Q1. Define -International Business.

answer:

International business is defined as a business the activities of which involve in between4wo or more
countries. It involves all commercial transactions by private companies as well as the government
companies. Private companies are engaged in such transactions for profit while government undertake
them for sales, investments and transportation.

Today international business comprises of a large and growing portion of the world's total
business. It includes not only international trade and foreign manufacturing but also the service
industry such as tourism, banking and mass communication etc.

International business, also called global business, is not a new phenomenon. However, the
volume of international trade and the number of players in it have increased dramatically over the last
decade. Today every nation and many companies buy and sell goods in the international market place.
Thus international business is the process of focusing on the global resources and the objectives of the
organization on global business opportunities and threats.

Q2. How does international business differ from domestic business?

Answer:

A firm doing business across borders must deal with three kinds of environmental forces; domestic,
foreign and international. Whereas a firm operating its business within the borders of a country deals
with domestic environmental forces only. The differences between these businesses are primarily in
the areas of currency] interest rates, inflation, government regulations, taxation systems language, and
cultural and economic barriers.

In an international business transaction a buyer of foreign goods must pay for them in a currency which
is different from hi own country. There may be exchange rate fluctuations and the ■ importer has to
enter into a forward contract with a banker. The commodities become subject to a different set of laws
once they cross a country's border. There are restrictions on goods like Quotas and Licences. A
business man who operates within domestic marks] feces a single tax system, short-term and long
term interest rates and only one rate of inflation but for a business man engaged in global business,
these variables are all different, having, operations in a number of countries.

A business man have to be aware of customs, institutions and languages of the people in the country,
he is operating. The kinds ol commodities being sold in foreign countries are affected by cultural
factors as well as the individual's conduct and procedure in selling overseas.

Business activities require vast investments of time, energy; and personnel on the domestic level.
Adding an international component merely intensifies the number of steps necessary and the length
and breadth of the firm's reach of effort and activity. The prospective commitment is staggering and is
generally avoided by many domestic businesses.

However, special problems arise in International business which are not normally experienced
when trading or manufacturingbat home.

In particulars

 Deals might have to be transacted in foreign languages and under foreign laws, customs and
regulations.
S.R.P* 5TH TERM- INTERNATIONAL BUSINESS Page 1
  Information on foreign countries needed by a foreign firm may be difficult to obtain.

 Foreign currency transactions will'be necessary, exchange rate ■ variations can be very wide and
create many problems for international business.

 Numerous cultural differences may have to be taken into account when trading in other nations.

 Control and communication systems are normally more complex for foreign operations than for
domestic operation!

 Risk levels might be higher in foreign markets. The risks \ international business include political
risks, commercial risl (market failure, products or advertisements not appealing foreign customers,
etc.), Financial risks (adverse movements in exchange rates of inflation reducing the real value ol
foreign working capital) and so on.

 International managers require a border range of manai skills than domestic managers who are
concerned only the domestic problems.

 Large amounts of important work might have to be left intermediaries consultants and advises.

Q3. Why do companies engage in international business?

Answer:

Firms engage in international business because of various reasons, all of which are linked to the desire
of either increasing profits and sales or protecting them from being eroded by competition The major
objectives which may influence the companies to engage in international business are as follows.

Expansion of Sales

The main objective of any firm is to increase the sales and profits when'this is not achieved at
home by any reason, firms begin to search for new markets by increasing their sales and reaching
international markets so increased sales are-a major motive for a company's expansion into
international business. Many large companies in the world derive their sales through international trade
and business. Many of the small companies also depend on foreigil sales.

Acquiring Resources

Most of the companies depend on foreign countries for their raw materials and inputs. They also
seek foreign capital, technology, • and useful information to them. Acquiring,such resources may
enable a company in improving its product quality and differentiating itself from competitors, increasing
market share and profits. Though any company acquires resources from its home country initially but
after sometime the earnings serve as resources for domestic operations, I

Diversification of Sources of Sales'and Supplies

Companies seek out foreign markets to take advantage of business cycles, recessions and
expansions which may be prevailing in different countries. The decrease in sales in one country which
is in recession can be covered by the increase in sales in another country which is expanding
economically. Thus the companies may be able to avoid the full impact of price swings or shortages in
any onecountry.

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 Minimizing Competitive Risk

Some companies engage in international business for defensive

reasons. They want to counter competitors advantages which they may gain in foreign market, due to
which, they could be hurt domestically. Such companies to avoid such a fear may enter foreign
markets primarily to prevent a competitor from gaining advantages.

Q4. Discuss the reasons for recent growth in IB.

Answer:

International Business has been growing recently at a faster pace than global production. Apart from
reasons such as to expand sales to acquire resources, to diversify sources of sales and supplies and
to minimize competitive risk, there are other interrelated factorslike.

A. Expansion of technology.
B. Liberalization of crossborder movements.
C. Development of supporting services.
D. Increase in global competition.

(a) Expansion of Technology

In recent years, the pace of technological advances has accelerated to greater heights and the
knowledge of products and services is available more quickly and widely due to communication and
transportation technology. By increasing the demand for new products and services, technology has
tremendous impact on international business.

Conducting business on an international level usually involves greater distance than conducting
domestic business and greater distance increases operating costs and makes control of;a company's
foreign operations more difficult

Improved communication and transportation speed up interactions and improve manager's ability to
control foreign operations.

(b) Liberalization of Crossborder Movements

Governments today imposes very few restrictions on crossborder movements than they did a
decade or two ago. With the ] enactment of the World Trade Organization in 1995, the restrictions
would continue to diminish. The reasons for the government reducing ] the restrictions are:

1. Their domestic products will become more efficient as a result of foreign competition.
2. Their citizens expressing the desire for better access to a larger I variety of goods and
services at lower prices.
3. Hoping to induce other countries to reduce their barriers for international movements.

(c) Development o f Supporting Services

Companies and governments developed services which earn international business.Most
producers can be paid relatively easily for goods and s .sold abroad because of bank credit
agreements, conversion y from one country to another and insurance that covers in route and the
nonpayment by buyer.

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(d) Increase in Global Competition

Due to pressures from foreign competition, domestic companies expand their businesses into
foreign markets. Today companies respond rapidly to many foreign sale's opportunities. They shift
production quickly among countries if they are experienced in foreign markets and transport goods
efficiently from most places.

