN, the European Union and COMESA can have a negative impact on the trade between outside cartels and non-members.

2. SOCIAL ENVIRONMENT The social environment encompassing religious aspects, language, customs, traditions and beliefs, influences buying consumption habits. Many companies face failure in foreign countries, due to their inability to understand the socio cultural environment. For example whenever any company establishes business in some African countries, the local population expects that many jobs will open up for them. Very few countries perceive tat they may be exploited. 1. National Taste 2. Language 3. Values and beliefs 4. Demography 5. Literacy rate 6. Female Workforce 7. Double Income Families 8. Impulse buying 3. POLITICAL ENVIRONMENT. The political environment in international business operates in different dimensions: 1. The home country political environment; 2. The host country political environment, and 3. The global political environment. 4. CULTURAL ENVIRONMENT The cultural environment for international business refers to the set of factors which shape the material and psychological development of a nation and represents the primary influence on individual lifestyle, attitude, pre-deposition and behavior as consumers in the market. The most important task of international business is to identify relevant similarities and differences among countries, and means and methods to match the organizations culture with that of the country of its operation. For example, when Toshiba gained 100 percent ownership of Rank-Toshiba in the Plymouth all the managers in charge learnt the British Style of working. The performance of a company in the international arena partly depends on how well the strategic elements fit into the culture of the host country. Culture may be described as the totality of the complex and learned behavior of members of a given society. Elements of culture include beliefs, art, morale, code of conduct and customs. 35

5. TECHNOLOGY ENVIRONMENT Technology and its applications are key factors in determining the international competitiveness of a firm in conducting international business. Multimedia using Pentium 4 is common in advanced countries whereas it will take at least another five years to introduce such products in Africa. Leadership in technology is achieved and maintained through a consistent program of intensive research and development, which can be very expensive. Only those companies that are able to maintain their technological activities will remain competitive. 6. LEGAL ENVIRONMENT : This relates to the laws and regulations governing the conduct of business activities in the country. Before entering any country, firms avail of the services of local legal firms to understand business interpretations pertaining to labor legislations, taxes, environment, pollution, investment, distribution, contracts, logistics etc. The international legal environment has three aspects: a) Home country laws b) Host country laws c) International laws. 7. COMPETITIVE ENVIRONMENT: Competition is a threat imposed by an environment, which may effect or hamper or challenge the operation of an international business firm. Competition either could be from the firms home country or host country or third country. Some times product related competition may crop up through substitutes or low cost production process or technology or cost reduction through economies of scale. The current international business operation has to encounter competition as various levels such as entry, operation, production, administration, human resource, technical resource, and financial resource. Distribution and logistics Globalization does not take place in a single instance. It takes place gradually through an evolutionary approach. Depending on the industry you are in, and where you intend to seek business, here are 5 considerations before you take that big leap: 1) Dont assume you have to be big to go global. Its largely thanks to inexpensive technology and services designed to help small businesses operate across borders with the same efficiencies as large businesses. 2) Research the legal, HR and tax environment in any countries where you will have a physical presence, before you leap. If you need or plan to have a presence in or ongoing sales to another country such as local employees, local warehouses or exports of goods to that country be sure to investigate all legal, HR and tax implications. Two main considerations: Employment Regulations and Practices. Shipping and Importation.

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3) Invest in technology from the get-go. The right technology, especially cloud based software, can position your business to scale without adding incremental cost or a large staff base. Webbased software services, email, social media and inexpensive telecommunications bring the world to your fingertips, helping bridge wide distances. 4 ) If you plan to export physical goods, get exporting help. There are many considerations tied up in the decision to export. You have to understand your market in the country you are targeting. You have to understand exporting laws and regulations, both here in the United States and in the target country. Sometimes licenses are required. 5) Figure out how youre going to get paid . Doing business internationally used to rely heavily on letters of credit. Letters of credit are still widely used. 6) Determine the Culture of that country. Culture is part of the external influences that impact the consumer. That is, culture represents influences that are imposed on the consumer by other individuals. Therefore, cultural knowledge is necessary. After going through these through considerations we can go through 5 stages. According to Ohamae, globalization has five stages. They are, 6) Domestic company exports to foreign countries directly on its own. 7) In the second stage, the domestic company exports to foreign countries directly on its own. 8) In the third stage, the domestic company becomes an international company by establishing production and marketing operations in various key foreign countries. 9) In the fourth stage, the company replicates a foreign company in the foreign country by having all the facilities including R&D, full-fledged human resources etc. 10) In the fifth stage, the company becomes a true foreign company. Q 2) Why is FDI important for home and host country? Discuss the FDI environment in china and India. Draw lessons for India to increase inward FDI.

