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INTERNATIONAL BUSINESS MANAGEMENT

(MB-0037) ASSIGNMENT-1 Q.1 Ans. Write a short note on ‘Globalization’. The term "globalization" has acquired considerable emotive force. Some view it as a process that is beneficial – a key to future world economic development – and also inevitable and irreversible. Others regard it with hostility, even fear, believing that it increases inequality within and between nations, threatens employment and living standards and thwarts social progress. This brief offers an overview of some aspects of globalization and aims to identify ways in which countries can tap the gains of this process, while remaining realistic about its potential and its risks. Globalization offers extensive opportunities for truly worldwide development but it is not progressing evenly. Some countries are becoming integrated into the global economy more quickly than others. Countries that have been able to integrate are seeing faster growth and reduced poverty. 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. 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

Movement of people: Workers move from one country to another partly to find better employment opportunities. has declined. Both portfolio investment and bank credit rose but they have been more volatile. aspect of globalization. The numbers involved are still quite small. direct foreign investment brings not only an expansion of the physical capital stock. Most migration occurs between developing countries. Spread of knowledge (and technology): Information exchange is an integral. falling sharply in the wake of the financial crises of the late 1990s. the proportion of labor forces round the world that was foreign born increased by about one-half. 2. 4. Capital movements: Globalization sharply increased private capital flows to developing countries during much of the 1990s. The strongest rise by far has been in the export of manufactured goods. management techniques.made possible by modern electronic communication. Trade: Developing countries as a whole have increased their share of world trade – from 19 percent in 1971 to 29 percent in 1999. net official flows of "aid" or development assistance have fallen significantly since the early 1980s. Direct foreign investment has become the most important category. The composition of what countries export is also important. while Africa as a whole has fared poorly. knowledge about production methods. but in the period 1965-90. For instance. More generally. export markets and economic policies is available at very low cost. and it represents a highly valuable resource for the developing countries. The share of primary commodities in world exports – such as food and raw materials – that are often produced by the poorest countries. There is also the potential for skills to be transferred back to the developing countries and for wages in those countries to rise. It also shows that:   the increase followed a particularly "dry" period in the 1980s. .  3. but also technical innovation. There are four aspects of globalization: 1. and the composition of private flows has changed dramatically. But the flow of migrants to advanced economies is likely to provide a means through which global wages converge. For instance. often overlooked. the newly industrialized economies (NIEs) of Asia have done well.

Q. trade opening (along with opening to foreign direct investment) has been an important element in the economic success of East Asia. inequality among countries has been on the decline since 1990. Developing countries can ill-afford the large implicit subsidies. one finding is that the benefits of trade liberalization can exceed the costs by more than a factor of 10. countries benefit most from liberalizing their own markets. Moreover. Further liberalization – by both industrial and developing countries – will be needed to . There is considerable evidence that more outward-oriented countries tend consistently to grow faster than ones that are inward-looking. No country in recent decades has achieved economic success. New jobs are created for unskilled workers. raising them into the middle class. Freeing trade frequently benefits the poor especially. In contrast. Although there are benefits from improved access to other countries’ markets. reflecting more rapid economic growth in developing countries. Describe the positives of trade liberalization. Countries that have opened their economies in recent years. In these countries. have experienced faster growth and more poverty reduction. would gain most from agricultural liberalization in industrial countries because of the greater relative importance of agriculture in their economies. and Uganda. in part the result of trade liberalization. Vietnam. The group of low-income countries.2 Ans. without being open to the rest of the world. including India. defined by the World Bank as the "new globalizers. Overall. On average. often channeled to narrow privileged interests that trade protection provides. however. those developing countries that lowered tariffs sharply in the 1980s grew more quickly in the 1990s than those that did not. 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. Developing countries would gain about equally from liberalization of manufacturing and agriculture. 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. The main benefits for industrial countries would come from the liberalization of their agricultural markets. Indeed. Policies that make an economy open to trade and investment with the rest of the world are needed for sustained economic growth." the number of people in absolute poverty declined by over 120 million (14 percent) between 1993 and 1998. in terms of substantial increases in living standards for its people. The evidence on this is clear.