Q5. Mention the different modes of International Business.

Answer:

To carry out business at international level, the private and government enterprises must decide
the mode of operation to u* The different modes which a company has, are as follows.

A. Merchandise Exports and Imports

B. Service exports and imports

C. Investments.

1. Merchandise Exports and Imports

Merchandise Exports are the goods which are sent out of a country and the merchandise imports
are the goods which are brought in a country. The merchandise exports and imports are visible. They

apply to merchandise and do not include service.

2. Service exports and Imports

The service exports and imports are non product international earnings. To make a service export
means receiving payment for the service and to make a service import means paying for the service
Such earnings can be gained through tourism and transportation performance of services, use of
assets etc.

(i) Tourism and Transportation

The main sources of revenue for airlines, shipping companies, travel agencies and hotels are
international tourism and transportation; Many countries too depend on tourism and transportation for
heavy revenue. For example, in Greece and Norway a significant amount of employment, profits, and
foreign exchange earnings comes from Foreign cargo which is carried on by the citizens of those
countries on ships owned BY them.

(ii) Performance of Service

Some companies earn their incomes in trie form of fees they get for the performance of services
like banks, insurance companies,' engineering and management services companies etc.

On an international level, companies that are often handled through turn key operations like
construction, performance under contracts, etc. by delivering facilities to tne owner at the beginning
time of operation.

Companies pay fees for management contracts also in which a company provides personnel for
management functions of another company

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(lii) Use of Assets

Some companies receive their earnings in the form of royalties by allowing other companies to use
their assets such as trademarks patents, copyrights, or expertise under contracts which is also known
as licensing agreements. Some companies earn royalties from franchise contracts. Franchising is a
mode of business in which one party gives permission to another party to use the trademark that is. it
for the franchise's business

3. Investments

Investment is made in a foreign country to own property in exchange of which interest and
dividends can be gained. This foreign* investment is of two types direct and portfolio.

In direct investment, the investor has a controlling interest in a foreign company. This is also called
as Foreign Direct investment

(FDI). When two or more companies share ownership of an FDI, it is known as joint venture. When a
government joins a company in an FID, then it is called, a mixed venture.

Q6. Mention the strategies used by the firms in the internationalization process.

Initially companies start their business operations at domestic level. They avoid foreign operations as
they view them riskier. They undertake these international activities reluctantly to minimize their risks.
But as they grow, they leam more about the foreign operations and experience success. Thus when
they move to deeper foreign operations, they seem them less risky.

Strategies of Expansion

In the following figure, it can be noted that as, a company moves further from the centre on any axis, its
international commitment becomes deeper. However, it is not necessary that a company should move
at the same speed along each axis.

(a)Passive to Active Expansion

Many of the companies are formed for the domestic purposes t! t% think only of the domestic
opportunities which may arise unless they come across a foreign opportunity. At that time, they may
decide to enter the international market or to ignore it. Many companies decide not to indulge in the
international operations as they are as well aware of the operations (Axis-A)

(b) External to Internal Handling of Operations

During the early stages of expansion, a company takes help of intermediaries to handle foreign
operations to minimize the risk. But when it starts growing, it wants to handle the foreign market
operations with its own staff because it has learned more about foreign operations so it considers them
less risky and justifies the development of internal capabilities such as hiring trained personnel to
maintain a department for foreign sales of purchases. (Axis-B)

(c) Deepening Mode of Commitment

The first mode which a company may undertake in becoming international may be importing or
exporting which requires the least commitment and least risk to the company's resources, such as
capital, personnel, equipment, and production facilities. A company often moves into some type of
foreign production after successfully bdM an export market (Axis-C).

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 (d) Geographic Diversification

Initially, companies usually perform their business operations! in only one or very few countries.
They tend to go to those geographical locations which are very close and similar. The risk will also be
low because of familiarity with the nearby areas anil because the economic development and
languages spoken there m also be similar.

Q7. Explain the Stages of Internationalization.

answer:

Many companies, since their very beginning have be! transacting international business. But most
of the companies whi are entirely domestic in their activities normally pass through differe stages of
internationalization before becoming global. The importa stages in this evolutionary process are as
follows.

Domestic Company

Domestic companies operate domestically. They don't consider the alternative of going
international. They limit their mission and vision to the national political boundaries. Their main focus
is on domestic market opportunities, domestic suppliers and financial companies and domestic
customers. They may extend their products to foreign .narkets by way of exporting, licensing and
franchising

International Company

This is usually the second stage in the internationalization process. These companies locate their
branches in the foreign markets and extend the same domestic operations to them. Thus, the
marketing mix developed for the home market is extended into the foreign markets. The company
orientation is basically ethnocentric.

Multinational/Multidomestic Company

The international company becomes multinational, when the company orientation shifts from
ethnocentric to polycentric* These \ companies formulate different Strategies for.different markets. In
each country, the branches and the offices of multinational companies work like domestic companies.
Thus, the company formulates a unique strategy for each country in which it conducts business.

Global Company

The global company is a company which chooses one strategy,. either to produce in its home
country and focus on marketing the products globally or to produce globally and focus on marketing the
j products in its home country. Thus, it has cither a globally marketing strategy or a global sourcing
strategy but not both.

Transnational Company

Transnational company produces, markets, invests and operates across the world. It links global
resources with globalI markets at profits and so is an integrated global enterprise. We cannot ( find any
pure transnational company anywhere but many of these es satisfy many characteristics of a global
corporation.

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Q8« Discuss the characteristics of a Transnational company.

Answer:The characteristics of a transnational company are as follows

(a) Geocentric Orientation

A transnational company thinks globally and acts locally i.e., they adopt global strategy but allows
value addition to the customer of a domestic country.Such company allows adoption to add value to its
global offer. In a nutshell, a transnational company is spread in many countries. But it is specialized in
each country based on the local needs. The research and development and production facilities are
spread but specialized and integrated.

(b) Scanning

Transnational companies scan the environment to collect the data and information worldwide
regarding economic, political, social, cultural and technological environments. They collect the
information regardless of geographical and national boundaries.

(c) Vision and Aspirations

Basically, their vision and aspirations are global i.e., global markets and global customers.