Ans: FDI Definition: FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. Foreign direct investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which

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can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly. Importance of FDI The simple answer is that making a direct foreign investment allows companies to accomplish several tasks: Avoiding foreign government pressure for local production. Circumventing trade barriers, hidden and otherwise. Making the move from domestic export sales to a locally-based national sales office. Capability to increase total production capacity. Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc; A more complete response might address the issue of global business partnering in very general terms. While it is nice that many business writers like the expression, think globally, act locally, this often used clich does not really mean very much to the average business executive in a small and medium sized company. The phrase does have significant connotations for multinational corporations. But for executives in SMEs, it is still just another buzzword. The simple explanation for this is the difference in perspective between executives of multinational corporations and small and medium sized companies. Multinational corporations are almost always concerned with worldwide manufacturing capacity and proximity to major markets. Small and medium sized companies tend to be more concerned with selling their products in overseas markets. The advent of the Internet has ushered in a new and very different mindset that tends to focus more on access issues. SMEs in particular are now focusing on access to markets, access to expertise and most of all access to technology. FDI Environment in China: Foreign direct investment in China rose to a record $105.7 billion last year, underscoring confidence that rising incomes will boost demand in the worlds fastest-growing major economy.Investment climbed 17.4 percent from a year earlier, the Ministry of Commerce said in a statement in Beijing today. Spending in December rose 15.6 percent from a year earlier to $14 billion. Estimates of five economists surveyed by Bloomberg News for the month ranged from an increase of 29 percent to a decline of 21 percent. Boosting wages and reducing income inequality will be major tasks over the next five years, Chinas leaders said in October after setting targets for the economy for the 12th five-year plan. Samsung Electronics Co. and LG Display Co., the worlds two biggest makers of liquid-crystal

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displays, received Chinese government approval to build LCD factories in the country and meet surging demand. Foreign companies tapping Chinese consumers will benefit from rising wages and will continue to invest in China, said Alan Liao, an economist at China trust Commercial Bank in Taipei. Theres a misconception that higher salaries will force companies out of China, this may apply to low-margin textiles or toy manufacturers, but its not true for value-added service sectors and high-margin technology companies. FDI Environment in India: The constant efforts of the Government of India in making the country an investor friendly destination are reaping dividends. Alongside the United Nations Conference on Trade and Development (UNCTAD) ranking India at second place in global foreign direct investments (FDI) in 2010, in its report titled, 'World Investment Prospects Survey 2009-2012' has added to the initiative to a great extent . The report further forecasts, India to be among the top five attractive destinations for international investors during 2010-12. FDI inflow rose by more than 100 per cent to US$ 4.66 billion in May 2011, which is the highest monthly inflow in 39 months, while the cumulative amount of FDI equity inflows from April 2000 to May 2011 stood at US$ 205.96 billion, according to the latest data released by the Department of Industrial Policy and Promotion (DIPP). The service (including financial and non-financial) sectors attracted highest FDI equity inflows during April-May 2011-12 at US$ 910 million. India received maximum FDI from countries like Mauritius, Singapore, and the US at US$ 56.31 billion, US$ 13.25 billion and US$ 9.71 billion, respectively, during April 2000-May 2011. India's foreign exchange (Forex) reserves have increased by US$ 2.29 billion for the week ended July 22, 2011, according to the weekly statistical bulletin released by the Reserve Bank of India (RBI). In the week under consideration, foreign currency assets went up by US$ 2.23 billion to US$ 284.53 billion. Furthermore, India may emerge as US Export Import Bank's (Ex-Im) largest market in next 12-18 months. During the last nine months, we have approved 173 transactions involving 100 companies and US$ 1.4 billion in financing of US exports to India, as per Fred P Hochberg, the bank's Chairman and President. Investment Scenario The total merger and acquisitions (M&A) and private equity (PE) (including qualified institutional placement (QIP)) deals in the first half of 2011 include 524 deals valued at US$ 32.48 billion, according to data released by Grant Thornton India. The global M&A activity has been increasing so far in 2011 (Jan-June 2011) clocking deals worth US$ 1.5 trillion.

