DRIVE

PROGRAM

Fall 2015
MBA SEM 4

SUBJECT CODE & NAME

MB0053 International Business

Management

Question 1: The world economy is globalizing at an accelerating pace. Discuss

this statement and list the benefits of globalization.
Answer :
Globalisation
Globalisation is a process where businesses are dealt in markets around the world,
apart from the local and national markets. According to business terminologies,
globalisation is defined as the worldwide trend of businesses expanding beyond their
domestic boundaries. It is advantageous for the economy of countries because it
promotes prosperity in the countries that embrace globalisation.
Globalisation involves companies that invest and operate in other countries. It promotes
economic growth and prosperity in the countries that embrace globalisation. Some of the
benefits of globalisation include liberalisation of economies and the free flow of
information.
Global companies Companies, which invest in other countries for business and also
operate from other countries, are considered as global companies. They have multiple
manufacturing plants across the globe, catering to multiple markets.
The transformation of a company from domestic to international is by entering just one
market or a few selected foreign markets as an exporter or importer. Competing on a
truly global scale comes later, after the company has established operations in several
countries across continents and is racing against rivals for global market leadership.
Thus, there is a meaningful distinction between a company that operates in few selected
foreign countries and a company that operates and markets its products across several
countries and continents with manufacturing capabilities in several of these countries.
Companies can also be differentiated by the kind of competitive strategy they adopt
while dealing internationally. Multinational strategy and global competitive strategy are
the two types of competitive strategy.
Benefits of globalisation
Outsourcing to low wage economies, increased living standards in developing countries,
competitive pricing of products and services, easy access to finance and global
educational opportunities are some benefits of globalisation.
The merits and demerits of globalisation are highly debatable. While globalisation
creates employment opportunities in the host countries, it also exploits labour at a very
low cost compared to the home country. Let us consider the benefits and ill-effects of
globalisation. Some of the benefits of globalisation are as follows:
Promotes foreign trade and liberalisation of economies.
Increases the living standards of people in several developing countries through
capital investments in developing countries by developed countries.
Benefits customers as companies outsource to low wage countries. Outsourcing
helps the companies to be competitive by keeping the cost low, with increased

productivity.
Promotes better education and jobs.
Leads to free flow of information and wide acceptance of foreign products, ideas,
ethics, best practices, and culture.
Provides better quality of products, customer services, and standardised delivery
models across countries.
Gives better access to finance for corporate and sovereign borrowers.
Increases business travel, which in turn leads to a flourishing travel and hospitality
industry across the world.
Increases sales as the availability of cutting edge technologies and production
techniques decrease the cost of production.
Provides several platforms for international dispute resolutions in business, which
facilitates international trade.
Question 2: Compare the Adam Smith and David Ricardos theories of international
trade with examples.
Answer :
Adam Smiths theory :
Smith said that countries should specialise in the production and manufacturing of goods
and services in which they have an absolute advantage.
Absolute advantage theory
In one of the most notable book Wealth of Nationsin 1776, Adam Smith attacked the
mercantilism and argued that countries differ in their ability to produce goods and services
efficiently due to variety of reasons. At that time, England, by virtue of their superior
manufacturing processes, were the worlds most efficient textile manufacturers of the world.
This was due to combination of several factors such as favourable climate, good soils,
skilled manpower and accumulated experience and expertise in textile production. On the
other hand, the French had one of the most efficient wine industries of the world. Thus,
England had an absolute advantage in the manufacturing of textiles and France had an
absolute advantage in the production of wine. Adam Smith argued that a country has an
absolute advantage if it has one of the most efficient and cost effective product in
comparison to any other country producing it.
Smith argued that countries should specialise in production and manufacturing of goods
and services in which they have an absolute advantage. Such cost effective and efficient
products can be traded with goods from other countries in which that country has an
absolute advantage. According to Smith, England should specialise in the production of
textiles and France should specialise in the production of wine. Both countries should
exchange such products of absolute advantage with each other, i.e. England should sell
textiles to France and France should sell wine to England.
The crux of Smiths absolute advantage theory is that a country should not produce goods
at home in which it does not have cost advantage; instead it should import from other
countries. Absolute advantage theory was based on positive sum game where countries
benefit from trade unlike mercantilism theory which was based on zero game. Caselet
tabled as under illustrates the benefits of absolute advantage theory.
David Ricardos Comparative advantage theory
Ricardo argued that a country should specialise in the production of those goods that it can