(d) Geographic Scope

Transnational companies collect and scan the global data am information to analyzse

 Global opportunities
 Availability for resources, customers, markets, technology, research and development
 Global challenges and threats like competition from other global companies, local
companies, political uncertainties etc.
 To formulate global strategy,

(e) Operating Style

 Transnational companies globalize the functions like R&D, product development, placing key
human resources, procurement of high valued material etc. Their key operations are
globalized.

(f) Adaption

 The products, marketing strategies and other functional strategies of transactional

companies are to adapted to the environmental factors of the markets concerned For
example, Mercedes Benz is a super luxury car in North America but it {grm luxury
automobile in Germany and a standard taxi in Europe.

(g) Extensions :Some products which do not require any change and which can be marketed in other
countries are known as extensions Example: Casio calculators of Japan, butane lighters and razors
etc.

(h) Creation through Extension: Transnational companies create the global brand through
extending the product to the new market.

(i) Human Resource Management Policy: Transnational companies select the best human
resources and develop them regardless of nationality, ethnic groups etc. But the international company
reserves the top and key positions for nationals.

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 Q9. State the different approaches to International Business-

Answer;

There are four approaches for international business

1. Ethnocentric approach
2. Polycentric approach
3. Regiocentric approach
4. Geocentric approach

1. Ethnocentric Approach
A domestic company normally formulates its strategies, product design and operation towards the
national markets, customers

and competitors. But, when it produces more than the demand, it exports the excessive production to
foreign countries. The foreign country can be viewed just as an extension to the domestic markets. The
maintenance of this domestic approach towards international business is known as ethnocentric
approach."

it views the foreign markets as an extension to the domestic market just like a new region. The
export department monitors the export operations under the supervision of marketing personnel of the
domestic company and the decisions relating to exports are taken by the executive at the Head office
of the company. This approach is suitable to small companies and to the companies during the early
days of internationalization.

2. Polycentric Approach

When a company establishes a foreign subsidiary company, decentralizes all the operations,
delegates decision-making and policy making authority to its executives, it is known to adopt
polycentria approach.

The company appoints executives, chief executives who reports to the managing director of the
company. Key personnel from home country and other vacancies are filled by people of the host
country. The executives of the subsidiary formulate the policies and strategies, design the product
based on the host country's environment

3. Regiocentric Approach

When a company for successfully operating in a foreign country, thinks of exporting to the
neighbouring countries of the host, it is known as regiocentric approach. The foreign subsidiary
considers the" regional environment for formulating policies and strategies. It markets the same
products with different market strategies.

4. Geocentric Approach

According to geocentric approach, the entire world is treat© like a single country for the company.
Employees are selected fror the entire globe and operated with a number of subsidiaries.

Activities of the subsidiaries are coordinated by th headquarter. Each subsidiary functions like an
independent an autonomous company in formulating policies, strategies, human resources and
operational policies etc.

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 Q16* Explain the Theory of Country Size,
I1
answer; 9

As the theories of absolute and comparative advantage do not explain the country-by-country
differences about the products of trade and their quantities, these differences are explained with the
help of the theory of country size as follows. I Variety of Resources

This theory states that the countries which i have large land areas can have many climates and
natural resources, which make them more self sufficient than the countries with smaller land areas.

Transport Costs

Transport costs affect large and small countries differently, which were ignored in the theories of
absolute advantage. If the distance is more, transport costs will be higher and vice versa. The distance
between the location of production and the place of marketing is higher for the international trade of
large countries. The small countries have advantage of lower transport costs for international trade

Size of Economv and Production Sales

Country's size can also be measured on the basis of econo size apart from the tand area. Such
countries which have lar economies and high per capita income can produce high quality g using
improved technologies. This in turn will help them to competitive in exports market also.

Companies locate their production in those locations where long production runs are important for
gaining competitive advantage,

using these locations as sources of exports to other countries.Companies minimize exports in such
areas where long production runs are not important, instead they produce where they have to sell

Q22. Give a brief account of the important environment factors relevant to International
Business.

Answer:

Business environment means the'factors which affect or influence the business. These include social
factors, cultural factors, technological factors, economic factors and political factors. Business
environment factors are broadly divided into internal environment factors and external environment
factors. The factors which affect the business from within the organization are called internal
environment factors which include human resource management, trade unions, organizational
structure,.financial management marketing and production management, leadership style etc. The
factors which influence the business from outside are called external environmental factors which are
further divided into micro external

environmental factors and macro external environmental factors Micro external environmental factors
include competitors, customer market intermediaries, suppliers, ^ankers and share holders el

Macro external environmental factors include social and cultur factors, technological factors,
economic factors, political factor;international factors and natural factors.

S.R.P* 5TH TERM- INTERNATIONAL BUSINESS Page 9

 Cultural Environment

Culture is the thought and behavior patterns that; society learns through language and r forms of
symbolic interaction. Their customs, habits, belief? z»v: ilues, the common view points which bind them
together as a s entity. The maj

cultural elements are :

A. Language
B. Religion
C. Values and attitudes
D. Manners and customs
E. Material elements
F. Aesthetics
G. Education
H. Social institutions

Political Environment
The political environment in the home and host countries and the laws and agreements governing
relationships among nations an important to the international business executive. Government affed
international business through legislations and the regulations which either support or hinder business
transactions. I

Through political actions such as expropriation, confiscation,, domestication, countries expose

firms to international risk.Management therefore needs to be aware of such risk possibility and be alert
to,new developments. Managers.must pay attention to international political relations, agreements and
treaties. Changes in relations or rules mean major new opportunities and occasional threats to
international business.

Economic Environment

. Trade and investment policies have been a subset of domestic policies. Domestic policies in turn
have aimed primarily at-maintaining and improving the standard of living, the developmental level, and
the employment level within the nation. Occasionally foreign policy concerns also played a role. The
capability of policy makers simply to focus on domestic issues is reduced because of global links in
trade and investment. In addition, traditional

Technological Environment

Technological environment has significant and directinfluence on business in general and

international business in particular. Technology is one of the significant factors which determine the
level of economic development of a country. The difference between the nations is mostly reflected by
the level of technology. The developing countries allow MNCs to enter in then* countries to have
benefits of the latest technology and to develop the domestic industry. Advanced countries enjoy the
fruits of latest technology while the developing nations face the consequences of obsolete or
outdatedtechnology.

