MB0037

SET 1

INTERNATIONAL BUSINESS MANAGEMENT

Q.1:- What is globalisation? What are its benefits? How does globalisation help in
international business? Give some instances.

Ans:- Economic "globalization" is a historical process, the result of human innovation and
technological progress. It refers to the increasing integration of economies around the world,
particularly through trade and financial flows. The term sometimes also refers to the
movement of people (labor) and knowledge (technology) across international borders. There
are also broader cultural, political and environmental dimensions of globalization that are not
covered here.

At its most basic, there is nothing mysterious about globalization. The term has come into
common usage since the 1980s, reflecting technological advances that have made it easier
and quicker to complete international transactions – both trade and financial flows. It refers to
an extension beyond national borders of the same market forces that have operated for
centuries at all levels of human economic activity – village markets, urban industries, or
financial centers.

Markets promote efficiency through competition and the division of labor – the specialization
that allows people and economies to focus on what they do best. Global markets offer greater
opportunity for people to tap into more and larger markets around the world. It means that
they can have access to more capital flows, technology, cheaper imports, and larger export
markets. But markets do not necessarily ensure that the benefits of increased efficiency are
shared by all. Countries must be prepared to embrace the policies needed, and in the case of
the poorest countries may need the support of the international community as they do so.

Globalization is not just a recent phenomenon. Some analysts have argued that the world
economy was just as globalized 100 years ago as it is today. But today commerce and
financial services are far more developed and deeply integrated than they were at that time.
The most striking aspect of this has been the integration of financial markets made possible
by modern electronic communication.

The 20th century saw unparalleled economic growth, with global per capita GDP increasing
almost five-fold. But this growth was not steady – the strongest expansion came during the
second half of the century, a period of rapid trade expansion accompanied by trade – and
typically somewhat later, financial – liberalization. Chart 1 break the century into four
periods. In the inter-war era, the world turned its back on internationalism – or globalization
as we now call it – and countries retreated into closed economies, protectionism and
pervasive capital controls. This was a major factor in the devastation of this period, when per
capita income growth fell to less than 1 percent during 1913-1950. For the rest of the century,
even though population grew at an unprecedented pace, per capita income growth was over 2

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percent, the fastest pace of all coming during the post – World War boom in the industrial
countries.

The story of the 20th century was of remarkable average income growth, but it is also quite
obvious that the progress was not evenly dispersed. The gaps between rich and poor
countries, and rich and poor people within countries, have grown. The richest quarter of the
world’s population saw its per capita GDP increase nearly six-fold during the century, while
the poorest quarter experienced less than a three-fold increase (Chart 1). Income inequality
has clearly increased. But, as noted below, per capita GDP does not tell the whole story.

Globalization means that world trade and financial markets are becoming more integrated.
But just how far have developing countries been involved in this integration? Their
experience in catching up with the advanced economies has been mixed. Chart 2 shows that
in some countries, especially in Asia, per capita incomes have been moving quickly toward
levels in the industrial countries since 1970. A larger number of developing countries have
made only slow progress or have lost ground. In particular, per capita incomes in Africa have
declined relative to the industrial countries and in some countries have declined in absolute
terms. Chart 2b illustrates part of the explanation: the countries catching up are those where
trade has grown strongly.

Role of globalisation in International Business

National and international institutions, inevitably influenced by differences in culture, play an

important role in the process of globalization. It may be best to leave an outside commentator
to reflect on the role of institutions:

"That the advent of highly integrated commodity and financial markets has been
accompanied by trade tensions and problems of financial instability should not come as a
surprise … The surprise is that these problems are not even more severe today, given that the
extent of commodity and financial market integration is so much greater.

“One possibility in accounting (for this surprise) is the stabilizing role of the institutions built
in the interim. At the national level this means social and financial safety nets. At the
international level it means the WTO, the IMF, and the Basle Committee of Banking
Supervisors. These institutions may be far from perfect, but they are better than nothing,
judging from the historical correlation between the level of integration on one hand and the
level of trade conflict and financial instability on the other."6 (parentheses added)

As globalization has progressed, living conditions (particularly when measured by broader

indicators of well being) have improved significantly in virtually all countries. However, the
strongest gains have been made by the advanced countries and only some of the developing
countries.

That the income gap between high income and low income countries has grown wider is a
matter for concern. And the number of the world’s citizens in abject poverty is deeply
disturbing. But it is wrong to jump to the conclusion that globalization has caused the
divergence, or that nothing can be done to improve the situation. To the contrary: low income
countries have not been able to integrate with the global economy as quickly as others, partly
because of their chosen policies and partly because of factors outside their control. No
country, least of all the poorest, can afford to remain isolated from the world economy. Every

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country should seek to reduce poverty. The international community should endeavor – by
strengthening the international financial system, through trade, and through aid – to help the
poorest countries integrate into the world economy, grow more rapidly, and reduce poverty.
That is the way to ensure all people in all countries have access to the benefits of
globalization.

Consider four aspects of globalization:

• Trade: Developing countries as a whole have increased their share of world trade –
from 19 percent in 1971 to 29 percent in 1999. But Chart 2b shows great variation among
the major regions. For instance, the newly industrialized economies (NIEs) of Asia have
done well, while Africa as a whole has fared poorly. The composition of what countries
export is also important. The strongest rise by far has been in the export of manufactured
goods. The share of primary commodities in world exports – such as food and raw
materials – that are often produced by the poorest countries, has declined.

• Capital movements: Chart 3 depicts what many people associate with globalization,
sharply increased private capital flows to developing countries during much of the 1990s.
It also shows that:

• the increase followed a particularly "dry" period in the 1980s;

• net official flows of "aid" or development assistance have fallen significantly since
the early 1980s; and

• the composition of private flows has changed dramatically. Direct foreign investment
has become the most important category. Both portfolio investment and bank credit rose
but they have been more volatile, falling sharply in the wake of the financial crises of the
late 1990s.

• Movement of people: Workers move from one country to another partly to find better
employment opportunities. The numbers involved are still quite small, but in the period
1965-90, the proportion of labor forces round the world that was foreign born increased
by about one-half. Most migration occurs between developing countries. But the flow of
migrants to advanced economies is likely to provide a means through which global wages
converge. There is also the potential for skills to be transferred back to the developing
countries and for wages in those countries to rise.

• Spread of knowledge (and technology): Information exchange is an integral, often

overlooked, aspect of globalization. For instance, direct foreign investment brings not
only an expansion of the physical capital stock, but also technical innovation. More
generally, knowledge about production methods, management techniques, export markets
and economic policies is available at very low cost, and it represents a highly valuable
resource for the developing countries.

• The special case of the economies in transition from planned to market economies –
they too are becoming more integrated with the global economy – is not explored in much
depth here. In fact, the term "transition economy" is losing its usefulness. Some countries
(e.g. Poland, Hungary) are converging quite rapidly toward the structure and performance

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 of advanced economies. Others (such as most countries of the former Soviet Union) face
long – term structural and institutional issues similar to those faced by developing
countries.

Q.2:- What is culture and in the context of international business environment how
does it impact international business decisions?

Ans:- Organizational culture is the set of values, beliefs, behaviors, customs, and attitudes
that helps the members of the organization understand what it stands for, how it does things,
and what it considers important. When the people comprising an organization represent
different cultures, their differences in values, beliefs, behaviors, customs, and attitudes reflect
multiculturalism. Diversity exists in a community of people when its members differ from
one another along one or more important dimensions.

The following can be looked as the various aspects of the cultural dichotomies.

In this new millennium, few executives can afford to turn a blind eye to global
business opportunities. Japanese auto-executives monitor carefully what their European and
Korean competitors are up to in getting a bigger slice of the Chinese auto-market. Executives
of Hollywood movie studios need to weigh the appeal of an expensive movie in Europe and
Asia as much as in the US before a firm commitment. The globalizing wind has broadened
the mindsets of executives, extended the geographical reach of firms, and nudged
international business (IB) research into some new trajectories. One such new trajectory is the
concern with national culture. Whereas traditional IB research has been concerned with
economic/ legal issues and organizational forms and structures, the importance of national
culture – broadly defined as values, beliefs, norms, and behavioural patterns of a national
group – has become increasingly important in the last two decades, largely as a result of the
classic work of Hofstede (1980). National culture has been shown to impact on major
business activities, from capital structure (Chui et al., 2002) to group performance (Gibson,
1999). For reviews, see’ Boyacigiller and Adler’ (1991) and ‘Earley and Gibson’ (2002).

The purpose of this Unit is to provide a state-of-the-art review of several recent

advances in culture and IB research, with an eye toward productive avenues for future
research. It is not our purpose to be comprehensive; our goal is to spotlight a few highly
promising areas for leapfrogging the field in an increasingly boundary-less business world.
We first review the issues surrounding cultural convergence and divergence, and the
processes underlying cultural changes. We then examine novel constructs for characterizing
cultures, and how to enhance the precision of cultural models by pinpointing when the effects
of culture are important. Finally, we examine the usefulness of experimental methods, which
are rarely employed in the field of culture and IB. A schematic summary of our coverage is
given in Table 2.1, which suggests that the topics reviewed are loosely related, and that their
juxtaposition in the present paper represents our attempt to highlight their importance rather
than their coherence as elements of an integrative framework.

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1. Cultural change, convergence and divergence in an era of partial globalization.
An issue of considerable theoretical significance is concerned with cultural
changes and transformations taking place in different parts of the world. In fact, since the
landmark study of Haire et al. (1966) and the publication of Industrialism and Industrial Man
by Kerr et al. (1960), researchers have continued to search for similarities in culture-specific
beliefs and attitudes in various aspects of work related attitudes and behaviours, consumption
patterns, and the like. If cultures of the various locales of the world are indeed converging
(e.g., Heuer et al., 1999), IB-related practices would indeed become increasingly similar.
Standard, culture-free business practices would eventually emerge, and inefficiencies and
complexities associated with divergent beliefs and practices in the past era would disappear.
In the following section, we review the evidence on the issue and conclude that such an
outlook pertaining to the convergence of various IB practices is overly optimistic.

2. Evolution of partial globalization. Globalization refers to a ‘growing

economic interdependence among countries, as reflected in the increased cross-border flow of
three types of entities: goods and services, capital, and know-how’ (Govindarajan and Gupta,
2001, 4). Few spoke of ‘world economy’ 25 years ago, and the prevalent term was
‘international trade’ (Drucker, 1995). However today, international trade has culminated in
the emergence of a global economy, consisting of flows of information, technology, money,
and people, and is conducted via government international organizations such as the North
American Free Trade Agreement (NAFTA) and the European Community; global
organizations such as the International Organization for Standardization (ISO); multinational
companies (MNCs); and cross – border alliances in the form of joint ventures, international
mergers, and acquisitions. These inter – relationships have enhanced participation in the
world economy, and have become a key to domestic economic growth and prosperity
(Drucker, 1995, 153).

Yet, globalization is not without its misgivings and discontents (Sassan, 1998). A
vivid image associated with the G8 summits is the fervent protests against globalization in
many parts of the world, as shown in television and reported in the popular media. Strong
opposition to globalization usually originates from developing countries that have been hurt
by the destabilizing effects of globalization, but in recent times we have also seen heated
debates in Western economies triggered by significant loss of professional jobs as a result of
off shoring to low – wage countries. Indeed, workers in manufacturing and farming in
advanced economies are becoming increasingly wary of globalization, as their income
continues to decline significantly. In parallel to the angry protests against globalization, the
flow of goods, services, and investments across national borders has continued to fall after
the rapid gains of the 1990s. Furthermore, the creation of regional trade blocs, such as
NAFTA, the European Union, and the Association of Southeast Asian Nations, have
stimulated discussions about creating other trade zones involving countries in South Asia,
Africa, and other parts of the world. Although it is often assumed that countries belonging to
the World Trade Organization (WTO) have embraced globalization, the fact is that the world
is only partially globalized, at best (Schaeffer, 2003). Many parts of Central Asia and Eastern
Europe, including the former republics of the Soviet Union, parts of Latin America, Africa,

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and parts of South Asia, have been sceptical of globalization (Greider, 1997). In fact, less
than 10% of the world’s population is fully globalized (i.e., being active participants in the
consumption of global products and services) (Schaeffer, 2003). Therefore, it is imperative
that we analyze the issues of cultural convergence and divergence in this partially globalized
world.