produce most efficiently and import the goods from another country which produces it
less efficiently even if it has absolute cost advantage in the production of those goods.
David Ricardo, in his notable book Principles of Political Economy published in 1817 came
up with an improvement on Adam Smiths absolute advantage theory. Ricardo argued
what might happen if one country has an absolute advantage in the production of all goods.
Adam Smiths theory suggests that such a country might not have benefitted from
international trade as trade is positive sum game and countries prosper only if they
exchange the goods in which they have absolute advantage.
Ricardo argued that it was not the case and showed that countries should trade goods with
each other where they have comparative cost advantage. For a sustainable economic
system, Ricardo argued that a country should specialise in the production of those goods
that it can produce most efficiently and import the goods which it produces less efficiently
even if it has absolute cost advantage in the production of those goods. Practical case on
comparative cost advantage is tabled as under:
Question 3: Regional integration is helping the countries in growing their trade.
Discuss this statement. Describe in brief the various types of regional integrations.
Answer: Regional integration is the bonding between nations and states through political,
cultural and economic cooperation. The cooperation is overseen by rules and regulations
decided upon by the states entering into an understanding.
Regional integration facilitates the growth of trade, ensures peace and security of the region
and binds different countries together.
Regional integration is necessary to improve the relationship between countries and to
promote trade. The overall development of the region is the principal behind regional
integration.
Overview of Regional Integration
Regional integration can be defined as the unification of countries into a larger whole. It also
reflects a countrys willingness to share or unify into a larger whole. The level of integration
of a country with other countries is determined by what it shares and how it shares.
Regional integration requires some compromise on the part of participating countries. It
should aim to improve the general quality of life for the citizens of those countries.
This tendency towards integration was activated by the European Union (EU) market
integration. This trend has influenced both developed and developing countries to form
customs unions and Free Trade Areas (FTA). The World Trade Organisation (WTO) terms
these agreements of integration as Regional Trade Agreements (RTA).
Impact of integration
Regional integration results in the creation and diversion of trade. It supports overall growth of
the region, coupled with efficient trading practices. Trade creation increases production and
income and also leads to new entrants in the market and, therefore, results in tougher
competition. The transfer of technology is also faster.
Regional integration induces reduction on tariffs and prohibitions. It spreads goodwill among
member countries and also helps in reducing the chances of conflict.
Types of Integration
There are different types of regional integration such as free trade area, customs union,
common market, economic union, political union, preferential trading agreement and free trade
area.

The different regional integration agreements are NAFTA, APEC, EU, EFTA, AFTA,
MERCOSUR, GCC and SAFTA.
1 Preferential trading agreement
Preferential trading agreement is a trade pact between countries. It is the weakest type of
economic integration and aims to reduce taxes on few products to the countries who sign the
pact. The tariffs are not abolished completely but are lower than the tariffs charged to countries
not party to the agreement. India is in PTA with countries like Afghanistan, Chile and South
Common Market (MERCOSUR). The introduction of PTA has generated an increase in the
market size and resulted in the availability and variety of new products.
2 Free trade area
Free Trade Area (FTA) is a type of trade bloc and can be considered as the second stage of
economic integration. It comprises of all countries that are willing to or agree to reduce
preferences, tariffs and quotas on services and goods traded between them. Countries choose
this kind of economic integration if their economical structures are similar. If countries compete
among themselves, they are likely to choose customs union.
The importers must obtain product information from all suppliers within the supply chain in order
to determine the eligibility for a Free Trade Agreement (FTA). After receiving the supplier
documentation, the importer must evaluate the eligibility of the product depending on the rules
pertaining the products. The importers product is qualified individually by the FTA. The product
should have a minimum percentage of local content for it to be qualified.
3 Custom union
Custom Union is an agreement among two or more countries having already entered into a free
trade agreement to further align their external tariff to help remove trade barriers. Custom union
agreement among negotiating countries may encompass to reduce or eliminate customs duty
on mutual trade. Under customs union agreement, countries generally impose a common
external -tariff (CTF) on imports from non-member countries. Such common external tariff helps
the member countries to reap the benefits of trade expansion, trade creation and trade
diversification. In the absence of common external tariff, there is a possibility that countries with
lower custom duties may become conduits for members which has higher custom duty. Custom
union is third stage in level of economic integration and is followed only after free trade
agreement among participating countries.
4. Common market
Common market is a group formed by countries within a geographical area to promote duty free
trade and free movement of labour and capital among its members. European community is an
example of common market. Common markets levy common external tariff on imports from nonmember countries.
A single market is a type of trade bloc, comprising a free trade area with common policies on
product regulation, and freedom of movement of goods, capital, labour and services, which are
known as the four factors of production. This agreement aims at making the movement of four
factors of production between the member countries easier. The technical, fiscal and physical
barriers among the member countries are eliminated considerably as these barriers hinder the
freedom of movement of the four factors of production. The member countries must come
forward to eliminate these barriers, have a political will and formulate common economic
policies.
A common market is the first step towards a single market. It may be initially limited to a FTA
with moderate free movement of capital and services, but it is not capable of removing the other
trade barriers.