The industrial revolution resulted in large-scale production. The recent technological improvement led
to the production of high quality products at lower cost As a result, the domestic companies entered
foreign countries to find markets for their products. Thus technology is one of the important cause for
globalization

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Qll. Explain the Genesis and Establishment of WTO?

The privatizing strategy heralded by the then Prime Miniskj Margaret Thatcher in the U.K.
Significantly enhanced the pride place of the private enterprise in the developed economies. v

The economic changes ushered in Peoples Republic of Chii in 1978 marked the beginning of
revolutionary changes in tl economic policies in the communist world.

The crumbling of communism/socialism in the crstwhi USSR and Eastern Block at the end of the 1980s
accelerated^ pace of borderless expansion for business.

Genesis and Establishment of WTO

The prolonged recession before the world war II in the west was due to the prolonged
protectionism followed by the industrialized countries. This led to conduct of negotiations in 1947
among 23 countries in order to prevent the protectionism policies. These negotiations of the
conference resulted in General Agreement on A Tariffs and Trade (GATT) among the participated
countries. Thus _ GATThas its origin in 1947 at a conference in Geneva/^

Q12. What is meant by GATT? Explain its objectives.

Answer:

General Agreement on Trade and Tariffs (GATT)

The General Agreement on Tariffs and Trade (GATT) the predecessor of WTO. was made in 1947
as a result of the international Desire to liberalize trade.

The international trading system since 1947 was, at least principle, guided by the rules and
procedures agreed by the signatory to the GATT which was an agreement signed by the contractin
nations which were admitted on the basis of their willingness to accej the GATT disciplines^/

The GATT was transformed into a World Trade Organizatioj with effect from January 1,1995. Thus,
after about five decades, original proposal of an International Trade Organization took shaj as the
WTO. The WTO, which is a more powerful body than tl GATT, has an enlarged role than the GATT.

The Objectives of GATT are

The primary objective of GATT was to expand intematioflj trade by liberalizing trade so as to bring
about all round ecoftof prosperity.
The preamble to fee GATT mentioned the following ^ important objectives..
1. Raising standard of living/
2. Ensuring full employment and a large and steady growth in volume of real income and effective
demand.
3. Optimum utilization of resources of the world
4. Expansion of production and international trade

The Rules of Conventions of GATT Required that

a. Any proposed change in the tariff, of any other type of commercial policy of a member country
should not be undertaken without consultation of other parties to die agreement^/
b. The countries that adhere to GATT should work towardsthe reduction of tariffs and other
barriers to international . trade, which should be negotiated within the framework of GATT.

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 Q 1 1 H O W is WTO different from GATT?

ANSWER:

' The WTO is completely different from GATT. It is not just a simple extension of the predecessor GATT.
The following are differences between GATT and WTO.
1. The GATT was only a set of rules and a multilateral agreement It had a small secretariat and
aimed to-estabtish an international trade organization. Whereas the WTO is a permanent
institution With its own secretariat
2. The dispute settlement system is faster and automatic than the old GATT system.
3. GATT was applied on a provisional basis, whereas the activities of WTO are full and permanent.
4. The agreements of WTO are almost multilateral whereas the agreements of GATT are both
multilateral and plurilateral.
5. The rules of GATT are applied only to trade in merchandise J goods. But uVrules of WTO are
also applied to trade inservices and trade Related aspects of intellectual property rights.
6. WTO has members, whereas GATT had contracting parties.
7. GATT allowed existing domestic registration to continue, even if it violates the GATT agreement
but WTO does not al low this.
8. GATT was less powerful than WTO and its ruling would be easily blocked. But in case of WTO,
it is very difficult to block the ruling

Ql 8. Expalin the functions of WTO.

following are the functions of WTO.

1. To administer and implement the multilateral and plurilaterial trade agreement, which make up
the WTO together
2. .To eurruoc regularK the trade regimes of individual member countries.
3. To provide technical assistance and training for developing countries.
4. To seek to resolve trade disputes.
5. To cooperate with other international institutions like IMF, IB&D and ILO, which are involved in
global economic policy making.
6. To act as a forum for multilateral trade negotiations.
7. To maintain trade related database. Members have to notify indetail various trade measures and
statistics.
8. To act as a forum for multilateral trade negotiations-/
9. To act as a watch dog of international trade, constantly examining the trade regimes of
individual members.

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Quw What are the different strategies of entering international market? Explain the concent of
entry strategy configuration; and bundling and unbundling . entry strategies.

ANSWER:

The different strategies for entering International Markets are:

1. Exporting
2. Wholly owned subsidiary
3. Licensing
4. Franchsising
5. Local manufacturing
6. Contract manufacturing
7. Management contract
8. Turnkey operations
9. Assembly operations
10. Integrated local production operations
11. Joint ventures
12. Third country location
13. Mergers and acquisitions

Characteristics of a MNC
1. A MNC has multi-country organisation structure aj operations. Hence a firm that controls
subsidiaries in a la^I number of nations is regarded as 'multinational.

2. MNCs produce abroad as well as in the head quarters,"

3. MNCs derive same minimum percentage of its income M foreign operations.

Question ; Foreign direct investment in to construction and real estate sector

The importance of foreign investment into real estate development cannot be disputed. The ever
increasing demand for housing, commercial space, townships and infrastructure in India can be timely
catered to only if foreign investment into this sector is allowed. Foreign participation will also bring in
quality and professionalism in the manner in which real estate development takes place in the country.

The Central Government has recognized this and amended the regulations from time to time to make it
convenient for foreign entry into this sector. Foreign Direct Investment assumes a greater role among
the various possible routes for foreign participation in this sector because firstly, investment through
Foreign Direct Investment not only makes the foreign investor invest in the sector but also makes the
foreign entity participate and monitor the way in which the foreign funds are used; and secondly, with
ban on certain routes like External Commercial Borrowings/ Fully Currency Convertible Bonds, etc.
makes Foreign Direct Investment scheme the only possible route for foreign investors to invest in this
sector. However, problems in the Foreign Direct Investment Policy as highlighted herein have to be
addressed if at all the Foreign Direct Investment route has to continue being the attractive mode of
investment for foreign investors.