‘Universal culture’ often refers to the assumptions, values, and practices of people in
the West and some elites in non-Western cultures. Huntington (1996) suggested that it
originates from the intellectual elites from a selected group of countries who meet annually in
the World Economic Forum in Davos, Switzerland. These individuals are highly educated,
work with symbols and numbers, are fluent in English, are extensively involved with
international commitments, and travel frequently outside their country. They share the
cultural value of individualism, and believe strongly in market economics and political
democracy. Although those belonging to the Davos group control virtually all of the world’s
important international institutions, many of the world’s governments, and a great majority of
the world’s economic and military capabilities, the cultural values of the Davos group are
probably embraced by only a small fraction of the six billion people of the world.

Popular culture, again mostly Western European and American in origin, also
contributes to a convergence of consumption patterns and leisure activities around the world.
However, the convergence may be superficial, and have only a small influence on
fundamental issues such as beliefs, norms, and ideas about how individuals, groups,
institutions, and other important social agencies ought to function. In fact, Huntington (1996,
58) noted that ‘The essence of Western civilization is the Magna Carta, not the Magna Mac.
The fact that non-Westerners may bite into the latter has no implications for their accepting
the former’. This argument is obvious if we reverse the typical situation and put Western
Europeans and Americans in the shoes of recipients of cultural influence. For instance, while
Chinese Kung Fu dominates fight scenes in Hollywood movies such as Matrix Reloaded, and
Chinese restaurants abound in the West, it seems implausible that Americans and Europeans
have espoused more Chinese values because of their fondness of Chinese Kung Fu and food.
A major argument against cultural convergence is that traditionalism and modernity may be
unrelated (Smith and Bond, 1998). Strong traditional values, such as group solidarity,
interpersonal harmony, paternalism, and feminism, can co-exist with modern values of
individual achievement and competition. A case in point is the findings that Chinese in
Singapore and China indeed endorsed both traditional and modern values (Chang et al., 2003;
Zhang et al., 2003). It is also conceivable that, just as we talk about Westernization of cultural
values around the world, we may also talk about Easternization of values in response to
forces of modernity and consumption values imposed by globalization (Marsella and Choi,
1993).

Although the argument that the world is becoming one culture seems untenable, there
are some areas that do show signs of convergence. We explore in the following the roles of
several factors that simultaneously cause cultures of the world to either converge or diverge,
in an attempt to identify several productive avenues for future research.

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3. Role of multiculturalism and cultural identity. The broad ideological
framework of a country, corporation, or situation is the most important determinant of the
cultural identity that people develop in a given locale (Triandis, 1994). The ‘melting pot’
ideology suggests that each cultural group loses some of its dominant characteristics in order
to become the mainstream: this is assimilation, or what Triandis (1994) calls subtractive
multiculturalism.

In contrast, when people from a cultural group add appropriate skills and
characteristics of other groups, it may be called integration, or additive multiculturalism.
Both of these processes are essential for cultural convergence to proceed. However, if there is
a significant history of conflict between the cultural groups, it is hard to initiate these
processes, as in the case of Israelis and Palestinians. In general, although there has been some
research on the typology of animosity against other nations (e.g., Jung et al., 2002), we do not
know much about how emotional antagonism against other cultural groups affects trade
patterns and intercultural cooperation in a business context. The issues of cultural identity and
emotional reactions to other cultural groups in an IB context constitute a significant gap in
our research effort in this area.

4. Implications of convergence and divergence issues. One message is clear:

while convergence in some domains of IB activity is easily noticeable, especially in
consumer values and lifestyles, significant divergence of cultures persists. In fact, Hofstede
(2001) asserts that mental programs of people around the world do not change rapidly, but
remain rather consistent over time. His findings indicate that cultural shifts are relative as
opposed to absolute. Although clusters of some countries in given geographical locales (e.g.,
Argentina, Brazil, Chile) might indicate significant culture shifts towards embracing Anglo
values, the changes do not diminish the absolute differences between such countries and
those of the Anglo countries (i.e., US, Canada, UK). Huntington, in his ‘The Clash of
Civilizations’ (1996), presents the view that there is indeed a resurgence of non-Western
cultures around the world, which could result in the redistribution of national power in the
conduct of international affairs. The attempt by the Davos group to bring about uniform
practices in various aspects of IB and work culture, thereby sustaining the forces of
globalization, is certainly worthwhile. However, our analysis suggests that there is no
guarantee that such convergence will come about easily, or without long periods of
resistance.

IB scholars need to understand that although some countries might exhibit strong
tendencies toward cultural convergence, as is found in Western countries, there are countries
that will reject globalization, not only because of its adverse economic impacts (Greider,
1997) but also because globalization tends to introduce distortions (in their view) in profound
cultural syndromes that characterize their national character.

Furthermore, reactions to globalization may take other forms. Bhagat et al. (2003)
have recently argued that adaptation is another approach that could characterize the

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tendencies of some cultures in the face of mounting pressures to globalize. Other approaches
are rejection, creative synthesis, and innovation (Bhagat et al., 2003). These different
approaches highlight once again the complex dynamics that underlie cultural convergence
and divergence in a partially globalized world. Also, in discussing issues of convergence and
divergence, it is necessary to recognize that the shift in values is not always from Western
society to others, but can result in the change of Western cultural values as well. For
example, the emphasis on quality and teamwork in the West is partly a result of the
popularity of Japanese management two decades ago.

Scholars of IB should recognize that the issue of convergence and divergence in this
era of partial globalization will remain as a persistent and complex issue whose direction
might only be assessed on a region-by-region basis. It is also wise to adopt an
interdisciplinary perspective in understanding the forces that create both convergence and
divergence of cultures in different parts of the world. For instance, in Understanding
Globalization, Schaeffer (2003) has provided an insightful discussion of the social
consequences of political, economic and other changes, which have significant implications
for IB. The cause-effect relationships of globalization and its various outcomes, especially the
cultural outcomes, are not only characterized by bi-directional arrows, but are embedded in a
complex web of relationships. How these complex relationships and processes play out on the
stage of IB remains to be uncovered by IB researchers.

5. Processes of cultural changes. In the previous section, we make the point that,
through the process of globalization, cultures influence each other and change, but whether or
not these changes will bring about cultural convergence is yet to be seen. In this section, we
delineate a general model that describes and explains the complex processes underlying
cultural changes. As explained before, IB is both an agent and a recipient of cultural change,
and for international business to flourish it is important to understand its complex, reciprocal
relationships with cultural change.

In line with the view of Hofstede (2001) that culture changes very slowly, culture has
been treated as a relatively stable characteristic, reflecting a shared knowledge structure that
attenuates variability in values, behavioral norms, and patterns of behaviors (Erez and Earley,
1993). Cultural stability helps to reduce ambiguity, and leads to more control over expected
behavioral outcomes (Weick and Quinn, 1999; Leana and Barry, 2000). For instance, most
existing models of culture and work behaviour assume cultural stability and emphasize the fit
between a given culture and certain managerial and motivational practices (Erez and Earley,
1993). High fit means high adaptation of managerial practices to a given culture and,
therefore, high effectiveness. The assumption of cultural stability is valid as long as there are
no environmental changes that precipitate adaptation and cultural change. Yet, the end of the
20th century and the beginning of the new millennium have been characterized by turbulent
political and economical changes, which instigate cultural changes. In line with this
argument, Lewin and Kim (2004), in their comprehensive chapter on adaptation and selection
in strategy and change, distinguished between theories driven by the underlying assumption
that adaptation is the mechanism to cope with change, and theories driven by the underlying

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assumption of selection and the survival of the fittest, suggesting that ineffective forms of
organization disappear, and new forms emerge. However, although organizational changes as
a reaction to environmental changes have been subjected to considerable conceptual analyses,
the issue of cultural change at the national level has rarely been addressed.

There are relatively few theories of culture that pertain to the dynamic aspect of
culture. One exception is the eco-cultural model by Berry et al. (2002), which views culture
as evolving adaptations to ecological and socio-political influences, and views individual
psychological characteristics in a population as adaptive to their cultural context, as well as to
the broader ecological and socio-political influences. Similarly, Kitayama (2002) proposes a
system view to understanding the dynamic nature of culture, as opposed to the entity view
that sees culture as a static entity. This system view suggests that each person’s psychological
processes are organized through the active effort to coordinate one’s behaviors with the
pertinent cultural systems of practices and public meanings. Yet, concurrently, many aspects
of the psychological systems develop rather flexibly as they are attuned to the surrounding
socio-cultural environment, and are likely to be configured in different ways across different
socio-cultural groups.

These adaptive views of culture are supported by empirical evidence. For example,
Van de Vliert et al. (1999) identified curvilinear relationships between temperature,
masculinity and domestic political violence across 53 countries. Their findings showed that
masculinity and domestic violence are higher in moderately warm countries than in countries
with extreme temperatures. Inglehart and Baker (2000) examined cultural change as reflected
by changes in basic values in three waves of the World Values Surveys, which included 65
societies and 75% of the world’s population. Their analysis showed that economic
development was associated with shifts away from traditional norms and values toward
values that are increasingly rational, tolerant, trusting, and participatory. However, the data
also showed that the broad cultural heritage of a society, whether it is Protestant, Roman
Catholic, Orthodox, Confucian, or Communist, leaves an enduring imprint on traditional
values despite the forces of modernization.

The process of globalization described before has introduced the most significant
change in IB, with its effects filtering down to the national, organizational, group and
individual levels. Reciprocally, changes at micro-levels of culture, when shared by the
members of the society, culminate into macro level phenomena and change the macro-levels
of culture. In the absence of research models that can shed light on this complex process of
cultural change, Erez and Gati (2004) proposed that the general model of multi-level analysis
(Klein and Kozlowski, 2000) could be adopted for understanding the dynamics of culture and
cultural change.

6. The dynamics of culture as a multi-level, multi-layer construct. The proposed

model consists of two building blocks. One is a multi-level approach, viewing culture as a
multi-level construct that consists of various levels nested within each other from the most
macro-level of a global culture, through national cultures, organizational cultures, group

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cultures, and cultural values that are represented in the self at the individual level. The second
is based on Schein’s (1992) model viewing culture as a multi – layer construct consisting of
the most external layer of observed artifacts and behaviors, the deeper level of values, which
is testable by social consensus, and the deepest level of basic assumption, which is invisible
and taken for granted. The present model proposes that culture as a multi – layer construct
exists at all levels – from the global to the individual – and that at each level change first
occurs at the most external layer of behavior, and then, when shared by individuals who
belong to the same cultural context, it becomes a shared value that characterizes the
aggregated unit (group, organizations, or nations).
In the model, the most macro-level is that of a global culture being created by global
networks and global institutions that cross national and cultural borders. As exemplified by
the effort of the Davos group discussed earlier, global organizational structures need to adopt
common rules and procedures in order to have a common ‘language’ for communicating
across cultural borders (Kostova, 1999; Kostova and Roth, 2003; Gupta and Govindarajan,
2000).

The dynamic of top-down–bottom-up processes across levels of culture.

Given the dominance of Western MNCs, the values that dominate the global context
are often based on a free market economy, democracy, acceptance and tolerance of diversity,
respect of freedom of choice, individual rights, and openness to change (Gupta and
Govindarajan, 2000).

Below the global level are nested organizations and networks at the national level
with their local cultures varying from one nation or network to another. Further down are
local organizations, and although all of them share some common values of their national
culture, they vary in their local organizational cultures, which are also shaped by the type of
industry that they represent, the type of ownership, the values of the founders, etc. Within
each organization are sub-units and groups that share the common national and organizational
culture, but that differ from each other in their unit culture on the basis of the differences in
their functions (e.g., R&D vs manufacturing), their leaders’ values, and the professional and
educational level of their members. At the bottom of this structure are individuals who
through the process of socialization acquire the cultural values transmitted to them from
higher levels of culture. Individuals who belong to the same group share the same values that

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differentiate them from other groups and create a group – level culture through a bottom-up
process of aggregation of shared values. For example, employees of an R&D unit are selected
into the unit because of their creative cognitive style and professional expertise. Their leader
also typically facilitates the display of these personal characteristics because they are crucial
for developing innovative products. Thus, all members of this unit share similar core values,
which differentiate them from other organizational units. Groups that share similar values
create the organizational culture through a process of aggregation, and local organizations
that share similar values create the national culture that is different from other national
cultures.