Economic union
Economic union is a type of trade bloc and is instituted through a trade pact. It comprises of a
common market with a customs union. The countries that are part of an economic union have
common policies on the freedom of movement of four factors of production, common product
regulations and a common external trade policy.
The purpose of an economic union is to promote closer cultural and political ties while
increasing the economic efficiency between the member countries.
Economic unions are established by means of a formal intergovernmental legal agreement
among independent countries with the intention of fostering greater economic integration. The
members of an economic union share some elements associated with their national economic
jurisdictions.
These include the free movements of:
Goods and services within the union along with a common taxing method for imports from
non-member countries.
Capital within the economic union.
Persons within the economic union. Some forms of cooperation usually exist while framing
fiscal and monetary policies.
Political union
A political union is a type of country, which consists of smaller countries/nations. Here, the
individual nations share a common government and the union is acknowledged internationally
as a single political entity. A political union can also be termed as a legislative union or state
union.
Regional Trading Arrangements
After learning the various types of integration, listing the regional trading arrangements required
for integration.
The European Union (EU)
European Free Trade Association (EFTA)
North American Free Trade Agreement (NAFTA)
Southern Common Market (MERCOSUR)
ASEAN Free Trade Area (AFTA)
Asia-Pacific Economic Cooperation (APEC)
Gulf Cooperation Council (GCC)
South Asian Free Trade Area (SAFTA)
Question 4 : Write short note on:
a) GATS (General Agreement on trade in services)
b) ILO (International Labour organization)
Answer :
General Agreement on Trade in Services (GATS) GATS is a framework agreement defining
the rules under which trade in services must occur. GATS aim at extending the rules covering
trade in goods to trade in services. A detailed rule has been included to take into account the
differences between goods and services and the way in which trade in services is conducted.
Trade in services cover a wide range of activities in the area of telecommunication, information,
banking, insurance and education. WTO has recognised over 150 service sub-sectors.
The main objective of GATS is to establish a framework for liberalising trade in services. It
encourages countries to modify their domestic regulations. This modification results in

elimination of restrictions applied to service products entering the country and is applicable to
international service suppliers who are carrying out business in various modes. According to the
GATS, MFN status and transparency is applicable to all services. Other commitments such as
national treatment and market access are only applicable to services that are opened according
to the specified negotiated commitments. GATS covers services known as consumption
abroad where services such as e-commerce are used by the consumers in a host country and
citizens of a country travel overseas to consume products such as tourism or education.
International Labour Organisation (ILO)
International Labour Organisation (ILO) is a specialised agency of the United Nations which
deals with labour issues. The headquarters is situated in Geneva, Switzerland. The secretariat
comprises of the people employed by the organisation throughout the world. The secretariat is
known as the International Labour Office. The ILO manages work through three main bodies.
They are:
International Labour Conference The members of the ILO meet at the International
Labour Conference every year in June, in Geneva. Two government delegates along with an
employer delegate and a worker delegate represents their respective member state. The
technical advisors also accompany the delegates. The Cabinet Ministers are usually
responsible for labour affairs, head the delegations and present the viewpoint of their
government. The Conference creates and implements standards for international labour. Social
and labour issues are discussed in the Conference. It also assigns the budget of the
organisation and elects the Governing Body.
Governing Body The executive council of the ILO is known as the Governing Body. It
meets thrice a year in Geneva and takes decisions on the ILO policies. It forms programmes
and budgets which are submitted to the Conference for adoption. The Governing Body has 28
government members, 14 employer members and 14 worker members. Ten government seats
are permanently held by states of chief industrial importance. Taking into consideration the
geographical distribution, representatives of other member countries are elected at the
Conference once in every three years. The representatives are elected by the employers and
workers.
International Labour Office The permanent secretariat of the International Labour
Organisation is the International Labour Office. It is the central point for all activities that are
administered by the governing body. The Office is a center for administration, research and
documentation. It employs more than 1,700 officials from 110 nationalities. The Office also
organises certain programmes to extend technical help to all member nations. Under this
programme of technical cooperation, around 600 experts undertake missions in all regions of
the world.
History
The ILO was created in 1919, after the First World War. The ideas of the International
Association for Labour Legislation were incorporated in the Constitution of the International
Labour Organisation. The initial motivation of the ILO was humanitarian because the workers
were exploited without any improvement in their health and family. The preamble of the
constitution of the ILO states the conditions of labour and the injustice and privation to large
number of people. The economic factor was the second motivation as it has a certain effect on
the cost of production. The failure of a nation to adopt humane conditions of labour affects the
economic situation of the country adversely.
The ILO constitution was written in April 1919 by the Labour Commission that was set up by the
Peace Conference. The first annual International Labour Conference had two representatives
from the government. It included one representative from the employers organisations and
another representative from the workers organisations of each member state. The first six