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In addition, the total value of outbound deals-Indian companies acquiring businesses outside India-in the first half of 2011 was recoded at 86 deals worth US$ 5.89 billion. PE deals amounted to 203 deals worth US$ 5.09 billion in the first half of 2011 as compared to 125 deals worth US$ 2.95 billion during the corresponding period in 2010. Q 3) Discuss the contemporary theories of international trade with egs. apply Porters model of competitive advantage for India for fresh fruits and vegetables.
Ans: Theories of International Trade

Theory of mercantilism, theory of neo-mercantilism, absolute cost advantage theory, comparative cost advantage theory, Heckscher-Ohlin Theory of factor proportion, Country similarity theory, International Product life Cycle theory, Country Size theory, Independence, interdependence-dependence theory, Strategic Rivalry theory, Porters Competitive Advantage theory, etc are dealt.
Theory of Absolute Cost Advantage Adam Smith was one of the forerunners of the classical school of thought. He propounded a theory of international trade in 1779, which is known as the theory of absolute cost advantages. He was of the opinion that productive efficiency differed among different countries because of diversity in the natural and acquired resourced possessed by them. Adam Smith explains the concept of absolute advantages in a two-commodity, two-country framework. Suppose Bangladesh produces one kilogram of rice with 10 units of labour or it produces one kilogram of wheat with 20 units of labour. On the other hand, Pakistan produces the same amount of rice with 20 units of labour and produces the same amount of wheat with 10 units of labour. Each of the countries has 100 units of labour. Equal amount of labour is used for the production of two goods in the absence of trade between the two countries. In the absence of trade, Bangladesh will be able to produce 5 kilogram of rice and 2.5 kilogram of wheat. At the same time, Pakistan will produce 5 kilogram of wheat and 2.5 kilogram of rice. But when trade is possible between the two countries, Bangladesh will produce only rice and exchange a part of the rice output with wheat with Pakistan. Pakistan will produce only wheat and exchange a part of the wheat output with rice from Bangladesh. The total output in both the countries will rise because of trade. Bangladesh, which was producing 7.5 kilogram of food grains in the absence of trade, will now produce 10 kilogram of food grains. Similarly in Pakistan 10 kilogram of food grains will be produced instead of 7.5 kilogram. Amount of Production in Absence of Trade Rice Wheat Bangladesh 5 kg 2.5 kg Pakistan 2.5 kg 5 kg Total output in two countries: 15 kg Amount of Production after Trade Rice Bangladesh 10 kg Pakistan Nil Total output in two countries: 20 kg Wheat Nil 10 kg

Trade Theory of Technology Gap Technology gap theory views technological asymmetries as important long run determinants of trade flows. Moreover, it also captures interactions between trade flows and changes in long run growth patterns and levels of employment. 40

A model of technology gap was first written by Josiah Tucker in the mid-1700s. Tucker was the first writer to posit a formal model which made use of dynamic gains from trade in accounting for the evolution of trade patterns. In other words, Tucker developed cumulative causation model of trade in which the gains provided by specialization from trade create new opportunities for further growth and trade. Tucker was profoundly interested in the relationship between the growth of poor countries and that of rich ones such as, his homeland, England. Specifically, several writers had expressed concern that Englands export markets would be taken over by poorer countries that could produce goods cheaper because of their lower wages and other costs. Tucker responded with an increasing returns argument that demonstrated the cost advantages of richer countries in the production of the most complex commodities: The rich country not only has the best tools and technologies, but also the superior Skill and Knowledge (acquired by long Habit and Experience) for inventing and making of more. Moreover, the rich country need not rely only on the genius of its own manufacturers and farmers to maintain this pace of innovation. The high wages, easier access to capital, and greater Exertion of Genius, Industry, and Ambition will cause the best and brightest of the poor countries to emigrate to the rich ones, draining the Flower of its *the poor countries+ inhabitants. This brain drain opens larger competencies, creates more employment for the natives, helps and improves old manufactures, and sets up new ones; thus impoverishing competitors, and the same time enriching tech. superior. The technology gap theory of trade tells that a country that is competitive in the production of the complex goods will rule the global trade and achieve higher level of economic development. Poor countries produce simple commodities cheaply, while the more complex commodities are cheaper in the rich countries. Third world countries because of their technological backwardness are either primary goods exporters or just exporters of ores, while developed countries trade in top end electronic goods, pharmaceuticals, destructive missiles, etc. Q 4) Why is rupee strengthening with respect to dollar in the last few weeks? What are the tools available to Indian export companies to protect them from risk of falling dollar? Ans: A slowdown in the US economy is bad news for India. Indian companies have major outsourcing deals from the US. India's exports to the US have also grown substantially over the years. The India economy is likely to lose between 1 to 2 percentage points in GDP growth in the next fiscal year. Indian companies with big tickets deals in the US would see their profit margins shrinking. The worries for exporters will grow as rupee strengthens further against the dollar. But experts note that the long-term prospects for India are stable. A weak dollar could bring more foreign money to Indian markets. Oil may get cheaper brining down inflation. A recession could bring down oil prices to $70. The whole of Asia would be hit by a recession as it depends on the US economy. Asia is yet to totally decouple itself (or be independent) from the rest of the world, say experts. Example:

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The US economy has suffered 10 recessions since the end of World War II. The Great Depression in the United was an economic slowdown, from 1930 to 1939. It was a decade of high unemployment, low profits, low prices of goods, and high poverty. The trade market was brought to a standstill, which consequently affected the world markets in the 1930s. Industries that suffered the most included agriculture, mining, and logging. Q 5) MNE boon or bane? Justify with Example .Discuss the eg of Indian MNC which has helped the host country company and India. Ans: MNCs generally have the innate growth impetus with them that engines the spread international business. They always look upon growth opportunities anywhere in the globe and try to seize them. Strategic alliance, joint ventures, wholly owned subsidiaries, mergers on acquisition, franchising, etc are the diverse strategies they adopt to expand their operation globally. there are MNCs who always have a constant eye on foreign markets resulting in expanding international business. IBM, Volkswagen, Unilever, Coco-Cola, N.V.Philips, Singer, Sony, Toyota, Microsoft, General Motors, Exxon, etc come in this category. Originally American firms bought plant and equipment in the Western Europe. Very recently Indian companies are on a shopping spree acquiring overseas entities. Tata Steel, the renowned Indian private sector steel firm, acquired Corus, the Europes second largest steel producer with revenues in 2005 of GBP 9.2 billion, and crude steel production of 18.2 million tons primarily in U.K. and Netherlands growth of international business is very much influenced by the management culture of mncs. MNCs generally adapt to local conditions and the relationship between parent and subsidiaries is that of coordinated federation. Decisions on investment financing and market are localized. Q 6)Discuss on the following a) Ethnocentric and polycentric orientation of MNEs Ethnocentric Approach- under this approach, parent country nationals are selected for all the key management jobs. This approach was widely followed by PROCTER AND GAMBLE, PHILLIPS, MATUSHITA,TOYOTA etc. when Philips filled the important vacancies by Dutch nationals, on Dutch employees referred them to as Dutch mafia. Some of the international firms follow this approach due to the following reasons: Non availability of qualified personnel in host countries particularly developing countries. To maintain a unified corporate culture. Japanese firms follow this reason. P &G also preferred this reason To transfer the core competencies of the company when the cre competencies are held by the existing employees of parent country nationals. Though this approach claims the above discussed advantages, it suffers from the following disadvantages: When important positions of the subsidiaries are filled with the parent country nationals, the staff of the host country feels frustrated resulting in low productivity. The subsidiary may fail to understand and respond to the host countrys culture due to culture myopia. P&G experienced a number of failures due to this problem and subsequently filing ,senior management positions by the host country nationals. 42

POLYCENTRIC APPROACH Under this approach, the positions including the senior management positions of the subsidiaries are filled by the host country nationals. The reason for adopting this approach includes: Host country nationals are familiar with the culture of the country including business culture. Level of job satisfaction of the employees of the subsidiaries can be enhanced. It is les expensive as the salary level f host country nationals is lower than that of host country nationals in case of MNC of advanced countries. It reduces overall cost of staff of subsidiaries.

It suffers from the following limitations: This approach limits the mobility of the employees among subsidiaries and between subsidiaries and the headquarters. Organizational culture of the parent company cannot be completely adopted in the subsidiaries. Culture of the subsidiaries and the headquarters cannot be exchanged as it isolates the headquarters from their subsidiaries. b) Political risk analysis Foreign Direct Investment (F.D.I.) continues to grow in emerging markets, some of which can be hazardous. Consequently, war, civil conflict, terrorism, insurgency, social unrest, and crime can cause fatalities, injuries, damage, and loss for the people, assets, operations, reputations, and environments of transnational businesses and Non Governmental Organizations (N.G.O.s) that have interests in these dangerous environments. Analysis of the politics of these volatile areas provides management with a qualified and quantified assessment of the likelihood of the occurrence of such threats and the consequent level of impacts on their organizations. This political risk analysis can then be applied by management to mitigate the level of damage by strengthening organizational vulnerabilities. If political risk analysis is not undertaken and subsequently maintained as an integral part of business planning, organizational vulnerabilities cannot be identified and consequently strengthened and levels of impact cannot then be reduced or negated. An organization would, therefore, be more exposed than necessary to political risk. Thus, political risk analysis is critical for effective business planning from Board to project level. C) country selection for IB

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