000 tariff concessions affecting $10 billion or about one-fifth – of world trade. In turn. speedier liberalization of textiles and clothing and of agriculture is particularly important. In an effort to give an early boost to trade liberalization after the Second World War and to begin to correct the large overhang of protectionist measures which remained in place from the early 1930s-tariff negotiations were opened among the 23 founding GATT "contracting parties" in 1946. General Agreement on Tariff and Trade( GATT): The GATT. The recent market-opening initiatives of the EU and some other countries are important steps in this regard. Q. extended to all goods. Similarly. It was also agreed that the value of these concessions should be protected by early and largely . Enhanced market access for the poorest developing countries would provide them with the means to harness trade for development and poverty reduction. Write a short note on GATT and WTO. developing countries would strengthen their own economies (and their trading partners’) if they made a sustained effort to reduce their own trade barriers further. are called for to remove the trade barriers facing developing countries. was established on a provisional basis after the Second World War in the wake of other new multilateral institutions dedicated to international economic cooperation – notably the "Britton Woods" institutions now known as the World Bank and the International Monetary Fund. Greater efforts by industrial countries and the international community more broadly. such access should be made permanent. To be completely effective. Although quotas under the so-called Multi-fibre Agreement are due to be phased out by 2005. restrictive business practices. particularly the poorest countries. highlighting the difference between the two. and accompanied by simple.realize trade’s potential as a driving force for economic growth and development. This first round of negotiations resulted in 45. The original 23 GATT countries were among over 50 which agreed a draft Charter for an International Trade Organization (ITO) – a new specialized agency of the United Nations.3 Ans. commodity agreements. transparent rules of origin. The Charter was intended to provide not only world trade disciplines but also contained rules relating to employment. the elimination of tariff peaks and escalation in agriculture and manufacturing also needs to be pursued. This would give the poorest countries the confidence to persist with difficult domestic reforms and ensure effective use of debt relief and aid flows. international investment and services. Offering the poorest countries duty – and quota – free access to world markets would greatly benefit these countries at little cost to the rest of the world.

Much of this was achieved through a series of "trade rounds". the ITO was effectively dead. The tariff concessions and rules together became known as the General Agreement on Tariffs and Trade and entered into force in January 1948. Despite its provisional nature. that it would not seek Congressional ratification of the Havana Charter. GATT’s success in reducing tariffs to such a low level. was a sign of difficult times to come. 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. in its 47 years. The WTO’s overriding objective is to help trade flow smoothly. the basic legal text of the GATT remained much as it was in 1948. Although. there were additions in the form of "plural-lateral” voluntary membership agreements and continual efforts to reduce tariffs. under the auspices of GATT – the Uruguay Round was the latest and most extensive. drove governments to devise other forms of protection for sectors facing increased overseas competition. combined with a series of economic recessions in the 1970s and early 1980s."provisional" acceptance of some of the trade rules in the draft ITO Charter. or "trade rounds". in 1950. fairly and predictably. freely. ratification in national legislatures proved impossible in some cases. The limited achievement of the Tokyo Round. The biggest leaps forward in international trade liberalization have come through multilateral trade negotiations. outside the tariff reduction results. When the United States’ government announced. WTO World Trade Organization came into existence in 1995 after the desolation of General Agreement on Tariff and Trade (GATT). Although the ITO Charter was finally agreed at a UN Conference on Trade and Employment in Havana in March 1948. the GATT remained the only multilateral instrument governing international trade from 1948 until the establishment of the WTO. It does this by:    Administering trade agreements Acting as a forum for trade negotiations Settling trade disputes . Both these changes undermined the credibility and effectiveness of GATT.

The WTO’s agreements have been ratified in all members’ parliaments. It does not have branch offices outside Geneva. Among the principal differences are the following: a. through technical assistance and training programs Cooperating with other international organizations The WTO has nearly 150 members. based in Geneva. The General Council also meets as the Trade Policy Review Body and the Dispute Settlement Body. either by ministers (who meet at least once every two years) or by their ambassadors or delegates (who meet regularly in Geneva). Services Council and Intellectual Property (TRIPS) Council report to the General Council. has around 600 staff and is headed by a director-general. Below this is the General Council which meets several times a year in the Geneva headquarters. only a small associated secretariat which had its origins in the attempt to establish an International Trade Organization in the 1940s. Decisions are made by the entire membership. working groups and working parties deal with the individual agreements and other areas such as the environment. Numerous specialized committees. and was extremely rare under the WTO’s predecessor. it completely replaces its predecessor and has a very different character. membership applications and regional trade agreements. development. the Goods Council. Difference between WTO and GATT:The World Trade Organization is not a simple extension of GATT. accounting for over 97% of world trade. At the next level. The WTO is run by its member governments. All major decisions are made by the membership as a whole. a multilateral agreement. This is typically by consensus. the Secretariat does not have the decision-making role that other international bureaucracies are given with. Its annual budget is roughly 160 million Swiss francs. with no institutional foundation. The GATT was a set of rules. The WTO’s top level decision-making body is the Ministerial Conference which meets at least once every two years. A majority vote is also possible but it has never been used in the WTO. GATT. Since decisions are taken by the members themselves.   Reviewing national trade policies Assisting developing countries in trade policy issues. The WTO Secretariat. The WTO is a . Around 30 others are negotiating membership. on the contrary. Decisions are normally taken by consensus.