International Labour Conventions that dealt with working hours in industry, minimum age,
unemployment, maternity protection and night work for women and night work for young
persons in was implemented in the first annual International Labour Conference. Albert Thomas
was chosen as the first Director of the International Labour Office by the Governing Body. From
the beginning, he drove organisation with a strong motivation. 16 International Labour
Conventions and 18 Recommendations were adopted in 2 years. In 1920, the ILO headquarters
was set up in Geneva.
International Labour Code
The International Labour Code is composed of Conventions and Recommendations adopted by
the International Labour Conference. In 1997, the Code contained 181 conventions and 188
recommendations that covered important subjects in labour and social fields. The main function
of the ILO is to set international labour standards by adopting conventions and
recommendations covering the major labour-related issues which are referred to as the
International Labour Code. The Conference adopts conventions and recommendations which is
prepared by the International Labour Office and the governing body. The representatives of the
member nations bring the conventions and recommendations to the notice of the authorities.
Conventions These treaties are not bound to a country unless they are approved by that
country. ILO conventions that have secured a two-third majority should be presented by the
member country in the Conference. The ILO conventions are approved as written and without
reservations. Flexibility clauses are included in the conventions to accommodate different
climatic conditions or states of development of particular countries.
Recommendations When state practices vary largely, non-binding guidelines known as
recommendations are issued. Recommendations are issued when the subject is:
Very technical and cannot be handled by a convention.
Already covered by a convention but needs to be addressed in more detail.
Member states are required to bring recommendations to the attention of their governments.
The ILO manages work through three main bodies, namely International Labour Conference,
Governing Body and International Labour Office.
The International Labour Code is composed of conventions and recommendations adopted
by the International Labour Conference.
Question 5: What is the difference between domestic and international accounting and
how will you measure this difference?
Answer: International Accounting Standards
Accounting is understood as the language of business. International Accounting Standards
state how should different types of transactions and events be recorded in financial statements.
International accounting refers to international comparative analysis, accounting
measurements, and reporting issues distinctive to multinational business connections. It also
refers to harmonisation of global accounting and financial reporting through political,
organisational, professional, and standard-setting activities.
Accounting Standards are the key mandatory and regulatory mechanisms for training on
financial reports and conducting successful audit for the same. It is used almost in all countries
throughout the world. They are concerned with the structure of measurement, rules for
preparation and arrangement of financial statements. They emerge as a set of authoritative
statements related to exact type of transactions, events, and other costs that are recognised
and reported in the financial statements. They are designed to supply practical information to