S.R.P* 5TH TERM- INTERNATIONAL BUSINESS Page 13

Secondly, local laws and approval mechanisms have to get a revamp because improvements in the
Foreign Direct Investment Policy will be of no avail if the Foreign Investor is faced with hurdles in the
implementation of the projects undertaken under the Foreign Direct Investment Policy.

What is required at this stage is a simplified and expeditious procedure with an intent to (i) invite more
Foreign Direct Investment; (ii) make projects more cost effective which inturn will attract more and
more foreign investors in the Real Estate Development Sector and boost the Indian economy.

Question : Impact of Globalisation on Developing Countries and India

Globalisation is the new buzzword that has come to dominate the world since the nineties of the last
century with the end of the cold war and the break-up of the former Soviet Union and the global trend
towards the rolling ball. The frontiers of the state with increased reliance on the market economy and
renewed faith in the private capital and resources, a process of structural adjustment spurred by the
studies and influences of the World Bank and other International organisations have started in many of
the developing countries. Also Globalisation has brought in new opportunities to developing countries.
Greater access to developed country markets and technology transfer hold out promise improved
productivity and higher living standard. But globalisation has also thrown up new challenges like
growing inequality across and within nations, volatility in financial market and environmental
deteriorations. Another negative aspect of globalisation is that a great majority of developing countries
remain removed from the process. Till the nineties the process of globalisation of the Indian economy
was constrained by the barriers to trade and investment liberalisation of trade, investment and financial
flows initiated in the nineties has progressively lowered the barriers to competition and hastened the
pace of globalisation.

Definition:

Globalised World - What does it mean?

Does it mean the fast movement of people which results in greater interaction?

Does it mean that because of IT revolution people can be in touch with each other in any part of the
world?

Does it mean trade and economy of each country is open in Non-Intrusive way so that all varieties are
available to consumer of his choice?

Does it mean that mankind has achieved emancipation to a level of where we can say it means a
social, economic and political globalisation?

Though the precise definition of globalisation is still unavailable a few definitions worth viewing,
Stephen Gill: defines globalisation as the reduction of transaction cost of transborder movements of
capital and goods thus of factors of production and goods. Guy Brainbant: says that the process of
globalisation not only includes opening up of world trade, development of advanced means of
communication, internationalisation of financial markets, growing importance of MNC's, population
migrations and more generally increased mobility of persons, goods, capital, data and ideas but also
infections, diseases and pollution

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Impact on India:

India opened up the economy in the early nineties following a major crisis that led by a foreign
exchange crunch that dragged the economy close to defaulting on loans. The response was a slew of
Domestic and external sector policy measures partly prompted by the immediate needs and partly by
the demand of the multilateral organisations. The new policy regime radically pushed forward in favour
of amore open and market oriented economy.

Major measures initiated as a part of the liberalisation and globalisation strategy in the early nineties
included scrapping of the industrial licensing regime, reduction in the number of areas reserved for the
public sector, amendment of the monopolies and the restrictive trade practices act, start of the
privatisation programme, reduction in tariff rates and change over to market determined exchange
rates.

Over the years there has been a steady liberalisation of the current account transactions, more and
more sectors opened up for foreign direct investments and portfolio investments facilitating entry of
foreign investors in telecom, roads, ports, airports, insurance and other major sectors.

India is Global:
The liberalisation of the domestic economy and the increasing integration of India with the global
economy have helped step up GDP growth rates, which picked up from 5.6% in 1990-91 to a peak
level of 77.8% in 1996-97. Growth rates have slowed down since the country has still bee able to
achieve 5-6% growth rate in three of the last six years. Though growth rates has slumped to the lowest
level 4.3% in 2002-03 mainly because of the worst droughts in two decades the growth rates are
expected to go up close to 70% in 2003-04. A Global comparison shows that India is now the fastest
growing just after China.

This is major improvement given that India is growth rate in the 1970's was very low at 3% and GDP
growth in countries like Brazil, Indonesia, Korea, and Mexico was more than twice that of India. Though
India's average annual growth rate almost doubled in the eighties to 5.9% it was still lower than the
growth rate in China, Korea and Indonesia. The pick up in GDP growth has helped improve India's
global position. Consequently India's position in the global economy has improved from the 8 th position
in 1991 to 4th place in 2001. When GDP is calculated on a purchasing power parity basis.

Globalisation and Poverty:

Globalisation in the form of increased integration though trade and investment is an important reason
why much progress has been made in reducing poverty and global inequality over recent decades. But
it is not the only reason for this often unrecognised progress, good national polices , sound institutions
and domestic political stability also matter.

Despite this progress, poverty remains one of the most serious international challenges we face up to
1.2 billion of the developing world 4.8 billion people still live in extreme poverty.

But the proportion of the world population living in poverty has been steadily declining and since 1980
the absolute number of poor people has stopped rising and appears to have fallen in recent years
despite strong population growth in poor countries. If the proportion living in poverty had not fallen
since 1987 alone a further 215million people would be living in extreme poverty today.

India has to concentrate on five important areas or things to follow to achieve this goal. The areas like
technological entrepreneurship, new business openings for small and medium enterprises, importance
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of quality management, new prospects in rural areas and privatisation of financial institutions. The
manufacturing of technology and management of technology are two different significant areas in the
country.

There will be new prospects in rural India. The growth of Indian economy very much depends upon
rural participation in the global race. After implementing the new economic policy the role of villages
got its own significance because of its unique outlook and branding methods. For example food
processing and packaging are the one of the area where new entrepreneurs can enter into a big way. It
may be organised in a collective way with the help of co-operatives to meet the global demand.

Understanding the current status of globalisation is necessary for setting course for future. For all
nations to reap the full benefits of globalisation it is essential to create a level playing field. President
Bush's recent proposal to eliminate all tariffs on all manufactured goods by 2015 will do it. In fact it may
exacerbate the prevalent inequalities. According to this proposal, tariffs of 5% or less on all
manufactured goods will be eliminated by 2005 and higher than 5% will be lowered to 8%. Starting
2010 the 8% tariffs will be lowered each year until they are eliminated by 2015.

