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Published by garima bhatngar

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Published by: garima bhatngar on Mar 07, 2013
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Q1. Write a note on Globalization.
According to business terminologies, globalization is defined as ‘the worldwide trend of businessesexpanding beyond their domestic boundaries’. It is advantageous for the economy of countries because it
promotes prosperity in the countries that embrace globalization. In this section, we will understandglobalization, its benefits and challenges.
 Benefits of globalization
The merits and demerits of globalization are highly debatable. While globalization creates employmentopportunities in the host countries, it also exploits labour at a very low cost compared to the home country. Letus consider the benefits and ill-effects of globalization. Some of the benefits of globalization are as follows:1.
Promotes foreign trade and liberalization of economies.2.
Increases the living standards of people in several developing countries through capital investments indeveloping countries by developed countries.3.
Benefits customers as companies outsource to low wage countries. Outsourcing helps the companiesto be competitive by keeping the cost low, with increased productivity.4.
Promotes better education and jobs.5.
Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, bestpractices, and culture.6.
Provides better quality of products, customer services, and standardized delivery models acrosscountries.7.
Gives better access to finance for corporate and sovereign borrowers.8.
Increases business travel, which in turn leads to a flourishing travel and hospitality industry across theworld.9.
Increases sales as the availability of cutting edge technologies and production techniques decrease thecost of production.10.
Provides several platforms for international dispute resolutions in business, which facilitatesinternational trade.In spite of its disadvantages, globalisation has improved our lives through various fields like communication,transportation, healthcare, and education
Why do nations trade? Discuss the relevance of Porter’s diamond model in today’s business context.
The answer to the above questions would be that countries world over are endowed with different natural,human, and capital resources. Each country varies from the other in combining these resources (land, labour andcapital). In a globalised set-up, every country cannot be as efficient as the best in producing the goods and servicesthat their residents demand. As a result, they have to trade off their decisions to produce any good or service basedon opportunity cost. Opportunity cost model helps us understand the
‘choice of producing one good or another’ 
.The production decision of the country depends on whether it is more efficient to produce the goods and serviceswith lower opportunity cost with increased and specialized production, or to trade those goods, with goods of higher opportunity cost. If a country can produce more of any goods or services with the same resources used byany other country, it is said to have an absolute cost advantage in the production of those goods or services. Forexample, India has absolute cost advantage in cutting and polishing of diamond. Around 68% of the diamonds fromall over the world are cut and polished in India. India is the largest producer of diamond jewellery in the world. Onthe other hand, India would import items which can be imported at a lower cost than it would take to manufacturethese items locally, for example Swiss watches where Switzerland has absolute advantage. Thus countries tradetheir production decision based on absolute cost advantages.Trade in globalised set-
up has been used as an instrument for enhancing a country’s economic growth and is
usually beneficial to both the exporting and importing countries.Nations even if they have an absolute cost advantage in the production of goods that are to be traded vis a vis its
counterpart, would like to specialize in higher opportunity cost products. The production size and scale may belimited by other constraints. For example India and Thailand have signed a Free Trade Agreement. Thailand is costefficient in both auto component and pharmaceuticals. India would like to import auto component and would exportpharmaceuticals to Thailand. This will be beneficial to India as it will benefit from economies of scale with higherproduction of pharmaceuticals.Opportunity cost and efficiency in production varies from country to country as countries have differentendowments of productive resources like land, labour and capital. For example, US, a capital rich country willspecialize in production of aeroplanes and India, rich in labour pool will specialize in rendering of informationtechnology services. Trade is also affected as different countries are endowed with different natural resources andclimate zones, longer growing seasons for a produce, abundance of natural resources such as oil, mica, coal, ironore, and highly educated and skilled workers, and larger quantities of sophisticated machinery. For example SaudiArabia will export oil, India will export mica, iron ore and information technology, Brazil will export coffee andThailand will export rice.
Porter’s diamond model
In 1990, Michael Porter analysed the reason behind some nations’ success and others’ failure in international
competition. His thesis outlined four broad attributes that shape the environment in which local firms compete andthese attributes promote the creation of competitive advantage. They are explained as follows:
Factor endowments
Characteristics of production were analysed in detail. There are basic factors like naturalresources, climate, and location and so on and advanced factors like communications infrastructure, researchfacilities.
Demand conditions
The role of home demand in improving competitive advantage is emphasised since firms aremost sensitive about the needs of their closest customers. For example, the Japanese camera industry which catersto a sophisticated and knowledgeable local market.