Both top-down and bottom-up processes reflect the dynamic nature of culture, and
explain how culture at different levels is being shaped and reshaped by changes that occur at
other levels, either above it through top-down processes or below it through bottom-up
processes. Similarly, changes at each level affect lower levels through a top-down process,
and upper levels through a bottom-up process of aggregation. The changes in national
cultures observed by Inglehart and Baker (2000) could serve as an example for top-down
effects of economic growth, enhanced by globalization, on a cultural shift from traditional
values to modernization. However, in line with Schein (1992), the deep basic assumptions
still reflect the traditional values shaped by the broad cultural heritage of a society.

Global organizations and networks are being formed by having local-level

organizations join the global arena. That means that there is a continuous reciprocal process
of shaping and reshaping organizations at both levels. For example, multinational companies
that operate in the global market develop common rules and cultural values that enable them
to create a synergy between the various regions, and different parts of the multinational
company. These global rules and values filter down to the local organizations that constitute
the global company, and, over time, they shape the local organizations. Reciprocally, having
local organizations join a global company may introduce changes into the global company
because of its need to function effectively across different cultural boarders. A study by Erez-
Rein et al. (2004) demonstrated how a multinational company that acquired an Israeli
company that develops and produces medical instruments changed the organizational culture
of the acquired company. The study identified a cultural gap between the two companies,
with the Israeli company being higher on the cultural dimension of innovation and lower on
the cultural dimension of attention to detail and conformity to rules and standards as
compared with the acquiring company. The latter insisted on sending the Israeli managers to
intensive courses in Six – Sigma, which is an advanced method of quality improvement, and
a managerial philosophy that encompasses all organizational functions. Upon returning to
their company, these managers introduced quality improvement work methods and
procedures to the local company, and caused behavioural changes, followed by the
internalization of quality – oriented values. Thus, a top-down process of training and
education led to changes in work behaviour and work values. Sharing common behaviours
and values by all employees of the local company then shaped the organizational culture
through bottom–up processes. The case of cultural change via international acquisitions
demonstrated the two building blocks of our dynamic model of culture: the multi-level

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structure explains how a lower-level culture is being shaped by top-down effects, and that the
cultural layer that changes first is the most external layer of behaviour. In the long run,
bottom – up processes of shared behaviours and norms shape the local organizational culture.

7. Factors that facilitate cultural change. Culture itself influences the level
of resistance or acceptance of change. Harzing and Hofstede (1996) proposed that certain
cultural values facilitate change, whereas others hinder it. The values of low power distance,
low uncertainty avoidance, and individualism facilitate change. Change threatens stability,
and introduces uncertainty, and resistance to change will therefore be higher in cultures of
high rather than low uncertainty avoidance (Steensma et al., 2000). Change also threatens the
power structure, and therefore will be avoided in high power distance cultures. Finally,
change breaks the existing harmony, which is highly valued in collectivistic cultures, and
therefore will not be easily accepted by collectivists (Levine and Norenzayan, 1999).

A recent study by Erez and Gati (2004) examined the effects of three factors on the
change process and its outcomes:

• the cultural value of individualism – collectivism;

• the reward structure and its congruence with the underlying cultural values;
and
• the degree of ambiguity in the reward structure.

The change process examined was a shift from choosing to work alone to a
behavioural choice of working as part of a team, and vice versa. Working alone is more
prevalent in individualistic cultures, whereas working in teams dominates the collectivistic
ones.

8. Understanding when culture matters: increasing the precision of cultural

models. Beyond exploring new cultural constructs and the dynamic nature of culture,
we also argue for the importance of examining contingency factors that enhance or mitigate
the effect of national culture. Consider the following scenario. A senior human resource
manager in a multinational firm is charged with implementing an integrative training program
in several of the firm’s subsidiaries around the globe. Over the term of her career, the
manager has been educated about differences in national culture and is sensitive to
intercultural opportunities and challenges. At the same time, she understands the strategic
need to create a unified global program that serves to further integrate the firm’s basic
processes, creating efficiencies and synergies across the remote sites. She approaches the
implementation with trepidation. A key challenge is to determine whether the program should
be implemented in the same manner in each subsidiary or modified according to the local
culture at each site. Put another way, in this complex circumstance, does culture matter?

Q.3:- Explain the meaning of the term ‘trade liberalisation and advantages. Also,
identify some commonly observed mistakes in international trade.

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Ans:- Trade Liberalization. Policies that make an economy open to trade and
investment with the rest of the world are needed for sustained economic growth. The
evidence on this is clear. No country in recent decades has achieved economic success, in
terms of substantial increases in living standards for its people, without being open to the rest
of the world. In contrast, trade opening (along with opening to foreign direct investment) has
been an important element in the economic success of East Asia, where the average import
tariff has fallen from 30 percent to 10 percent over the past 20 years.

Opening up their economies to the global economy has been essential in enabling
many developing countries to develop competitive advantages in the manufacture of certain
products. In these countries, defined by the World Bank as the "new globalizers," the number
of people in absolute poverty declined by over 120 million (14 percent) between 1993 and
1998.

There is considerable evidence that more outward-oriented countries tend consistently

to grow faster than ones that are inward-looking. Indeed, one finding is that the benefits of
trade liberalization can exceed the costs by more than a factor of 10. Countries that have
opened their economies in recent years, including India, Vietnam, and Uganda, have
experienced faster growth and more poverty reduction. On average, those developing
countries that lowered tariffs sharply in the 1980s grew more quickly in the 1990s than those
that did not.

Freeing trade frequently benefits the poor especially. Developing countries can ill-
afford the large implicit subsidies, often channeled to narrow privileged interests that trade
protection provides. Moreover, the increased growth that results from free trade itself tends to
increase the incomes of the poor in roughly the same proportion as those of the population as
a whole. New jobs are created for unskilled workers, raising them into the middle class.
Overall, inequality among countries has been on the decline since 1990, reflecting more rapid
economic growth in developing countries, in part the result of trade liberalization.

The potential gains from eliminating remaining trade barriers are considerable.
Estimate of the gains from eliminating all barriers to merchandise trade range from US$250
billion to US$680 billion per year. About two-thirds of these gains would accrue to industrial
countries. But the amount accruing to developing countries would still be more than twice the
level of aid they currently receive. Moreover, developing countries would gain more from
global trade liberalization as a percentage of their GDP than industrial countries, because
their economies are more highly protected and because they face higher barriers.

Although there are benefits from improved access to other countries’ markets,
countries benefit most from liberalizing their own markets. The main benefits for industrial
countries would come from the liberalization of their agricultural markets. Developing
countries would gain about equally from liberalization of manufacturing and agriculture. The
group of low-income countries, however, would gain most from agricultural liberalization in

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industrial countries because of the greater relative importance of agriculture in their
economies.

Advantages

• Enhance your domestic competitiveness

• Increase sales and profits

• Gain your global market share

• Reduce dependence on existing markets

• Exploit international trade technology

• Reduce dependence on existing markets

• Exploit international trade technology

• Extend sales potential of existing products

• Stabilize seasonal market fluctuations

• Enhance potential for expansion of your business

• Sell excess production capacity

• Maintain cost competitiveness in your domestic market

Disadvantages

• You may need to wait for long-term gains

• Hire staff to launch international trading

• Modify your product or packaging

• Develop new promotional material

• Incur added administrative costs

• Dedicate personnel for travelling

• Wait long for payments

• Apply for additional financing

• Deal with special licenses and regulations

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Some Common Mistakes in International Trade

Common Export Mistakes

Solutions

1. Failure to obtain qualified export counselling and to develop a master international

marketing plan before starting an export business.

Obtain Export Counselling

2. Insufficient commitment by top management to exporting.

Determine Export Readiness

3. Failure to have a solid agent/distributor’s agreement

Understand Agent/Distributor Contracts

4. Blindly chasing “E-orders” from around the world.

Avoid Accidental Exporting

5. Failure to understand the connection

between country risk and securing export financing.

Understand Export Financing

6. Failure to understand Intellectual Property Rights

Understand Intellectual Property Rights (IPR)

7. Insufficient attention to marketing and advertising requirements.

Pay Attention to Overseas Marketing and Advertising

8. Lack of attention to product preparation needs.

Pay Attention to Product Preparation Requirements

9. Failure to consider legal aspects of going global.

Understand Licensing and Joint Ventures

10. Failure to know the rules of trade.

Understand Export Regulations

· Failure to obtain export counselling and to develop a master international marketing plan
before starting an export business:

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Utilize Government and Association Resources for Export Counselling: It is also important
for new exporters to seek legal counsel.

Hire a Lawyer to Help. You Structure Your Export Operations for the Long Run: Lawyers
are concerned with issues of compliance on both ends of the transaction, therefore they are
instrumental in helping you to make sure that your recordkeeping system is planned correctly,
that your legal documents are structured correctly, and to advise you on a broad range of
compliance issues before the sale, during the sale, and after the sale.

· Insufficient commitment to overcome the initial difficulties and financial requirements of

exporting:

To be successful in exporting, firms have to establish an export department to which they

dedicate personnel and a budget, and for which they develop appropriate procedures,
preferably in consultation with a qualified trade lawyer.
· Failure to have a solid agent and or distributor’s agreement:

Firms that intend to enter and to expand in exporting will likely need an agent or distributor
at some point. Key considerations include

Understanding the Role of Agents: The NTDB Web site at (www.stat-USA.gov) provides
information on agents and distributors. As explained on this Web site, agents receive
commission on their sales rather than buying and selling for their own account. As agents do
not own the products they sell, the risk of loss remains with the company the agent represents
(the principal).

Understanding the Role of Distributors: The key legal distinctions between an agent and
distributor are

* A distributor takes title to the goods and accepts the risk of loss. A distributor makes
profits by reselling the goods.
* Distributors cannot contractually bind the company producing the goods.
* Distributors establish the price and sales terms of the goods.

Contract Drafting Considerations for Agent/Distributor Agreements: The first and most
important consideration when drafting an agreement is to, ensure that the agreement clearly
states whether there is an agent or a distributor relationship. The agreement should also
clarify the terms and conditions for selling the products. For example:

* Determine whether the relationship is exclusive versus non-exclusive.

* Specify which geographic regions are to be covered.
* Outline issues of payment and payment schedules for the products (in the case of a
distributor) and for payments of commissions (in the case of agents).
* Determine the currency in which payments are to be made and address currency
fluctuation issues.
* Provide specific provisions regarding renewal of the agreement, including specific
parameters for performance, promotional activity and notice of desire to renew.

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 * Establish a specific provision for termination of the agreement and terms for such
termination. (Some foreign countries restrict or prohibit termination without just cause or
compensation.)
* Outline the termination process for the end of the agreement period.
* Provide for workable and acceptable dispute settlement clauses.
* Assure that the agreement addresses whether or not intellectual property rights are being
licensed or reserved.
* Do not allow, without seller’s consent, the contract to be assigned to another party (sub-
agents or sub-distributors) to be used to fulfil obligations in the contract or the contract to be
transferred with a change of ownership or control over the agent/distributor.
* Assure that your contract complies with both U.S. and foreign laws.

· Blindly chasing orders from around the world

You may be in your office when suddenly and unexpectedly someone from a foreign country
contacts you electronically and wants to buy a line of your products. What do you do next?

Make sure the order is not on the denied list: Go to the Bureau of Industry and Security’s
Web site to view the entire list of denied orders (bxa.doc.gov/DPL/Default.shtm).

Business considerations in checking out the firm making the inquiry: Make sure the
opportunity is a reasonable one and involves something that can reasonably be handled by
your firm, without spending countless hours researching the requirement. The Department of
Commerce Commercial Service has a number of services to assist you.

