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ADL-84-AM2

ADL-84-AM2

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Published by Sanjeev Kumar
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Published by: Sanjeev Kumar on Mar 17, 2011
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ADL-84-International Business Environment-AM2
Assignment - A
Question 1. The world's poorest countries are at a competitive disadvantage in everysector of their economies. They have little to export. They have no capital; their land is of poor quality; they often have too many people given available work opportunities; andthey are poorly educated. Free trade is not in interest of these countries. Discuss.Question 2. How do you think the successful conclusion of the multilateral agreement toliberalize regulations governing FDI will benefit the world economy.Question 3. Discuss the National Competitive Advantage Theory of International Trade.How this theory is different from other theories.Question 4. On what basis countries as classified as low income, middle income and highincome countries? Do you think economic status of a country will influence its globalbusiness.Question 5. Explain different types of Economic System. What are the major challengesfaced by the command economies while transiting to a market economy?
Assignment - B
Question 1. Explain the following terms i) Tariff ii) Subsidies and Countervailing Dutiesiii) Quotas iv) Voluntary Export Restraint v) Local Content Requirement. Why doadvanced countries insist on elimination of subsidies.Question 2. Explain the achievement of EU in integrating its member countries. Howformation of EU is beneficial for India.Question 3. How is WTO different from GATT?. What are the main issued in the DohaDevelopment Agenda and what are the implications for the developing countries?
Case Study 
The Daewoo Group and the Asian Financial CrisisIn 1999, the Daewoo Group, Korea's second largest chaebol, or family owned businessconglomerate, collapsed under $57 billion in debt and was forced to split intoindependent companies. The Asian Financial crisis and its aftermath finally took its tollon the expansion-minded Daewoo and forced both Daewoo and the Korean governmentto decide how to dissolve the chaebol.
 
Kim Woo-Choong started Daewoo in 1967 as a small textile company with only fiveemployees and $10,000 as capital. In just 30 years, Mr Kim had grown Daewoo into adiversified company with 250,000 employees worldwide as well as over 30 domesticcompanies and 300 oversear subsidiaries that generated sales of more than $100 billionannually. However, some estimates that Daewoo and its subcontractors employed 2.5million people in Korea. Although Daewoo started in textiles, it quickly moved into other fields, first heavy and chemicals industries in the 1970, and then technology intensiveindustries in the 1980s. By the end of 1999, Daewoo was organized into six major divisions :Trading DivisionHeavy Industry and ShipbuildingConstruction and HotelMotor Vehicle Division'Electronics and TelecommunicationsFinance and ServicesHowever, Daewoo was struggling. Its $50 billion debt was 40 percent greater than in1998, equaling 13 percent of Korea's entire GDP. A good share of that total $10 billion,was owed to overseas creditors. Its debt-to-equity ratio (total debt divided by share-holders equity) in 199 was 5 to 1, which was higher than the 4 to 1 average of other largecheabol, but it was significantly higher than the U.S average, which usually is around 1 to1 but which rarely climbs above 2 to 1. Of course, there is no way of knowing the truepicture of Daewoo's financial information because of the climate of secrecy in Koreancompanies. In addition it is possible that Daewoo's estimated debt might be greatlyunderestimated because no one knows whether or not the $50 million figure includeddebt of foreign subsidiaries.How did Daewoo get into such a terrible position, and how much did the nature of theKorean economy and the Asian Financial crisis affect Daewoo?Korean EconomyThe impact of the Asian financial crisis on Korea was partly a result of the economicsystem of state intervention adopted by Korea in the mid-1950s. Modeled after theJapanese economic system, the Korean authoritarian government targeted export growthas the key for the country's future. Initially, the government adopted a strategy of importsubstitution, and that later gave way to a strategy of "export or die". Significantincentives were given to exporters, such as access to low cost money (often borrowedabroad in dollars and loaned to companies at below market interest rates in Korean won),lower corporate income taxes, tariff exemptions, tax holidays for domestic suppliers of 
 
export firms, reduced rates on public utilities, and monopoly rights for new exportmarkets. Clearly, the government wanted Korean companies to exportThe chaebol, of which the four largest were Hyundai, Daewoo, Samsung and theLGgroup, become the dominant business institutions during the rise in the Koreaneconomy. They were among the largest companies in the world and were verydiversified, as can be seen by the Daewoo's investment and business choices. They wereheld together by ownership, management and family ties. In particular, family ties playedan key role in controlling the chaebol. Until the 1980s, the bank in Korea provided mostof the funding to the chaebol, and were owned and controlled by the government.Because of the importance of the exporting the chaebol were all tied to general tradingcompanies. The chaebol received lots of support from the government, and they werevery loyal to the government, giving rise to the charges of corruption.Most chaebol were initially involved in the light industry, such as textile production, butthe government realized that companies first shift to heavy industry and then totechnology industries. Daewoo transitioned to heavy industry in 1976 when the Koreangovernment asked President Kim to acquire an ailing industrial firm rather than let thefirm go out of business and create unemployment.Asian Financial Crisis and Its impact on KoreaThe country continued to liberalize, and democracy finally came into being in 1988 withthe introduction of a new constitution and the election of Kim Young-Sam, the firstdemocratic president in Korea's history. The economy also continued to grow at 5 to 8percent annually during early to mid-1990s, led primarily by exports and the World Bank predicted that Korea would have the seventh largest economy in the world by 2020.However, the Asian financial crisis brought that growth to halt. After the Thai bhat wasdevalued on July 2, 1997, the Korean won soon followed, and the Korean stock marketcrashed as well. By the end of 1997, the South Korean won was 46.2 percent lower thanits pre devaluation rate. At the time the crisis hit, Korea's external debt was estimated tobe $110 billion to $150 billion, 60 percent of it maturing in less than one year. Inaddition, Korea had another $368 billion of domestic debt.Korea's banks had been a tool to state industrial policy, with the government orderingbanks to make loans to certain companies even if they were not healthy. Banks borrowedmony in dollars and lent them to firms in won, shifting the burden of foreign exchangefrom the firms to the banks. Hanbo steel and Kia Motors went bankrupt leaving somebanks with huge losses. The Korean won fell in the fall of 1997 causing the governmentto raise interest rate to support the won and resulting in more problem loans. Bad loans atthe nine largest financial institutions in Korea ranged from 94 percent to 376 percent of the banks capital, making the banks technically insolvent.The chaebol were also very overextended. The top five chaebol were in average of 140businesses, ranging from semi-conductor manufacture to shipbuilding to automanufacturing. This was happening during a time when most companies in the industrial

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