diverse users of the financial statements such as shareholders, creditors, lenders, organisation,
investors, suppliers, competitors, researchers, regulatory bodies. These statements are
designed and approved to develop and benchmark the quality of financial reporting.
A financial reporting system of international standard is required to attract foreign and present
and potential investors at home, which can be achieved by harmonising the accounting
standards.
Domestic vs. international accounting
Different countries whether domestic or international, have different accounting standards. A
common belief is that these differences reduce the quality and importance of accounting
information. Accounting standards determine the financial reporting quality and provides
separately verified information about an organisation's financial performance to investors
creditors.
Though there are differences in accounting methods, domestic businesses are not affected. The
accounting system of a domestic organisation must meet the specialised and regulatory
standards of its home country. But, an MNC and its subsidiaries must meet differing accounting
and auditing standards of all the countries in which it operates. This leads to a need for
comparability between businesses in the group. In order to successfully manage and organise
their operations, local managers require accounting information, which should be prepared
according to the local accounting concepts and denomination in the local currency. Yet, for
financial controllers, to measure the foreign subsidiarys performance and worth, the
subsidiarys accounts must be translated into the organisations home currency. This translation
is done using accounting concepts and measures, which are detailed by the organisation.
Investors worldwide look for the highest possible returns on their capital, in order to interpret the
track record, though they use a currency and an accounting system of their own. The
organisation also has to pay taxes to the countries where it does business, based on the
accounting statements prepared in these countries. Besides this, when a parent corporation
tries to combine the accounting records of its subsidiaries to produce consolidated financial
statements, extra complexities occur because of the changes in the value of the host and home
currencies.
There are many differences between International Accounting Standards (IAS) and Domestic
Accounting Standards (DAS). On the basis of difference between the two, two indices, namely
'divergence' and 'absence', are created. Absence is the difference between DAS and IAS; the
rules on certain accounting issues are missed out in DAS and covered in IAS. Divergence
represents the differences between DAS and IAS; the rules on the same accounting issue differ
in DAS and IAS.
Measurement of differences between IAS and DAS
You can measure the differences between IAS and DAS in the following way:
Literature on international accounting differences Referring to earlier reports
on international accounting could give more information about the subject. Most of the earlier
reports understand international accounting differences as various options adopted by nations
for the similar accounting problems, which correspond to divergence concept.
Framework of analysis Links between variations in accounting standards and financial
reporting quality of various countries could be clearly seen from the reports published earlier.
We should consider the institutional determinants of accounting differences such as legal origin,
governance structure, economic development, and equity market.
Differences in accounting standards exist because of diverse political, legal, economic, and
cultural systems of the countries. Accounting standards and practices are also prejudiced by the

sources of capital used to fund business.

Accounting systems were influenced by private ownership, industrialisation, inflation, and so on.
When there are differences in economic conditions, it is not surprising to find differences in
accounting practices. However, there are other influencing elements apart from economic
factors. These are legal systems, educational systems, socio cultural features, and political
systems. These also influence the need for accounting, speed and direction of its development.
Due to the increasing trend in globalisation of business, understanding various accounting
system is important.

Question 6: Discuss the various payment terms in international trade. Which is the safest
method and why?
Answer: Understanding Payment Mechanism in Foreign Trade
For successfully conducting international trade in todays competitive international environment,
it is essential for the exporters to offer attractive sales terms and payments to importers so as to
woo them for business. One of the major concerns for en exporter is to choose the appropriate
payment method in order to minimise risks related to payments of trade transaction. Payment
should be done after understanding the economic scenario of importers country, importer credit
worthiness and to certain extent accommodating the needs of the importer. Exporter can choose
any mode of payment depending on risk perception, size of deal, importer credit worthiness and
economic situation in importers country.
Factors to be considered for choosing payment terms
Factor

Require Letter
of Credit

Type of the
customer

Undetermined

Consider
Documentary
Collection
Against
Payment
Acceptable

Consider
Open Account

Excellent

Relationship
Economic
stability
Type of order

New
Unstable

Established
Stable

Established
Very stable

Custom

In stock

Transaction
Size
Cash flow

Large

Regular
production
Moderate

Always

Never

Never

Small

In case of international trade, exporter has to take more precautions as some methods of
payment are unique and usually used in case of international trade only. Key consideration
while deciding upon a payment term in foreign trade is elaborated as under.
A. Some of the major risks involved in realisation of payments in international trade can be
either at importer, importer bank and importers country such as insolvency and default by
importer, insolvency of importer bank and exchange control restrictions, inconvertibility issues
with importers country. ..
B. Some of the risks involved in international trade in Liberalisation, Privatisation and
Globalisation era can be under control of exporter but some cannot be. For example, credit risk
which arises from a change in
the credit worthiness of importer can be covered by ECGC. Exchange Rate Fluctuation risk can
be covered by hedging the currency invoiced in forward contract market but risk such as Force
Majeure which arises from change in policy of a country, which in turn affects the trade
capability, and by a natural disaster cannot be anticipated in complex international
environments1. Other risks mainly arises due to a difference in culture, law, or language are
also beyond exporter control.
C. International Trade Operations offers different types, quantum and location of risks, thereby
confusing the exporter with uncertainty over realisation of payments and timing of payments
between the exporter and importer2.
D. For exporters, any international sale will be equivalent to gift until he has not realised the
payment from the importer. For importer any payment is donation until he has received the
cargo as sent by exporter.
E. Exporter will always be interested to receive the payments as soon as he/she sends the
goods to importer through shipment. Importer will be willing to delay the payments as he/she will
be interested to sell these goods in markets and then make the payments to exporter.