* International Company Profile (ICP) – The ICP service, referred to earlier, helps firms
investigate the reliability of prospective trading partners.
* Country Directories of International Contacts (CDIC) Provides the name and contact
information for directories of importers, agents, trade associations, government agencies, etc.,
on a country-by-country basis. The information is available on the National Trade Data Bank.

Competitive considerations in checking out the market for the product: By reviewing industry
sector information, firms can obtain useful data to assess the probability that the inquiry they
are investigating is real. One resource that may be helpful is the Department of Commerce,
Commercial Service’s Industry Sector.

· Failure to understand the connection between country risk and the probability of getting
export financing

The best source of information about whether a country is in good standing with the U.S. is
the U.S. Export-Import Bank’s Country Limitation Schedule. (www.exim.gov).

Access the Export Financing Options: The SBA, ExIm and the Agriculture Department are
three of the biggest providers of export financing in the federal government. A list of the
strategic banking partners of the ExIm and SBA export financing and credit insurance
programs can be obtained from ExIm and SBA.

Check out SBA’s Export Financing Products: The SBA’s Export Working Capital Program
(EWCP) provides short-term working capital for up to one year.

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Consult the ExIm’s Export Financing Products: The ExIm’s Working Capital Guarantee
Program allows commercial lenders to make working capital loans to U.S. exporters for
various export-related activities by substantially reducing the risks associated with these
loans.

Access ExIm’s Export Credit Insurance: The Export Credit Insurance program provides
protection against losses associated with foreign buyers or other foreign debtor default for
political or commercial reasons.

· Failure to understand Intellectual Property Rights (IPR):

Intellectual property rights refer to the legal system that protects patents, trademarks,
copyrights, trade secrets. It is important for exporters to understand how and whether
intellectual property rights are protected in different countries.

· Insufficient attention to marketing and advertising requirements:

Key considerations include

Trade Shows and Trade Missions: Trade shows and missions may be in the virtual form or
entail travelling to the foreign country.

Advertising: Exporters can advertise U.S.-made products or services in Commercial News

USA, a catalogue-magazine published 10 times a year to promote U.S. products and services
in overseas markets. Commercial News USA is disseminated to business readers worldwide
via U.S. embassies and consulates and international electronic bulletin boards, and selected
portions are also reprinted in certain newsletters.

U.S. Pavilions: About eighty to one hundred worldwide trade fairs are selected annually by
the Commerce Department for recruitment of a USA pavilion. Selection priority is given to
events in viable markets that are suitable for new-to-export or new-to-market, "export ready"
firms.
· Lack of attention to product adaptation and preparation needs

The selection and preparation of a firm’s product for export requires not only knowledge of
the product, but also knowledge of the unique characteristics of each market being targeted.
Key considerations include

Product Adaptation to standards requirements: As tariff barriers (tariffs, duties, and quotas)
are eliminated around the world in accordance with the requirements of participation in the
World Trade Organization (WTO), other non-tariff barriers, such as product standards, are
proliferating. Exporters must understand conformity requirements to operate on an
international basis. The DOC’s National Center for Standards and Certification Information
(NCSCI) provides information on U.S. and foreign conformity assessment procedures and
standards for non-agricultural products. You can visit their Web site by going to ts.nist.gov.

Product Engineering and Redesign: The factors that may necessitate re-engineering or
redesign of U.S. products may include differences in electrical and measurement systems.

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Branding, Labelling and Packaging: Cultural considerations and customs may influence
branding, labelling and package considerations.

· Are certain colours used on labels and packages attractive or offensive?

· Do labels have to be in the local language?

· Must each item be labelled individually?

· Must each item be labelled individually?

· Are name brands important?

Installation: Another important element of product preparation is to ensure that the product
can be easily installed in the foreign location. Importers and exporters need to know they may
also consider providing training or providing manuals that have been translated into the local
language along with the product.

Warranties: In order to compete with competitors in the market, firms may have to include
warranties on their products.

Servicing: The service that U.S. companies provide for their products is of concern to foreign
consumers. Foreign consumers want to know whether they can access spare parts, technicians
who can service the product, and distributors of the products in their countries.

· Failure to obtain legal advice

While it is virtually impossible for any firm, no matter how big or small, to know all of the
laws that pertain to exporting from the U.S., as well as the relevant laws of other countries,
there are measures that can be taken by firms in the planning process to minimize the
probability that they will make unnecessary errors that have grave legal consequences

· Failure to understand export licensing requirements

Businesses that are new to the export arena may confuse the local and state rules regarding
business taxes, zoning and other issues, i.e., legal registrations, with the federal requirements
governing export licenses. In order to export an item that may be on the restricted list, an
export license is required. This allows the federal government to control the export of the
goods. The license is not required for every item exported.

The U.S. Department of Commerce Bureau of Export Administration (BXA) is the primary
licensing agency for dual-use exports (commercial items that could have military
applications). The first step in determining your license requirements is to classify your
product using the Commerce Control List (CCL). Once the product’s classification is
determined, the following five questions will determine your obligations under the EAR:

· What is the item you intend to export or re-export?

· Where is it going?

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· Who will receive it?

· What will they do with it?

· What is the recipient’s other activities?

Q.4:- Explain the product life cycle theory.

Ans:- Product Life Cycle Theory

Life cycle theory has been used since the 1970s to describe the behaviour of a product or
service from design to obsolescence.

The typical pattern of a product is represented by a curve divided into four distinct phases:
introduction, growth, maturity, and decline. Recent research in the area has focused on its use
in decision making in areas ranging from those as broad as overall strategy to those as narrow
as equipment replacement.

But does the product life cycle, or PLC, really tell the entire story? Consider the Ford
Mustang. Since its 1964 introduction, the automobile has undergone several changes.
Performance was increased with the addition of the 428 CobraJet in 1968 and Mach I styling
in 1969. Another substantial change took place in 1971 with the introduction of the high-
performance Boss 351. Then a true muscle car, the Mustang was detuned in 1974, when oil
prices forced a more fuel-efficient redesign, called Mustang II. The fourth generation
Mustang, introduced as the 1994 model, has been further refined and is more aerodynamic
than its immediate predecessor. Yet it still shares roots with earlier models. A 302 V-8 is still
offered, the wheelbase is similar, and if one looks closely enough, one can see its genesis in
the 1964 model. The pattern evidenced by the life of the Mustang, then, is several curves of
introduction, growth, maturity, and decline.

Another intriguing example is the C-130 Hercules aircraft manufactured by Lockheed. The
company recently announced the sale of 25 "J" models to the Royal Air Force, which is the
fifth version of the Hercules originally produced in the 1950s. Although the aircraft
resembles its older relatives, the new model features a totally different electronics package
and more powerful engines. Here again, the Hercules PLC shows a curve with five local
maximum points (swells of activity, in effect), rather than the traditional, single maximum
point, PLC curve.

The examples above suggest a PLC model represented by waves of product introductions,
growth, maturity, and decline. Design engineering, process engineering, product marketing,
production, and end-of-life decisions are key elements within the system. Each has its own
cycle consisting of varying levels of activity. The waves are triggered by critical decision
points during the life of a product, when production, operations, and marketing managers
must optimize their collective efforts.

Conventional Life Cycle Theory

As shown in Figure 4.1, conventional theory suggests that a product or service goes through
four distinct stages. The objective is to maximize the product’s value and profitability at each
stage. In the introductory phase, sales are slow. The strategy is to create widespread

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awareness. Costs are incurred in building distribution and increasing awareness through
heavy promotion. It is hoped that the investments made in new product introduction pay off
and the product or service moves to the growth phase.

The firm may either build market share or profitability in the growth phase. Strategies here
are to make differential changes that add value to the product and to target new markets.
Marketing moves away from promotion through personal selling toward more mass media
advertising. Just as predators react to attractive targets, competition begins to build as
awareness increases and sales momentum builds. Unit manufacturing costs begin to fall as
fixed costs are spread over more production units and workers move down the learning curve.
The firm attempts to stay in the growth stage as long as possible.

Sales growth slows at maturity and the firm moves to defend market position. This is where
marketing managers must pay the most attention. Promotion costs increase significantly. Cost
reduction is crucial as competitors begin to lower prices and introduce improved versions of
the product. With the lower prices come lower profits, and competitors begin to drop out.
This is typically the longest lasting stage, with some market leaders holding their position
over several decades.

The final stage is decline. Here the firm may continue to market the product hoping that
competitors will discontinue their products. Other strategies are to maximize profit by
eliminating as many product costs as possible as sales slow, or else to eliminate the product
altogether.

• Life Cycle Elements

Design engineering, process engineering, product marketing, and production have been
recurring elements in each stage of the product life cycle. In addition, end-of-life (EOL)
issues must be addressed when the product approaches obsolescence. These elements vary in
importance as the product or service moves through its life, thus creating waves of activity.
The fact that they change in importance and magnitude requires that they be closely
managed. Let’s begin our discussion of the individual elements with design engineering.

• Design Engineering

The typical design engineering curve (see Figure 4.2) shows two peaks. One occurs during
the introduction of the new product and the other during a redesign that takes place during the
maturity phase of the life cycle.

Design engineering is involved in the five phases of the new product introduction (NPI)
process. Idea validation is first. Engineers take informal ideas and study the market for needs
that are not being met by products currently being offered or planned. Technology,
manufacturing capabilities, competition, and potential revenues are analyzed in the review.

The second phase is conceptual design. Here, ideas begin to take shape as product
specifications are identified. Initial investigations are made into product pricing,
performance, and styling in a feasibility analysis. Design and manufacturing engineers may
work as part of a concurrent team to develop specifications and resolve technical aspects of
how the product will be produced.

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Specification and design are third. This is the phase in which design engineering plays a large
role. The goal is design release. Final decisions are made as to how the product will work and
look.

The objective of prototype production and testing is to provide assurances that the design is
sound and the need for subsequent changes will be small. The product is tested under a pilot
run simulation to see how well it meets specifications and quality objectives. Manufacturing
capabilities are also checked. Engineers may solicit customer reactions to the product in this
phase.

The final traditional phase of NPI is manufacturing ramp – up, or commercialization. The
chief concern is obtaining the desired level of manufacturing capacity as soon as possible
while meeting quality specifications. Design engineers provide solutions to problems with
product reliability and variability in this stage. They also participate in any resulting
manufacturing process changes.

The goal of any new product introduction is to place a quality product in the market, in
desired amounts, at the producing firm’s lowest possible cost. Design engineering’s integral
role in this process results in the introduction of the initial version of the product. We call this
the "A" model designation, meaning that this is the first model in a potential series.

The second design engineering activity spike occurs when the cumulative effect of
implemented or contemplated product changes results in a substantially new product. If the
product needs a major face – lift to attract new users, the resulting peak in activity level may
be higher than that for the previous model. Changes made to the product here typically result
in markedly higher quality, new features that increase the product’s utility value, and/or
improvements in the attractiveness of the product through styling. This second, updated
model is the "B" version. An example is Caterpillar’s high-drive crawler tractors, which were
given an entirely new series designation ("H") upon their introduction in the 1980s. The
high-drive bulldozers, on which the track resembles a skewed pyramid, represented a
substantial departure from conventional – tracked tractors with their oval tracks. In fact, they
have redefined the industry.

• Process Engineering

The process engineering function is responsible for the production system. To that end,
process engineers specify the type of system, equipment, tooling, layout, and flow used in
manufacturing or service operations. Their task is to ensure the efficient production of each
part or component. Traditionally, the first step is a review of the end item bill of materials,
which identifies all the separate parts that make up the product or service to be produced in,
or to flow through, the operation area. Once the bill of materials analysis is completed, the
problem of which type of production system to employ may be tackled.

Laufer (1975) identifies three basic types of process structures used in manufacturing (which
could easily be used by service entities as well): intermittent, batch, and continuous.
Typically, the type of product offered by the firm defines which structure will be employed.
Intermittent operations are usually found in custom firms or job shops in which end item or
service specifications are provided by the customer. The product or service is made as
ordered, so production tends to be either infrequent or one time only. Production run lengths
are often small. Output is more standardized in the batch operation and is produced in higher

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quantities. The plant is used to process a product run over a given period of time, after which
a different item or goods may be produced. Finally, production in continuous operations is
highly standardized, variety is limited, and output is high.