Relating and supporting industries
The presence of suppliers or related industries is advantageous since thebenefits of investment in advanced factors of production spill over to these supporting industries. Successfulindustries within a country tend to be grouped into clusters of related industries. For example Silicon Valley.
Firm strategy, structure and rivalry
Domestic rivalry creates pressure to innovate, improve quality, and reducecosts which in turn helps create world-class competitors. He said that these four attributes constituted the diamondand he argued that firms are most likely to succeed in industries where the diamond is most favorable. He alsostated that the diamond is a mutually reinforcing system and the effect of one attribute depends on the state of others. For example, favourable demand conditions will not result in a competitive advantage unless the state of rivalry is enough to elicit a response from the firms.
Q3. Why do firms pay so much attention to economic factors while entering in particularmarket? Justify your answer with practical examples.
The economic environment refers to the economic conditions under which a business operates and takesinto account all factors that have affected it. It includes prime interest rates, legislation concerning employment of foreigners, return of profits, safety of country, political stability and so on.
National economic policies
 National economic policies depend on a country’s socio
-economic and cultural background. All governments aspireto achieve four major economic objectives:1.
Full employment.2.
A high economic growth rate.3.
A low rate of inflation.4.
Absence of deficit in the country’s balance of payments.
The basic problem is that the first two objectives work against the last two. Measures such as low interest rates, taxcuts and increase in public spending creates jobs and stimulates growth but also causes inflation, increase in wage,
and higher imports. Due to increased consumer expenditure the country’s balance of trade worsens.
Economic structure
International Business managers need to understand and assess international economic forces at work. Key
variables that need to be examined include Gross Domestic Product (GDP) per capita, regional distribution of GDP,levels of investment, consumer expenditure, labour costs, inflation and unemployment. Variables that are examinedwhen assessing national economic environments include:
Economic structure
The structure of a nation’s economy is determined by the size and rate of its population
growth, income levels and distribution of income, natural resources, agricultural, manufacturing and servicessector. Economic infrastructure is the sum of all the external facilities and services that support the work of firmsincluding communication, transportation, electricity supply, banking and financial services.
Industry structure
The structure of an industry is determined by factors such as:
Market growth
It is measured in terms of local currency and adjusted for inflation. Local currency is usedbecause conversions into other currencies are affected by exchange rate fluctuations.
Income levels
It is taken as the GDP per capita and GDP is directly proportional to the productivity of thecountry. Net income is another important variable and is without tax payments from individual gross incomes.
Sector wise trends
Growth activity in a country might vary significantly among certain industries. For example,India has a vibrant software services industry.
Openness of the economy
The ratio of a country’s imports and exports to its Gross National Product (GNP)
indicates its vulnerability to fluctuations in international trade. A nation with a high foreign trade or GNP dependsheavily on the economic well-being of the nations it exports to. Conversely, closed economies have a high degreeof control over the economy.
International debt
An outstanding loan that one country owes to another country or institutions within thatcountry. Foreign debt also includes due payments to international organizations. Foreign exchange reserves shouldnot be less than outstanding short-term foreign debts. On the other hand, a high foreign debt servicing requirementmaybe a positive indicator, suggesting that a country has borrowed heavily to invest in its future.
Degree of urbanization
This is an important factor because there are major differences in incomes and lifestylesbetween urban and rural areas in most countries such as:
shopping frequency, average purchase value..
Q4. How has India reacted towards regional integration? Discuss briefly the trade agreementssigned by India.
:- India and Trade Agreements
After learning about regional trading arrangements in the previous section, we shall now discuss the tradingagreements conducted by India.India considers Regional Trading Arrangements (RTA's) as the building blocks towards the objective of tradeliberalization. Therefore, India participates in a number of RTAs, which include Free Trade Agreements (FTAs),Preferential Trade Agreements (PTAs) and so on. These agreements take place bilaterally or in a regional grouping.We shall now discuss some of the major agreements signed by India.
Asia-Pacific Trade Agreement (APTA)
The Asia-Pacific Trade Agreement (APTA), previously known as the Bangkok Agreement, was signed on 31st of July 1975, as an initiative of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAThe United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) is the regional developmearm of the United Nations for the Asia-Pacific region. It focuses on issues that are most effectively addressed throuregional cooperation and includes issues oft:1.
All or a group of countries in the region face, for which it is necessary to learn from each other.2.
Benefit from regional or multi-country involvement.3.
Cut across boundaries, or that would benefit from collaborative inter-country approaches.

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