Consequences:

The implications of globalisation for a national economy are many. Globalisation has intensified
interdependence and competition between economies in the world market. This is reflected in
Interdependence in regard to trading in goods and services and in movement of capital. As a result
domestic economic developments are not determined entirely by domestic policies and market
conditions. Rather, they are influenced by both domestic and international policies and economic
conditions. It is thus clear that a globalising economy, while formulating and evaluating its domestic
policy cannot afford to ignore the possible actions and reactions of policies and developments in the
rest of the world. This constrained the policy option available to the government which implies loss of
policy autonomy to some extent, in decision-making at the national level.

Que : Define International trade

Global Competitiveness Index (2008-2009): competitiveness is an important determinant for the well-
being of states in an intrnational trade environment.

International trade uses a variety of currencies, the most important of which are held as foreign
reserves by governments and central banks. Here the percentage of global cummulative reserves held
for each currency between 1995 and 2005 are shown: the US dollar is the most sought-after currency,
with the Euro in strong demand as well.

International trade is exchange of capital, goods, and services across international borders or
territories.[1]. In most countries, it represents a significant share of gross domestic product (GDP).
While international trade has been present throughout much of history (see Silk Road, Amber Road),
its economic, social, and political importance has been on the rise in recent centuries.

Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing

are all having a major impact on the international trade system. Increasing international trade is crucial

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to the continuance of globalization. Without international trade, nations would be limited to the goods
and services produced within their own borders.

International trade is in principle not different from domestic trade as the motivation and the behavior of
parties involved in a trade do not change fundamentally regardless of whether trade is across a border
or not. The main difference is that international trade is typically more costly than domestic trade. The
reason is that a border typically imposes additional costs such as tariffs, time costs due to border
delays and costs associated with country differences such as language, the legal system or culture.

Qu e : International marketing
International marketing (IM) or global marketing refers to marketing carried out by companies
overseas or across national borderlines. This strategy uses an extension of the techniques used in the
home country of a firm.[1] It refers to the firm-level marketing practices across the border including
market identification and targeting, entry mode selection, marketing mix, and strategic decisions to
compete in international markets.[2] According to the American Marketing Association (AMA)
"international marketing is the multinational process of planning and executing the conception,
pricing, promotion and distribution of ideas, goods, and services to create exchanges that
satisfy individual and organizational objectives." In contrast to the definition of marketing only the
word multinational has been added.[3] In simple words international marketing is the application of
marketing principles to across national boundaries. However, there is a crossover between what is
commonly expressed as international marketing and global marketing, which is a similar term.

The intersection is the result of the process of internationalization. Many American and European
authors see international marketing as a simple extension of exporting, whereby the marketing mix
4P's is simply adapted in some way to take into account differences in consumers and segments. It
then follows that global marketing takes a more standardised approach to world markets and focuses
upon sameness, in other words the similarities in consumers and segments.

Que : TRADE BLOC

A trade bloc is a large free trade zone or near-free trade zone formed by one or more tax, tariff and
trade agreements.
Typically trade pacts that define such a bloc specify formal adjudication bodies, e.g. EUROPEAN
UNION

MAJOR TRADE BLOCKS

1. European Union (Eu)
2. North American Free Trade Agreement (Nafta)
3. Singapore ±American Free Trade Agreement(Safta)
4. Organisation Of Petroleum Exportingcountries (Opec)
5. Association Of South East Asian Nation (Asean)
6. South Asian Association Of Regional Co- Operation (Saarc)

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Que : Balance of payments
The capital account records the net change in ownership of foreign assets. It includes the reserve
account (the international operations of a nation's central bank), along with loans and investments
between the country and the rest of world (but not the future regular repayments / dividends that the
loans and investments yield, those are earnings and will be recorded in the current account).

A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a
country and the rest of the world.[1] These transactions include payments for the country's exports and
imports of goods, services, and financial capital, as well as financial transfers. The BOP summarises
international transactions for a specific period, usually a year, and is prepared in a single currency,
typically the domestic currency for the country concerned. Sources of funds for a nation, such as
exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of
funds, such as for imports or to invest in foreign countries, are recorded as a negative or deficit item.

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

While the overall BOP sheet will always balance when all types of payments are included, imbalances
are possible on individual elements of the BOP, such as the current account. This can result in surplus
countries accumulating hoards of wealth, while deficit nations become increasingly indebted.
Historically there have been different approaches to the question of how to correct imbalances and
debate on whether they are something governments should be concerned about. With record
imbalances held up as one of the contributing factors to the financial crisis of 2007–2010, plans to
address global imbalances are now high on the agenda of policy makers for 2010.

What Does Country Risk Mean?

A collection of risks associated with investing in a foreign country. These risks include political risk,
exchange rate risk, economic risk, sovereign risk and transfer risk, which is the risk of capital being
locked up or frozen by government action. Country risk varies from one country to the next. Some
countries have high enough risk to discourage much foreign investment.

PURPOSE OF THE ANALYSIS AND ITS TERM

Before starting an analysis is essential a definition about why it is been done. Once many contents of
each country risk analysis usually deal with common variables, there are always specific aspects,
which must be emphasized according to different uses. Otherwise, it will not be useful and, worst,could
lead to some issues that will not clearly explain what kind of risks the investor could be submitted to.
First of all, it is important to reckon what kind of investment has been thought, like loans, trade, direct
investment, bonds, shares or whatever. This definition will address to another important issue, which is
the term of the investment (short or long).

 Country analysis involves the examination and interpretation of a nation‟s economic, social
and political environment. The analysis offers a comprehensive overview of a country.

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Objectives

 To explain the techniques used to measure country risk; and

 To explain how MNCs use the assessment of country risk when making financial decisions.

Why Country Risk Analysis Is Important

 Country analysis is useful for:

 Investors in the financial market
 Companies intending to set up a subsidiary
 Companies wishing to enter a new market
 People wishing to reside in the country
 Country risk analysis can be used:
 To monitor countries where the MNC is currently doing business.
 As a screening device to avoid conducting business in countries with excessive
risk.
 To revise its investment or financing decisions in light of recent events.

Types of Country Risk Assessment

 A macro-assessment of country risk is an overall risk assessment of a country without

considering the MNC‟s business.
 A micro-assessment of country risk is the risk assessment of a country with respect to the
MNC‟s type of business.