When considering the type of process to employ, a production layout that facilitates the
product movement through the plant must be chosen. Questions to consider include: Is the
product suited to an assembly line layout, in which work stations are linked by some type of
material handling device? Is production more efficient in a cellular layout, in which
groupings of dissimilar machines work on components that have similar processing
requirements? Should the firm employ a just-in-time layout and pull the product through the
plant?

In conjunction with selecting the process layout, manufacturing decisions must be made as to
the level of automation used within the plant. For example, will the firm feature a flexible
manufacturing system and group numerically controlled machines throughout the different
manufacturing areas? Finally, maintenance and repair decisions must be made–no small
chore. Less frequent maintenance may allow for higher use of equipment and tooling.
Eventually, however, this may be offset by more frequent (and more expensive) catastrophic
failures.

The process engineering curve shadows that of design engineering in Figure 2, with its two
peaks. Activity begins just after receipt of the bill of materials. The initial system is designed,
equipment and tooling are purchased, maintenance programs are put in place, and flows are
decided. The first peak is reached after design and process changes stabilize. Again, this is
the "A" model. The second begins to build with the development of the "B" version, and
peaks just before the system stabilizes, as equipment, tooling, and flow are adjusted to
optimize production.

• Production

Production activity follows demand for the product or service; both are linked by
manufacturing planning and control systems. Activity begins in earnest during production
ramp-up. Equipment processes, and trained production personnel must be in place. Targets
for product cost, conformance to specification, and overall quality must be met. As customer
sales begin to speed up production, overhead per-unit costs decrease and direct costs increase.

Manufacturing activity ramps up during initial production, leaps through growth, and peaks
near the point at which customer demand is highest. The shape of the curve, then, is similar to
the traditional PLC shown in Figure 1. Potts (1988) suggests that demand for service parts
shadows the installed base and also shows one peak, albeit lagging somewhat behind product
sales.

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 • Relationships

Design engineering, process engineering, and production are all related. The purpose of
presenting the traditional relationship here is to facilitate later comparisons with the five-
element wave. The model is illustrated in Figure 3, which shows that traditional product
engineering follows a linear path. The first step is design engineering, in which the good or
service is taken from concept and detail design to prototyping. The product moves to process
engineering, where technologies and production methods are evaluated as a system is set into
motion. Finally, the product flows to production, where down-stream manufacturing
activities, such as production planning and scheduling, take place. This is known as the over-
the-wall method of product design and development, with each stage separate from the next.

• Product Marketing

New products are usually supported with high advertising budgets to build awareness and
encourage an initial purchase. If the target is the entire market, a typical first strategy is to
attack it with one theme. When resources are relatively limited, the business may choose to
identify smaller, more homogenous concentrations within the market and tailor the
advertising to those groups. Once the product becomes established, fewer advertising dollars
per sales unit are required to encourage demand.

Sales promotion is another tool used to stimulate immediate demand. Emphasis on sales
promotion is highest at new product introduction, falls during product growth, and increases
as the good or service becomes more of a commodity after competitors and the market adjust.
Sales promotion effects tend to be short – term. According to Kotler and Armstrong (1991),
"Sales promotion consists of short-term incentives to encourage purchase or sales of a
product or service. Whereas advertising offers reasons to buy a product or service, sales
promotion offers reason to buy now." Examples of these promotions are free samples, rebates
on purchases, and the ubiquitous newspaper coupon.

There are two occurrences of particularly high activity or expenditure in marketing a product
or service. The first peak occurs during introduction-the "A" version – where plans are
created and first put into action. During growth, marketing activity begins to fall as the
product begins to generate its own demand. The second flurry of activity occurs after demand
growth flattens and the product becomes somewhat of a commodity, when the product is
modified and results in a new and improved "B" version. Finally, once the firm decides to
allow the good to gracefully exit the market as it moves towards obsolescence, advertising
and promotion activity levels naturally fall to zero.

• End of Life

This element considers what happens when sales decline to the point at which revenues drop
to a level that supposedly precludes continued production of a good by the firm. One strategy
is to cease production and allow inventory levels to drop to zero. An alternative tactic is to
attempt to give new life to the product and risk succumbing to what is known as "The
Thomas Lawson Syndrome." Harari (1994) provides this summary:

Even before it sank, the sailing ship Thomas Lawson had become obsolete as steam-powered
vessels emerged. Its saga symbolizes the fatal tendency of organizations to cling to old
beliefs and outmoded technologies.

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In other words, the firm ignores the technological warnings of the industry and continues to
make the product at the expense of future success. This is analogous to the ostrich that sticks
its head in the sand when approached by a hungry lion. The bird (firm) expects that it cannot
be hurt by what it cannot see, while the lion (the competitor) sees nothing but an easy meal.
How big a problem is EOL decision making? It may be immense, considering that the largest
firms in the U.S. have many products in the late mature stage. Most technological changes
occurred in a 20 – year period after World War II. Markets boomed, owing to large
population increases and repressed demand during the Depression and the ensuing war years.
The market’s hangover began in the 1970s. Product break-through were expensive and few.
Companies began to cut R&D expenditures, and population growth slowed. Businesses that
made names for themselves in the post-war boom had begun to feel invincible. They relied on
dated products, ignored potential new products that could result from research and
development, and created businesses filled with hierarchical practices rather than the
flexibility required for growth.

Where should a firm position itself? A product should continue to be marketed as long as it
provides a return that minimizes opportunity cost. The key is to recognize that EOL decisions
are important and should be driven by a combination of customer expectation and
marketplace realities.

EOL activities should consider profitability measures and a program in which a manufacturer
enters into an agreement with an EOL company.

According to Emehiser (1991):

An EOL program is a unique opportunity for a manufacturer to sell the legal obligation of
supporting a product that is no longer in manufacture. All or part of product support may be
assumed, dependent on the amount of finished product in use, anticipated life of the product,
spares available, and other considerations. Product support can include parts distribution,
service, technical support, quality assurance, and/or continuation engineering.

In effect, the EOL Company assumes responsibility for supporting the product or service,
which the original manufacturer no longer produces. The former therefore becomes the
manufacturer and has its own single-peaked manufacturing cycle.

In summary, then, each of the five elements of the product life cycle system has its own
cycles. These cycles, or waves, are formed by product decisions that result in varying activity
levels among the five elements. Figure 4 provides an initial comparison between the
traditional product life cycle and the five-element wave.

Q.5:- Discuss the implications of Heckscher-Ohlin theory model.

Ans. Eli Heckscher (1879 – 1952) Heckscher was a Swedish economist. He is

probably best known for his book "Mercantilist." Although his major interest was in studying
economic history, he also developed the essentials of the factor endowment theory of
international trade in a short article in Swedish in 1919. It was translated into English thirty
years later.

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 The factor proportions model was originally developed by two Swedish economists, Eli
Heckscher and his student Bertil Ohlin in the 1920s. Many elaborations of the model were
provided by Paul Samuelson after the 1930s and thus sometimes the model is referred to as
the Heckscher-Ohlin-Samuelson (or HOS) model. In the 1950s and 60s some noteworthy
extensions to the model were made by Jaroslav Vanek and so occasionally the model is called
the Heckscher-Ohlin-Vanek model.

The model demonstrates that advantageous trade may arise between countries if the countries
differ only in their factor endowments. Each country will export those goods which use a
high proportion of the country's well endowed factors. Thus if a country is well endowed
with capital equipment, then it will export goods which use a lot of capital in production. The
model demonstrates that trade will improve national welfare for all trading countries.
However, trade will also cause a redistribution of income between factors of production. A
country's relatively abundant factor will realize real income gains from trade while a
country's relatively scarce factor will suffer real income losses from trade. Thus free trade
generates both winners and losers in the economy.

Heckscher-Ohlin Model Assumptions

Market Structure

1. Perfect Competition prevails in all markets.

2. Two countries
Again, the case of two countries is used to simplify the model analysis. Let one country be
Home, the other Foreign. Note, anything related exclusively to Home and Foreign in the
model will be marked respectively with an "H" and "F".

3. Two goods
Two goods are produced by both countries. We assume a barter economy. Again, this means
that there is no money used to make transactions. Instead, for trade to occur, goods must be
traded for other goods. Thus we need at least two goods in the model. Let the two produced
goods be clothing and steel.

4. Two factors
Two factors of production, labour and capital, are used to produce the two goods, clothing
and steel. Both labour and capital are homogeneous. Thus there is only one type of labour and
one type of capital. The labourers and capital equipment in different industries are exactly the
same. We also assume that labour and capital are freely mobile across industries within the
country but immobile across countries. Free mobility makes the H-O model a long-run
model.

Implications of Heckscher-Ohlin theory model The two-factor, two-commodity

Heckscher-Ohlin (HO) model contains four elegant propositions that have charmed many
trade theorists. For instance, if the United States were a capital-abundant country, the HO
theory predicts that it would export capital-intensive goods.

Wassily W. Leontief (1953) conducted the first empirical test of the theory, using 1947 U.S.
trade data. Contrary to his expectation, however, Leontief discovered that U.S.

-26-
importcompeting industries required 30 percent more capital per worker than exports. This
finding has come to be known as the Leontief Paradox.

In all subsequent empirical studies, the number of industries has been much greater than that
of factors. For instance, Leontief’s (1956) second test included 192 industries. Similarly, in
Stern and Maskus (1981) and Trefler (1993), the number of industries was much greater than
that of factors. However, as Chipman (1988) noted, regardless of the elegance of the results, a
simple 2 × 2 HO model would lose much of its charm if the results were not robust in the
multicommodity world. The purpose of this paper is to examine the implications of many
commodities on various propositions of the HO model. It is shown that once we depart from
the simple 2 × 2 world, the extended HO model cannot predict the trade pattern using notions
of factor abundance and intensities. The impacts of output prices on factor prices and the
mean Rybczynski effects are 2 shown to be negligible when there are many industries. The n
× 2 model does not predict that exports of a capital abundant country will be capital intensive.
Leontief’s approach was not valid, because he expected the prediction of a 2 × 2 model to be
borne out in his two empirical studies that included more than two industries. In the real
world, the so-called Leontief Paradox may appear to be a common occurrence.

Q.6:- Do you think WTO is helpful for promoting international business?Give reasons
for your answer.

Ans:- The World Trade Organization came into being in 1995. One of the youngest of the
international organizations, the WTO is the successor to the General Agreement on Tariffs
and Trade (GATT) established in the wake of the Second World War. So while the WTO is
still young, the multilateral trading system that was originally set up under GATT is well over
50 years old.

History of World Trade Organization

World Trade Organization Came into existence in 1995 after the desolation of General
Agreement on Tariff and Trade (GATT) Lets first understand the historical perspective of
GATT to scale the ladder towards the present WTO

Structure of World Trade Organization (WTO)

The WTO’s overriding objective is to help trade flow smoothly, freely, fairly and predictably.

It does this by:

· Administering trade agreements

· Acting as a forum for trade negotiations

· Settling trade disputes

· Reviewing national trade policies

· Assisting developing countries in trade policy issues, through technical assistance and
training programs

-27-
· Cooperating with other international organizations

Structure

The WTO has nearly 150 members, accounting for over 97% of world trade. Around 30
others are negotiating membership.

Decisions are made by the entire membership. This is typically by consensus. A majority vote
is also possible but it has never been used in the WTO, and was extremely rare under the
WTO’s predecessor, GATT. The WTO’s agreements have been ratified in all members’
parliaments.

The WTO’s top level decision-making body is the Ministerial Conference which meets at
least once every two years.

Below this is the General Council (normally ambassadors and heads of delegation in Geneva,
but sometimes officials sent from members’ capitals) which meets several times a year in the
Geneva headquarters. The General Council also meets as the Trade Policy Review Body and
the Dispute Settlement Body.

At the next level, the Goods Council, Services Council and Intellectual Property (TRIPS)
Council report to the General Council.

Numerous specialized committees, working groups and working parties deal with the
individual agreements and other areas such as the environment, development, membership
applications and regional trade agreements.

Secretariat

The WTO Secretariat, based in Geneva, has around 600 staff and is headed by a director-
general. Its annual budget is roughly 160 million Swiss francs. It does not have branch offices
outside Geneva. Since decisions are taken by the members themselves, the Secretariat does
not have the decision-making role that other international bureaucracies are given with. The
Secretariat’s main duties are to supply technical support for the various councils and
committees and the ministerial conferences, to provide technical assistance for developing
countries, to analyze world trade, and to explain WTO affairs to the public and media.

The Secretariat also provides some forms of legal assistance in the dispute settlement process
and advises governments wishing to become members of the WTO.
The WTO is ‘member-driven’, with decisions taken by consensus among all member
governments.

The WTO is run by its member governments. All major decisions are made by the
membership as a whole, either by ministers (who meet at least once every two years) or by
their ambassadors or delegates (who meet regularly in Geneva). Decisions are normally taken
by consensus.

-28-
In this respect, the WTO is different from some other international organizations such as the
World Bank and International Monetary Fund. In the WTO, power is not delegated to a board
of directors or the organization’s head.

When WTO rules impose disciplines on countries’ policies, that is the outcome of
negotiations among WTO members, the rules are enforced by the members themselves under
agreed procedures that they negotiated, including the possibility of trade sanctions. But those
sanctions are imposed by member countries, and authorized by the membership as a whole.
This is quite different from other agencies whose bureaucracies can, for example, influence a
country’s policy by threatening to withhold credit.

Reaching decisions by consensus among some 150 members can be difficult. Its main
advantage is that decisions made this way are more acceptable to all members. And despite
the difficulty, some remarkable agreements have been reached. Nevertheless, proposals for
the creation of a smaller executive body – perhaps like a board of directors each representing
different groups of countries – are heard periodically. But for now, the WTO is a member-
driven, consensus-based organization.

Highest authority: the Ministerial Conference

So, the WTO belongs to its members. The countries make their decisions through various
councils and committees, whose membership consists of all WTO members. Topmost is the
ministerial conference which has to meet at least once every two years. The Ministerial
Conference can take decisions on all matters under any of the multilateral trade agreements.

Second level: General Council in three guises

Day-to-day work in between the ministerial conferences is handled by three bodies:

· The General Council

· The Dispute Settlement Body

· The Trade Policy Review Body

All three are in fact the same – the Agreement Establishing the WTO states they are all the
General Council, although they meet under different terms of reference. Again, all three
consist of all WTO members. They report to the Ministerial Conference.

The General Council acts on behalf of the Ministerial Conference on all WTO affairs. It
meets as the Dispute Settlement Body and the Trade Policy Review Body to oversee
procedures for settling disputes between members and to analyze members’ trade policies.

Third level: councils for each broad area of trade, and more back to top

Three more councils, each handling a different broad area of trade, report to the General
Council:

· The Council for Trade in Goods (Goods Council)

-29-
· The Council for Trade in Services (Services Council)

· The Council for Trade – Related Aspects of Intellectual Property Rights (TRIPS Council)

As their names indicate, the three are responsible for the workings of the WTO agreements
dealing with their respective areas of trade. Again they consist of all WTO members. These
three also have the subsidiary bodies.

Six other bodies report to the General Council. The scope of their coverage is smaller, so they
are “committees”. But they still consist of all WTO members. They cover issues such as trade
and development, the environment, regional trading arrangements, and administrative issues.
The Singapore Ministerial Conference in December 1996 decided to create new working
groups to look at investment and competition policy, transparency in government
procurement, and trade facilitation.

Two more subsidiary bodies dealing with the plural-lateral agreements (which are not signed
by all WTO members) keep the General Council informed of their activities regularly.

Fourth level: down to the nitty-gritty

Each of the higher level councils has subsidiary bodies. The Goods Council has 11
committees dealing with specific subjects (such as agriculture, market access, subsidies, anti-
dumping measures and so on). Again, these consist of all member countries. Also reporting to
the Goods Council is the Textiles Monitoring Body, which consists of a chairman and 10
members acting in their personal capacities, and groups dealing with notifications
(governments informing the WTO about current and new policies or measures) and state
trading enterprises.

The Services Council’s subsidiary bodies deal with financial services, domestic regulations,
GATS rules and specific commitments.

At the General Council level, the Dispute Settlement Body also has two subsidiaries: the
dispute settlement “panels” of experts appointed to adjudicate on unresolved disputes, and the
Appellate Body that deals with appeals.

Heads of Delegations and other boards: the need for informality

Important breakthroughs are rarely made in formal meetings of these bodies, least of all in the
higher level councils. Since decisions are made by consensus, without voting, informal
consultations within the WTO play a vital role in bringing a vastly diverse membership round
to an agreement.

One step away from the formal meetings is informal meetings that still include the full
membership, such as those of the Heads of Delegations (HOD). More difficult issues have to
be thrashed out in smaller groups. A common recent practice is for the chairperson of a
negotiating group to attempt to forge a compromise by holding consultations with delegations
individually, in twos or threes, or in groups of 20 – 30 of the most interested delegations.

These smaller meetings have to be handled sensitively. The key is to ensure that everyone is
kept informed about what is going on (the process must be “transparent”) even if they are not

-30-
in a particular consultation or meeting, and that they have an opportunity to participate or
provide input (it must be “inclusive”).

One term has become controversial, but more among some outside observers than among
delegations. The “Green Room” is a phrase taken from the informal name of the director-
general’s conference room. It is used to refer to meetings of 20 – 40 delegations, usually at
the level of heads of delegations. These meetings can take place elsewhere, such as at
Ministerial Conferences, and can be called by the minister chairing the conference as well as
the director-general. Similar smaller group consultations can be organized by the chairs of
committees negotiating individual subjects, although the term Green Room is not usually
used for these.

In the past delegations have sometimes felt that Green Room meetings could lead to
compromises being struck behind their backs. So, extra efforts are made to ensure that the
process is handled correctly, with regular reports back to the full membership.

The way countries now negotiate has helped somewhat. In order to increase their bargaining
power, countries have formed coalitions. In some subjects such as agriculture virtually all
countries are members of at least one coalition – and in many cases, several coalitions. This
means that all countries can be represented in the process if the coordinators and other key
players are present. The coordinators also take responsibility for both “transparency” and
“inclusiveness” by keeping their coalitions informed and by taking the positions negotiated
within their alliances.

In the end, decisions have to be taken by all members and by consensus. The membership as
a whole would resist attempts to impose the will of a small group. No one has been able to
find an alternative way of achieving consensus on difficult issues, because it is virtually
impossible for members to change their positions voluntarily in meetings of the full
membership.

Market access negotiations also involve small groups, but for a completely different reason.
The final outcome is a multilateral package of individual countries’ commitments, but those
commitments are the result of numerous bilateral, informal bargaining sessions, which
depend on individual countries’ interests. (Examples include the traditional tariff
negotiations, and market access talks in services.)

So, informal consultations in various forms play a vital role in allowing consensus to be
reached, but they do not appear in organization charts, precisely because they are informal.

They are not separate from the formal meetings, however. They are necessary for making
formal decisions in the councils and committees. Nor are the formal meetings unimportant.
They are the forums for exchanging views, putting countries’ positions on the record, and
ultimately for confirming decisions. The art of achieving agreement among all WTO
members is to strike an appropriate balance, so that a breakthrough achieved among only a
few countries can be acceptable to the rest of the membership.

-31-
 MB0037
SET 2

INTERNATIONAL BUSINESS MANAGEMENT

Q.1:- What is WTO? What is GATT? Explain both.

Ans:- Structure of World Trade Organization (WTO)

The WTO’s overriding objective is to help trade flow smoothly, freely, fairly and
predictably.

It does this by:

• Administering trade agreements

• Acting as a forum for trade negotiations
• Settling trade disputes
• Reviewing national trade policies
• Assisting developing countries in trade policy issues, through technical
assistance and training programs
• Cooperating with other international organizations

Structure. The WTO has nearly 150 members, accounting for over 97% of world trade.
Around 30 others are negotiating membership.

Decisions are made by the entire membership. This is typically by consensus. A majority vote
is also possible but it has never been used in the WTO, and was extremely rare under the
WTO’s predecessor, GATT. The WTO’s agreements have been ratified in all members’
parliaments.

The WTO’s top level decision-making body is the Ministerial Conference which meets at
least once every two years.

Below this is the General Council (normally ambassadors and heads of delegation in
Geneva, but sometimes officials sent from members’ capitals) which meets several times a
year in the Geneva headquarters. The General Council also meets as the Trade Policy Review
Body and the Dispute Settlement Body.

At the next level, the Goods Council, Services Council and Intellectual Property (TRIPS)
Council report to the General Council.
Numerous specialized committees, working groups and working parties deal with the
individual agreements and other areas such as the environment, development, membership
applications and regional trade agreements.

-32-
Secretariat. The WTO Secretariat, based in Geneva, has around 600 staff and is headed by
a director-general. Its annual budget is roughly 160 million Swiss francs. It does not have
branch offices outside Geneva. Since decisions are taken by the members themselves, the
Secretariat does not have the decision-making role that other international bureaucracies are
given with. The Secretariat’s main duties are to supply technical support for the various
councils and committees and the ministerial conferences, to provide technical assistance for
developing countries, to analyze world trade, and to explain WTO affairs to the public and
media.

The Secretariat also provides some forms of legal assistance in the dispute settlement process
and advises governments wishing to become members of the WTO.

Structure of WTO

The WTO is ‘member-driven’, with decisions taken by consensus among all member
governments.

The WTO is run by its member governments. All major decisions are made by the
membership as a whole, either by ministers (who meet at least once every two years) or by
their ambassadors or delegates (who meet regularly in Geneva). Decisions are normally taken
by consensus.

In this respect, the WTO is different from some other international organizations such as the
World Bank and International Monetary Fund. In the WTO, power is not delegated to a board
of directors or the organization’s head.
When WTO rules impose disciplines on countries’ policies, that is the outcome of
negotiations among WTO members, the rules are enforced by the members themselves under
agreed procedures that they negotiated, including the possibility of trade sanctions. But those
sanctions are imposed by member countries, and authorized by the membership as a whole.
This is quite different from other agencies whose bureaucracies can, for example, influence a
country’s policy by threatening to withhold credit.

-33-
Reaching decisions by consensus among some 150 members can be difficult. Its main
advantage is that decisions made this way are more acceptable to all members. And despite
the difficulty, some remarkable agreements have been reached. Nevertheless, proposals for
the creation of a smaller executive body – perhaps like a board of directors each representing
different groups of countries – are heard periodically. But for now, the WTO is a member-
driven, consensus-based organization.

Highest authority: the Ministerial Conference

So, the WTO belongs to its members. The countries make their decisions through various
councils and committees, whose membership consists of all WTO members. Topmost is the
ministerial conference which has to meet at least once every two years. The Ministerial
Conference can take decisions on all matters under any of the multilateral trade agreements.

Second level: General Council in three guises

Day-to-day work in between the ministerial conferences is handled by three bodies:

• The General Council
• The Dispute Settlement Body
• The Trade Policy Review Body

All three are in fact the same – the Agreement Establishing the WTO states they are all the
General Council, although they meet under different terms of reference. Again, all three
consist of all WTO members. They report to the Ministerial Conference.

The General Council acts on behalf of the Ministerial Conference on all WTO affairs. It
meets as the Dispute Settlement Body and the Trade Policy Review Body to oversee
procedures for settling disputes between members and to analyze members’ trade policies.

Third level: councils for each broad area of trade, and more back to top

Three more councils, each handling a different broad area of trade, report to the General
Council:

• The Council for Trade in Goods (Goods Council)

• The Council for Trade in Services (Services Council)
• The Council for Trade – Related Aspects of Intellectual Property Rights
(TRIPS Council)

As their names indicate, the three are responsible for the workings of the WTO agreements
dealing with their respective areas of trade. Again they consist of all WTO members. These
three also have the subsidiary bodies.

-34-
Six other bodies report to the General Council. The scope of their coverage is smaller, so they
are “committees”. But they still consist of all WTO members. They cover issues such as trade
and development, the environment, regional trading arrangements, and administrative issues.
The Singapore Ministerial Conference in December 1996 decided to create new working
groups to look at investment and competition policy, transparency in government
procurement, and trade facilitation.