Factors of Country Risk anlaysis

PART 1: THE MEASUREMENT OF POLITICAL RISK
• The consequences of political risk
• Quantitative measures to evaluate Political Stability
• Economic Factors
• Subjective Factors
PART II. ECONOMIC AND POLITICAL FACTORS
• Economic and Political Factors Primary focus: How well is the country doing
economically?
PART III. COUNTRY RISK ANALYSIS IN INTERNATIONAL BANKING

PART I. THE MEASUREMENT OF POLITICAL RISK

I. MEASURING POLITICAL RISK
A. The consequences of political risk:
1. Expropriation
2. Currency or trade controls
3. Changes in tax
4. Changes in labor laws
5. Regulatory restrictions
6. Requirement for additional local production
Common denominator:Government intervention into the working of the economy that affect for
good or ill the value of the firm

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 B. Quantitative measures to evaluate Political Stability
1. Measured by:
a. Frequency of government changes
b. Level of violence
c. Number of armed insurrections
d. Conflict with other states
C. Economic Factors
1. Indicators of political unrest
a. Rampant inflation
b. Balance of payment deficits
c. Slowed growth of per capita GDP
• All this factors determine weather the economy is in good shape or requires a quick fix, such as
expropriation to increase government revenues or currency inconvertibility to improve the
balance of payments.

D. Subjective Factors
1. Profit Opportunity Recommendation: done by a panel of experts
2. Political Risk and Uncertain Property Rights: Determine the general perception of the
country‟s attitude toward private enterprise
3. Capital Flight

Definition: the export of savings by a nation‟s citizens because of safety-of-capital fears. Measurement:
use the balance-of- payment account

PART II. ECONOMIC AND POLITICAL FACTORS

II. Economic and Political Factors Primary focus: How well is the country doing economically?
A. Fiscal Irresponsibility
The government deficit as a percentage of gross domestic product: the higher this figure, the more
the government is promising to its citizens relative to its resources
high government deficits lowers the possibility that the government can meet its promises without
resorting to:
• Expropriation of property: Capital flight and dry up new investments.
• Raising taxes: affect incentive to work, save and take risks
• Printing money: monetary instability, high inflation, high interest rates and
currency depreciation

B. Monetary instability

• Inflation is the logical outcome of expansion of the money supply in excess of real output
growth.
• Expansion in the money supply is typical to large government deficits that the central
bank monetizes (the example of Zimbabwe

C. Controlled Exchange Rate System

• Currency control is used to fix the exchange rate.
• Goes hand with hand with an overvalued local currency (equivalent of taxing exports and
subsidizing imports)
• The risk of tighter currency controls and the treat of devaluation encourage capital flight
• Leaves the economy with little flexibility to respond to changing relative prices and wealth
positions
D. Wasteful Government Spending
• inability to service foreign debt
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 E. Resource base
Consists of: Natural, human and financial resources
• lack of strong work ethic
• A highly skilled productive workers:
• Scientist
• Engineers

PART III. COUNTRY RISK ANALYSIS IN INTERNATIONAL BANKING

I. Country Risk and the Terms of Trade
What ultimately determines a nation‟s ability to repay foreign loans?
- Its ability to generate U.S dollars and other hard currencies which based on a nation‟s
“terms of trade”. When the terms improved foreign goods becomes relatively less expensive and the
standard of living rises and consumers and business become more dependent on imports
- the speed of adjustment

II. The Government‟s Cost/Benefit Calculus

• debt to wealth ratio
• cost of default: the likelihood of being cut off from international credit
• A bailout decision: depend on the :nation‟s geopolitical importance to the US
• The probability that the necessary adjustment will result in unacceptable political turmoil
• fluctuations in the terms of trade depends ondegree of product diversification

Que : COUNTRY PROFILE

The purpose of Country Profiles is to:

 Help countries monitor their own progress;

 Share experiences and information with others; and,
 Serve as institutional memory to track and record national actions undertaken to implement
Agenda 21.

Que NEW GLOBAL STRATEGY OF MULTINATIONAL COMPANIES.

The economic analysis of MNC strategies is very much influenced by two theoretical models
respectively elaborated on by John Dunning and James Markusen in the late 1980s and early 1990s.
Both models are definitely relevant for analysing MNC‟s investment strategies until the late 1980s.
However, with the new globalisation era, both models do not take over the fact that one major factor of
globalisation1 is a newglobal strategy designed by MNCs since the mid-1980s.

2.1. Multinational company traditional strategies.

Dunning‟s approach of MNC strategies stabilised in the early 1990s (Dunning, 1993) around four
typical strategies, recently inserted in a more general framework (Dunning, 2006; Dunning & NarulW,
2004), which are resource seeking, market seeking, efficiency seeking and asset seeking strategies.

A. Resource seeking: It basically developed when major companies were keeping their production
units in developed countries and were investing abroad only to secure the delivery of some natural
resources, raw materials or primary goods (such as agricultural inputs and products). In one of its
earliest forms, production-sharing activities involved the production of primary products in developing

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countries, shipment of these goods to industrial nations for further processing, and then the re-
exportation (in part) of the processed product back to the primary-commodity-producing country
(Yeats, 2001). MNCs adopt this strategy in countries possessing an absolute advantag in a given
scarce natural resource, namely in developing countries. Thus, this strategy consists in FDI to acquire
inputs for further processing activities.

B. Market seeking: Here MNCs duplicate their units of production abroad in order to open or enlarge
their access to a foreign market. Such strategy developed after World War II when MNCs started to
gear their FDI more toward developed market economies than toward developing countries and former
colonies. In such strategy, FDI is primarily oriented to supplying goods and services, oftn substituting
previous exports, to markets with high level of economic development (GDP per capita) and, therefore,
with a demand emanating from high revenue consumers. MNCs look for production economies of
scale due to the size and wealth of host market and transport cost saving due to export substitution.
Such strategy basically fits with FDI in developed rather than developing countries, even though it is
accurate for big emerging economies (Brazil, Russia, India, China) as well, in particular when their
domestic markets are somewhat protected.

C. Efficiency seeking: MNCs reorganise their activity on a global scale in specialising their
subsidiaries in different activities, including the production of some inputs and semi-finished products in
a network of plants located in different countries, namely in a number of low labour cost countries. FDI
is locating manufacturing (and now services) activity in middle-income and emerging countries to
exploit lower costs and improve efficiency, and often to use the relocated plant as an export base
toward all relevant markets. This process sometimes goes along with closing higher cost plants in
MNCs‟ home countries.

2.2. The various dimensions of a global strategy

The first characteristics of MNC global strategy is that it combines, links, integrates or even merges
into a single strategy, within a single firm, all the previous strategies, that is resource seeking, market
seeking, efficiency seeking, and asset seeking – and by the same token global offshore outsourcing.
Playing on all cords, such a strategy makes MNCs nearly free (or footloose) from any national territory
and weakens the efficiency of any state intervention aiming at influencing MNCs‟ behaviour.

2.3. An alternative global strategy based on international subcontracting: Nike versus Adidas.
Separability of ownership is an important determinant of the organisational structure of cross-border
production sharing; where it is not feasible, MNCs and FDI are likely to play a dominant role. Where
ownership is separable, arm‟s-length relationships (foreign trade) are possible and FDI is less
important. In between, there is an option for international subcontracting taking advantage of
preferential customs duties applied to outward processing trade (OPT). Some additional advantages of
international subcontracting are the following.

2.4. How much outsourcing fits with global strategy?

Global strategy with fragmentation of the production process has maximum potential in a situation
where an industry is internationally footloose in production terms, that is, factor requirements are such
that it can potentially relocate anywhere. The immediate consequence is outsourcing of factors, inputs,
components and semi-finished products. The required post-Fordism flexible production adjustment to
extremely differentiated („individualised‟) demand is also facilitated by offshore ousourcing under the
prerequisites of computerised internationally transmitted orders, just-in-time delivery, robotising
assembly lines, process quality control, and on the job training of shopfloor workers. Thus, outsourcing
is a core development which acted as a rocket pad for MNC global strategy together with high tech,
NITC and instant international transfers of information, decision and finance.

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Export Credit Guarantee Corporation (ECGC)
ECGC provides:
1. A range of credit risk insurance covers to exporters against loss in export of goods and
services.
2. Guarantees to banks and financial institutions to enable exporters obtain better facilities from
them.
3. Special schemes like Overseas Investment Insurance to Indian companies investing in joint
ventures abroad in the form of equity.

ECGC Products and Services:

1. Credit Insurance Policies
 SCR or Standard policy
 Turnover policy
 Small Exporter's policy
 Specific Shipment policy short-term
 Buyerwise policy short-term
 Consignment Exports policy
 Buyer Exposure policies
 IT - Enabled Services (Specific Customer) policies
 Insurance cover for buyer's credit and line of credit

1. Guarantees to Banks
 Packing Credit Guarantee
 Export Production Finance Guarantee
 Post Shipment Credit Guarantee
 Export Finance Guarantee
 Export Performance Guarantee
 Export Finance (Overseas Lending) Guarantee
3. Maturity Factoring
4. Special Schemes
 Transfer Guarantee
 Overseas Investment Insurance
 Exchange Fluctuations Risk Cover
 Constructions Work Policy
 Specific Policy for Supply Contract

2.Standard Policy
Standard Policy offers to cover risks in respect of all shipments on short-term credit (credit not
exceeding 180 days) by exporters with an anticipated annual turnover of more than Rs. 50 lakhs. This
policy is also called Shipment (Comprehensive Risk) Policy or SCR. Standard Policy covers the
following commercial and political risks from the date of shipment.

2.1Commercial Risks
 Insolvency of the buyer.
 Failure of the buyer to make the payment due within a specified period, normally four
months from due date.
 Buyer's failure to accept goods, subject to certain conditions.

2.2Political Risks
 Imposition of restriction by the government of the buyer's country or any government
action.
 War, civil war, revolution or civil disturbances in the buyer's country.

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  New import restrictions or cancellation of a valid import licence in the buyer's country.
 Interruption or diversion of voyage outside India resulting in payment of additional
freight or insurance charges.
 Any other cause of loss occurring outside India, not normally insured by general
insurers, and beyond the control of both exporter and buyer.

The following risks are outside the scope of the Standard Policy:
 Commercial disputes including quality disputes raised by the buyer, unless the
exporter obtains a decree from a competent court of law in the buyer's country in his favour.
 Causes inherent in the nature of goods.
 Buyer's failure to obtain necessary import or exchange authorisation from authorities in
his country.
 Insolvency or default of any agent of the exporter or of the collecting bank.
 Loss or damage to goods which can be covered by general insurers.
 Exchange rate fluctuation.
 Failure or negligence on the part of the exporter to fulfil the terms of the export
contract.

3. Turnover Policy
Turnover policy is a variation of the standard policy for the benefit of all large exporters who pay a total
premium of Rs. 10 lakhs or more in a year. It envisages projection of the export turnover of the
exporter for a year and the initial determination of the premium payable on that basis, subject to
adjustment at the end of the year based on actuals. The policy provides additional discount in
premium with an added incentive for increasing exports beyond the projected turnover and also offers
simplified procedure for premium remittance and filing of shipment information.
The holders of turnover policy need not submit monthly declarations of shipment. The basic premium
rates applicable for the standard policy will apply to the turnover policy also.

4. Small Exporter's Policy

o Small Exporter's Policy is issued for a period of 12 months.
o Premium payable is determined on the basis of projected exports on an annual basis.
o No claim bonus in the premium rate is granted every year at the rate of 5%.
o Shipments need to be declared quarterly.
o Small exporters are required to submit monthly declarations of all payments remaining
overdue by more than 60 days from the due date.
o For shipments covered under the Small Exporter's Policy.
o The normal waiting period for claims under the Small Exporter's Policy is two months.
o In order to enable small exporters deal with their buyers in a flexible manner.

5. Buyerwise Policy (Short-Term)

 Buyerwise Policies - Short-Term (BP-ST) provide cover to Indian exporters against
commercial and political risks involved in export of goods on short-term credit to a particular
buyer.
 The policy would be valid for a period of one year. The percentage of cover normally available
under the policy would be 80% of the gross value of the shipments covered.

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