Two more subsidiary bodies dealing with the plural-lateral agreements (which are not
signed by all WTO members) keep the General Council informed of their activities regularly.

Fourth level: down to the nitty-gritty

Each of the higher level councils has subsidiary bodies. The Goods Council has 11
committees dealing with specific subjects (such as agriculture, market access, subsidies, anti-
dumping measures and so on). Again, these consist of all member countries. Also reporting to
the Goods Council is the Textiles Monitoring Body, which consists of a chairman and 10
members acting in their personal capacities, and groups dealing with notifications
(governments informing the WTO about current and new policies or measures) and state
trading enterprises.

The Services Council’s subsidiary bodies deal with financial services, domestic regulations,
GATS rules and specific commitments.

At the General Council level, the Dispute Settlement Body also has two subsidiaries: the
dispute settlement “panels” of experts appointed to adjudicate on unresolved disputes, and the
Appellate Body that deals with appeals.

-35-
Heads of Delegations and other boards: the need for informality

Important breakthroughs are rarely made in formal meetings of these bodies, least of all in the
higher level councils. Since decisions are made by consensus, without voting, informal
consultations within the WTO play a vital role in bringing a vastly diverse membership round
to an agreement.

One step away from the formal meetings is informal meetings that still include the full
membership, such as those of the Heads of Delegations (HOD). More difficult issues have to
be thrashed out in smaller groups. A common recent practice is for the chairperson of a
negotiating group to attempt to forge a compromise by holding consultations with delegations
individually, in twos or threes, or in groups of 20 – 30 of the most interested delegations.

These smaller meetings have to be handled sensitively. The key is to ensure that everyone is
kept informed about what is going on (the process must be “transparent”) even if they are not
in a particular consultation or meeting, and that they have an opportunity to participate or
provide input (it must be “inclusive”).
One term has become controversial, but more among some outside observers than among
delegations. The “Green Room” is a phrase taken from the informal name of the director-
general’s conference room. It is used to refer to meetings of 20 – 40 delegations, usually at
the level of heads of delegations. These meetings can take place elsewhere, such as at
Ministerial Conferences, and can be called by the minister chairing the conference as well as
the director-general. Similar smaller group consultations can be organized by the chairs of
committees negotiating individual subjects, although the term Green Room is not usually
used for these.

In the past delegations have sometimes felt that Green Room meetings could lead to
compromises being struck behind their backs. So, extra efforts are made to ensure that the
process is handled correctly, with regular reports back to the full membership.
The way countries now negotiate has helped somewhat. In order to increase their bargaining
power, countries have formed coalitions. In some subjects such as agriculture virtually all
countries are members of at least one coalition – and in many cases, several coalitions. This
means that all countries can be represented in the process if the coordinators and other key
players are present. The coordinators also take responsibility for both “transparency” and
“inclusiveness” by keeping their coalitions informed and by taking the positions negotiated
within their alliances.

In the end, decisions have to be taken by all members and by consensus. The membership as
a whole would resist attempts to impose the will of a small group. No one has been able to
find an alternative way of achieving consensus on difficult issues, because it is virtually
impossible for members to change their positions voluntarily in meetings of the full
membership.

-36-
Market access negotiations also involve small groups, but for a completely different reason.
The final outcome is a multilateral package of individual countries’ commitments, but those
commitments are the result of numerous bilateral, informal bargaining sessions, which
depend on individual countries’ interests. (Examples include the traditional tariff
negotiations, and market access talks in services.)
So, informal consultations in various forms play a vital role in allowing consensus to be
reached, but they do not appear in organization charts, precisely because they are informal.

They are not separate from the formal meetings, however. They are necessary for making
formal decisions in the councils and committees. Nor are the formal meetings unimportant.
They are the forums for exchanging views, putting countries’ positions on the record, and
ultimately for confirming decisions. The art of achieving agreement among all WTO
members is to strike an appropriate balance, so that a breakthrough achieved among only a
few countries can be acceptable to the rest of the membership.

(b) GATT.

Given its provisional nature and limited field of action, the success of GATT in promoting
and securing the liberalization of much of world trade over 47 years is incontestable.
Continual reductions in tariffs alone helped spur very high rates of world trade growth –
around 8 per cent a year on average during the 1950s and 1960s. And the momentum of trade
liberalization helped ensure that trade growth consistently out-paced production growth
throughout the GATT era. The rush of new members during the Uruguay Round
demonstrated that the multilateral trading system, as then represented by GATT, was
recognized as an anchor for development and an instrument of economic and trade reform.

The limited achievement of the Tokyo Round, outside the tariff reduction results, was a sign
of difficult times to come. GATT’s success in reducing tariffs to such a low level, combined
with a series of economic recessions in the 1970s and early 1980s, drove governments to
devise other forms of protection for sectors facing increased overseas competition. High rates
of unemployment and constant factory closures led governments in Europe and North
America to seek bilateral market-sharing arrangements with competitors and to embark on a
subsidies race to maintain their holds on agricultural trade. Both these changes undermined
the credibility and effectiveness of GATT.
Apart from the deterioration in the trade policy environment, it also became apparent by the
early 1980s that the General Agreement was no longer as relevant to the realities of world
trade as it had been in the 1940s. For a start, world trade had become far more complex and
important than 40 years before: the globalization of the world economy was underway,
international investment was exploding and trade in services – not covered by the rules of
GATT – was of major interest to more and more countries and, at the same time, closely tied
to further increases in world merchandise trade. In other respects, the GATT had been found
wanting: for instance, with respect to agriculture where loopholes in the multilateral system
were heavily exploited – and efforts at liberalizing agricultural trade met with little success –
and in the textiles and clothing sector where an exception to the normal disciplines of GATT

-37-
was negotiated in the form of the Multi-fibre Arrangement. Even the institutional structure of
GATT and its dispute settlement system were giving cause for concern.

Together, these and other factors convinced GATT members that a new effort to reinforce
and extend the multilateral system should be attempted. That effort resulted in the Uruguay
Round.

Q.2:- What is MNC? Explain the 3 stages of evolution.

Ans:- Multi National Corporation Economists are not in agreement as to how

multinational or transnational corporations should be defined. Multinational
corporations have many dimensions and can be viewed from several perspectives
(ownership, management, strategy and structural, etc.) The following is an excerpt from
Franklin Root (International Trade and Investment, 1994)

Ownership criterion: some argue that ownership is a key criterion. A firm becomes
multinational only when the headquarter or parent company is effectively owned by nationals
of two or more countries. For example, Shell and Unilever, controlled by British and Dutch
interests, are good examples. However, by ownership test, very few multinationals are
multinational. The ownership of most MNCs are uninational. (see videotape concerning the
Smith-Corona versus Brothers case) Depending on the case, each is considered an American
multinational company in one case, and each is considered a foreign multinational in another
case. Thus, ownership does not really matter.

Nationality mix of headquarter managers: An international company is multinational if

the managers of the parent company are nationals of several countries. Usually, managers of
the headquarters are nationals of the home country. This may be a transitional phenomenon.
Very few companies pass this test currently.

Business Strategy:

global profit maximization

some are home country oriented,

others are host country oriented.

Successful firms: world-oriented, but must adapt to local markets

According to Franklin Root (1994), an MNC is a parent company that

1. engages in foreign production through its affiliates located in several countries,

2. exercises direct control over the policies of its affiliates,
3. implements business strategies in production, marketing, finance and staffing that
transcend national boundaries (geocentric).

In other words, MNCs exhibit no loyalty to the country in which they are incorporated.

-38-
Three Stages of Evolution

1. Export stage

• initial inquiries => firms rely on export agents

• expansion of export sales
• further expansion þ foreign sales branch or assembly operations (to save
transport cost)

2. Foreign Production Stage

There is a limit to foreign sales (tariffs, NTBs)

DFI versus Licensing

Once the firm chooses foreign production as a method of delivering goods to foreign markets,
it must decide whether to establish a foreign production subsidiary or license the technology
to a foreign firm.

Licensing

Licensing is usually first experience (because it is easy)

e.g.: Kentucky Fried Chicken in the U.K.

• it does not require any capital expenditure

• it is not risky
• payment = a fixed % of sales

Problem: the mother firm cannot exercise any managerial control over the licensee (it is
independent)

The licensee may transfer industrial secrets to another independent firm, thereby creating a
rival.

Direct Investment

It requires the decision of top management because it is a critical step.

• it is risky (lack of information) (US -> Canada)

• plants are established in several countries
• licensing is switched from independent producers to its subsidiaries.
• export continues

3. Multinational Stage The company becomes a multinational enterprise when it

begins to plan, organize and coordinate production, marketing, R&D, financing, and
staffing. For each of these operations, the firm must find the best location.

Q.3:- Mention the differences between currency markets and exchange rate markets in
the context of international business environment.

-39-
Ans:- The exchange rate regimes adopted by countries in today’s international monetary and
financial system, and the system itself, are profoundly different from those envisaged at the
1944 meeting at Bretton Woods establishing the IMF and the World Bank. In the Bretton
Woods system:

• exchange rates were fixed but adjustable. This system aimed both to avoid the undue
volatility thought to characterize floating exchange rates and to prevent competitive
depreciations, while permitting enough flexibility to adjust to fundamental disequilibrium
under international supervision;

• private capital flows were expected to play only a limited role in financing payments
imbalances, and widespread use of controls would prevent instability in such flows;

• temporary official financing of payments imbalances, mainly through the IMF, would
smooth the adjustment process and avoid unduly sharp correction of current account
imbalances, with their repercussions on trade flows, output, and employment.

In the current system, exchange rates among the major currencies (principally the U.S.
dollar, the euro, and Japanese yen) fluctuate in response to market forces, with short-run
volatility and occasional large medium-run swings (Figure 1). Some medium-sized industrial
countries also have market – determined floating rate regimes, while others have adopted
harder pegs, including some European countries outside the euro area. Developing and
transition economies have a wide variety of exchange rate arrangements, with a tendency for
many but by no means all countries to move toward increased exchange rate flexibility.

This variety of exchange rate regimes exists in an environment with the following
characteristics:

• partly for efficiency reasons, and also because of the limited effectiveness of capital
controls, industrial countries have generally abandoned such controls and emerging
market economies have gradually moved away from them. The growth of international
capital flows and globalization of financial markets has also been spurred by the
revolution in telecommunications and information technology, which has dramatically
lowered transaction costs in financial markets and further promoted the liberalization and
deregulation of international financial transactions;

• international private capital flows finance substantial current account imbalances, but
the changes in these flows appear also sometimes to be a cause of macroeconomic
disturbances or an important channel through which they are transmitted to the
international system;

• developing and transition countries have been increasingly drawn into the integrating
world economy, in terms of both their trade in goods and services and of financial
transactions.

Lessons from the recent crises in emerging markets are that for such countries with important
linkages to global capital markets, the requirements for sustaining pegged exchange rate
regimes have become more demanding as a result of the increased mobility of capital.
Therefore, regimes that allow substantial exchange rate flexibility are probably desirable

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unless the exchange rate is firmly fixed through a currency board, unification with another
currency, or the adoption of another currency as the domestic currency (dollarization).

Flexible exchange rates among the major industrial country currencies seem likely to remain
a key feature of the system. The launch of the euro in January 1999 marked a new phase in
the evolution of the system, but the European Central Bank has a clear mandate to focus
monetary policy on the domestic objective of price stability rather than on the exchange rate.
Many medium-sized industrial countries, and developing and transition economies, in an
environment of increasing capital market integration, may also continue to maintain market-
determined floating rates, although more countries could may adopt harder pegs over the
longer term. Thus, prospects are that:

• exchange rates among the euro, the yen, and the dollar are likely to continue to exhibit
volatility, and schemes to reduce volatility are neither likely to be adopted, nor to be
desirable as they prevent monetary policy from being devoted consistently to domestic
stabilization objectives;

• several of the transition countries of central and eastern Europe, especially those
preparing for membership in the European Union, are likely to seek to establish over time
the policy disciplines and institutional structures required to make possible the eventual
adoption of the euro.

The approach taken by the IMF continues to be to advise member countries on the
implications of adopting different exchange rate regimes, to consider the choice of regime to
be a matter for each country to decide and to provide policy advice that is consistent with the
maintenance of the chosen regime.

Q.4:- a) Explain the role of privatization in international business.

b) Mention the relevance of these international commercial terms: FCA,
EXW, DES, CIF and DDP

Ans:- (a) The economists generally agreed on the need for speed in carrying out
liberalization and stabilization. But on privatization of large enterprises, there was a debate
on whether to have a rapid transfer of assets from the state to the private sector or to adopt a
more gradual approach.

Advocates of rapid privatization called for eliminating state ownership by giving assets to
citizens, for instance, through vouchers that gave their holders the right and means to
purchase state-owned companies on sale. They were motivated by considerations of fairness,
a desire to give ordinary citizens a stake in the economy. They also perceived a need to seize
the window of opportunity that had opened for privatization before the state bureaucracies
regrouped and resisted the process.

Others advocated a more gradual scaling back of state enterprises as new private sector firms
emerged in the economy. They were in favour of the privatization of enterprises through the
sale of assets to those likely to work on improving the performance of the companies. They
also stressed the imposition of ‘hard budget constraints’ on enterprises so that chronic loss
makers would be forced out, leaving the more profitable enterprises to attract investors.

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Hungary followed this gradualist approach to privatization, and it appears to have proved
more conducive to genuine restructuring of enterprises.

By contrast, experience has shown some of the pitfalls of the rapid privatization approach. In
the Czech Republic, for instance, the assets transferred to millions of ordinary citizens in the
first phase of rapid privatization were sold by the recipients and ended up being consolidated
in investment funds. But there was no genuine restructuring of enterprises, either because the
investment funds lacked the capital to develop them or because the funds were in turn
controlled by state-owned banks that did not impose hard budget constraints. The weak
growth performance of the Czech Republic in the late-1990s, relative to other CEE countries,
is attributed in part to its weak enterprise reforms.

Rapid privatization fared even worse in Russia. The country’s mass privatization programme
of 1992-94 transferred ownership of over 15,000 firms into private hands. However, contrary
to expectations, insider privatization did not lead to self-induced restructuring of firms. It was
hoped that secondary trading would introduce outside ownership, and that transparent
methods would be used in the second wave of privatization of remaining firms still in state
hands. Neither hope was fulfilled. Insiders were wary of relinquishing control; workers feared
the cost-cutting that might occur under outside control, and managers found it easier to keep
enterprises alive by lobbying the state for subsidies than to foster competitive performance
through involvement of outsiders. The second wave of privatization, in particular the so-
called "loans-for-shares" scheme, was non-transparent and systematically excluded foreign
investors and banks in favour of parties with ties to government interests.

Overall, the experience of the transition economies suggests that privatized firms tend to
restructure more quickly and perform better than comparable firms that remain in state
ownership, but only if complementary conditions are met. These conditions include the
presence of hard budget constraints and competition, effective standards of corporate
governance, and an effective legal structure and property rights.

In contrast to the mixed experience on privatization of large enterprises, the privatization of

small – scale enterprises has been generally successful and has been completed in all but five
countries.

(b) FCA (Free Carrier)

The delivery of goods on truck, rail car or container at the specified point (depot) of
departure, which is usually the seller’s premises, or a named railroad station or a named cargo
terminal or into the custody of the carrier, at seller’s expense. The point (depot) at origin may
or may not be a customs clearance centre. Buyer is responsible for the main carriage/freight,
cargo insurance and other costs and risks.

In the air shipment, technically speaking, goods placed in the custody of an air carrier are
considered as delivery on board the plane. In practice, many importers and exporters still use
the term FOB in the air shipment.

The term FCA is also used in the RO/RO (roll on/roll off) services.

In the export quotation, indicate the point of departure (loading) after the acronym FCA, for
example FCA Hong Kong and FCA Seattle.

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Some manufacturers may use the former terms FOT (Free On Truck) and FOR (Free On
Rail) in selling to export-traders.

EXW (Ex Works) Ex means from. Works means factory, mill or warehouse, which are
the seller’s premises. EXW applies to goods available only at the seller’s premises. Buyer is
responsible for loading the goods on truck or container at the seller’s premises, and for the
subsequent costs and risks.

In practice, it is not uncommon that the seller loads the goods on truck or container at the
seller’s premises without charging loading fee.

In the quotation, indicate the named place (seller’s premises) after the acronym EXW, for
example EXW Kobe and EXW San Antonio.

The term EXW is commonly used between the manufacturer (seller) and export-trader
(buyer), and the export-trader resells on other trade terms to the foreign buyers. Some
manufacturers may use the term Ex Factory, which means the same as Ex Works.

DES (Delivered Ex Ship) The delivery of goods on board the vessel is at the named port
of destination (discharge) at seller’s expense. Buyer assumes the unloading fee, import
customs clearance, payment of customs duties and taxes, cargo insurance, and other costs and
risks.

In the export quotation, indicate the port of destination (discharge) after the acronym DES,
for example DES Helsinki and DES Stockholm.

CIF (Cost, Insurance and Freight) The cargo insurance and delivery of goods is to the
named port of destination (discharge) at the seller’s expense. Buyer is responsible for the
import customs clearance and other costs and risks.

In the export quotation, indicate the port of destination (discharge) after the acronym CIF, for
example CIF Pusan and CIF Singapore.

Under the rules of the INCOTERMS 1990, the term CIF is used for ocean freight only.
However, in practice, many importers and exporters still use the term CIF in the air freight.

DDP (Delivered Duty Paid) The seller is responsible for most of the expenses, which
include the cargo insurance, import customs clearance, and payment of customs duties and
taxes at the buyer’s end, and the delivery of goods to the final point at destination, which is
often the project site or buyer’s premises. The seller may opt not to insure the goods at his/her
own risks.

In the export quotation, indicate the point of destination (discharge) after the acronym DDP,
for example DDP Bujumbura and DDP Mbabane.

Q. 5:- Give short notes on Letter of credit and Bill of Landing.

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Ans:- A bill of lading (sometimes referred to as a BOL,or B/L) is a document issued by a
carrier to a shipper, acknowledging that specified goods have been received on board as
cargo for conveyance to a named place for delivery to the consignee who is usually
identified. A thorough bill of lading involves the use of at least two different modes of
transport from road, rail, air, and sea. The term derives from the verb "to lade" which means
to load a cargo onto a ship or other form of transportation.

A bill of lading can be used as a traded object. The standard short form bill of lading is
evidence of the contract of carriage of goods and it serves a number of purposes:

• It is evidence that a valid contract of carriage, or a chartering contract, exists, and it

may incorporate the full terms of the contract between the consignor and the carrier by
reference (i.e. the short form simply refers to the main contract as an existing document,
whereas the long form of a bill of lading (connaissement intégral) issued by the carrier
sets out all the terms of the contract of carriage)

• It is a receipt signed by the carrier confirming whether goods matching the contract
description have been received in good condition (a bill will be described as clean if the
goods have been received on board in apparent good condition and stowed ready for
transport)

• It is also a document of transfer, being freely transferable but not a negotiable

instrument in the legal sense, i.e. it governs all the legal aspects of physical carriage, and,
like a cheque or other negotiable instrument, it may be endorsed affecting ownership of
the goods actually being carried. This matches everyday experience in that the contract a
person might make with a commercial carrier like FedEx for mostly airway parcels, is
separate from any contract for the sale of the goods to be carried; however, it binds the
carrier to its terms, irrespectively of who the actual holder of the B/L, and owner of the
goods, may be at a specific moment.

• A standard, commercial letter of credit is a document issued mostly by a financial

institution, used primarily in trade finance, which usually provides an irrevocable
payment undertaking.

• The letter of credit can also be source of payment for a transaction, meaning that
redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in
international trade transactions of significant value, for deals between a supplier in one
country and a customer in another. They are also used in the land development process to
ensure that approved public facilities (streets, sidewalks, storm water ponds, etc.) will be
built. The parties to a letter of credit are usually a beneficiary who is to receive the
money, the issuing bank of whom the applicant is a client, and the advising bank of
whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be
amended or canceled without prior agreement of the beneficiary, the issuing bank and the
confirming bank, if any. In executing a transaction, letters of credit incorporate functions
common to giros and Traveler's cheques. Typically, the documents a beneficiary has to
present in order to receive payment include a commercial invoice, bill of lading, and
documents proving the shipment was insured against loss or damage in transit. However,
the list and form of documents is open to imagination and negotiation and might contain

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 requirements to present documents issued by a neutral third party evidencing the quality
of the goods shipped, or their place of origin.

Q.6:- Discuss the entire methods in international business with relevant examples.

Ans:- Entry Strategies to enter international markets. With rare exceptions, products
just don’t emerge in foreign markets overnight – a firm has to build up a market over time.
Several strategies, which differ in aggressiveness, risk, and the amount of control that the
firm is able to maintain, are available:

1. Exporting is a relatively low risk strategy in which few investments are made in the
new country. A drawback is that, because the firm makes few if any marketing investments in
the new country, market share may be below potential. Further, the firm, by not operating in
the country, learns less about the market (What do consumers really want? Which kinds of
advertising campaigns are most successful? What are the most effective methods of
distribution?) If an importer is willing to do a good job of marketing, this arrangement may
represent a "win-win" situation, but it may be more difficult for the firm to enter on its own
later if it decides that larger profits can be made within the country.

2. Licensing and franchising are also low exposure methods of entry – you allow
someone else to use your trademarks and accumulated expertise. Your partner puts up the
money and assumes the risk. Problems here involve the fact that you are training a potential
competitor and that you have little control over how the business is operated. For example,
American fast food restaurants have found that foreign franchisees often fail to maintain
American standards of cleanliness. Similarly, a foreign manufacturer may use lower quality
ingredients in manufacturing a brand based on premium contents in the home country.

3. Contract manufacturing involves having someone else manufacture products while

you take on some of the marketing efforts yourself. This saves investment, but again you may
be training a competitor.

4. Direct entry strategies, where the firm either acquires a firm or builds operations
"from scratch" involve the highest exposure, but also the greatest opportunities for profits.
The firm gains more knowledge about the local market and maintains greater control, but
now has a huge investment. In some countries, the government may expropriate assets
without compensation, so direct investment entails an additional risk. A variation involves a
joint venture, where a local firm puts up some of the money and knowledge about the local
market.

Methods of entry

With rare exceptions, products just don’t emerge in foreign markets overnight – a firm has to
build up a market over time. Several strategies, which differ in aggressiveness, risk, and the
amount of control that the firm is able to maintain, are available:

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· Exporting is a relatively low risk strategy in which few investments are made in the new
country. A drawback is that, because the firm makes few if any marketing investments in the
new country, market share may be below potential. Further, the firm, by not operating in the
country, learns less about the market (What do consumers really want? Which kinds of
advertising campaigns are most successful? What are the most effective methods of
distribution?) If an importer is willing to do a good job of marketing, this arrangement may
represent a "win-win" situation, but it may be more difficult for the firm to enter on its own
later if it decides that larger profits can be made within the country.

· Licensing and franchising are also low exposure methods of entry – you allow someone else
to use your trademarks and accumulated expertise. Your partner puts up the money and
assumes the risk. Problems here involve the fact that you are training a potential competitor
and that you have little control over how the business is operated. For example, American
fast food restaurants have found that foreign franchisees often fail to maintain American
standards of cleanliness. Similarly, a foreign manufacturer may use lower quality ingredients
in manufacturing a brand based on premium contents in the home country.

· Contract manufacturing involves having someone else manufacture products while you take
on some of the marketing efforts yourself. This saves investment, but again you may be
training a competitor.

· Direct entry strategies, where the firm either acquires a firm or builds operations "from
scratch" involve the highest exposure, but also the greatest opportunities for profits. The firm
gains more knowledge about the local market and maintains greater control, but now has a
huge investment. In some countries, the government may expropriate assets without
compensation, so direct investment entails an additional risk. A variation involves a joint
venture, where a local firm puts up some of the money and knowledge about the local market.

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