Export stage    initial inquiries . c. The GATT was applied on a "provisional basis" even if. b. While GATT was a multilateral instrument. b.permanent institution with its own secretariat. the WTO covers trade in services and trade-related aspects of intellectual property. However. involve commitments for the entire membership.firms rely on export agents expansion of export sales further expansion . an MNC is a parent company that a. The WTO commitments are full and permanent. The agreements which constitute the WTO are almost all multilateral and. Business strategy of a MNC can be analyzed with the help of Three Stages of Evolution 1. especially when the home country itself is populated by many different races. engages in foreign production through its affiliates located in several countries.4 Ans. polycentric and geocentric. and therefore selective. "ethnocentric" is misleading because it focuses on race or ethnicity. The WTO dispute settlement system is faster. nature. exercises direct control over the policies of its affiliates. The implementation of WTO dispute findings will also be more easily assured. governments chose to treat it as a permanent commitment. thus. after more than forty years. e. Q. Perlmutter uses such terms as ethnocentric. In addition to goods. Multinational companies (MNC) may pursue business strategies that are home country – oriented or host country – oriented or world – oriented. marketing. implements business strategies in production. than the old GATT system. whereas "polycentric" loses its meaning when the MNCs operate only in one or two foreign countries. by the 1980s many new agreements had been added of a plural-lateral. d. more automatic. Think of any MNC and analyze its business strategy orientation.foreign sales branch or assembly operations (to save transport cost) . The GATT rules applied to trade in merchandise goods. and thus much less susceptible to blockages. finance and staffing that transcend national boundaries. According to Franklin Root (1994). c.

and staffing. For each of these operations.  it is risky (lack of information) (for example-US firms tend to establish subsidiaries in Canada first. Secondly. invests in another country. Foreign Production Stage There is a limit to foreign sales (tariffs. Multinational Stage: The company becomes a multinational enterprise when it begins to plan. it must decide whether to establish a foreign production subsidiary or license the technology to a foreign firm. marketing. The next stage for supplementing any particular business strategy is Investments involved. Problem that may arise while following a particular business strategy: The mother firm may find it difficult in exercise of any managerial control over the licensee (as it is independent). When MNC incorporated in one country. it is said that the FDI has flowed into the . the licensee may transfer industrial secrets to another independent firm. organize and coordinate production. New MNCs do not pop up randomly in foreign nations. This is how a MNC decides its business strategy orientation.K.2. thereby creating a rival. financing. Q.5 Ans. Licensing is usually first experience (because it is easy)    it does not require any capital expenditure it is not risky payment = a fixed % of sales e.: Kentucky Fried Chicken in the U. Singer Manufacturing Company established its foreign plants in Scotland and Australia in the 1850s)  plants are established in several countries  licensing is switched from independent producers to its subsidiaries. It is the result of conscious planning by corporate managers. It requires the decision of top management because it is a critical step.  export continues 3. Investment flows from regions of low anticipated profits to those of high returns. NTBs).g.Once the firm chooses foreign production as a method of delivering goods to foreign markets. the firm must find the best location. What does FDI stand for? Why do MNCs opt for FDI to enter international market? FDI stands for Foreign Direct Investment. R&D.

They later became competitors. European Community imposed common external tariff against outsiders. Labour costs tend to differ among nations. Cheap foreign labour.6 Ans.S. MNCs can hold down costs by locating part of all their productive facilities abroad. Cost reduction: United Fruit has established banana-producing facilities in Honduras. Multinational firms that invested and built production plants in the United States are better off than the exporting firms that utilized New Orleans port to ship and distribute products through New Orleans. 4. multinational firms want to build production plants close to the market in order to save transportation costs. There are two kinds of approach construct of culture. Viewing culture as a multi-level construct. For instance.other country from some foreign origin. group cultures. Protection in the importing countries : Foreign direct investment is one way to expand. to bypass VERs. Market competition: The most certain method of preventing actual or potential competition is to acquire foreign businesses. and produce the rest in the U. Growth motive: A company may have reached a plateau satisfying domestic demand. provided that they built plants in a safe area. High Transportation Costs : Transportation costs are like tariffs in that they are barriers which raise consumer prices. Toyota imports engines and transmissions from Japanese plants. which is not growing. US companies circumvented these barriers by setting up subsidiaries. GM purchased Monarch (GM Canada) and Opel (GM Germany). 6. Also. Looking for new markets. 5. through national cultures. 2. Exchange Rate Fluctuations: Japanese firms invest here to produce heavy construction machines to avoid excessive exchange rate fluctuations. Datsun (Nissan) and Volkswagen. and cultural values that are represented in the . When transportation costs are high. (Maquildoras) Q. 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. Japanese automobile firms have plants to produce automobile parts. Japanese corporations located auto assembly plants in the US. One is a multi-level approach. describe various levels it consists of. organizational cultures. 3. The main reasons for MNCs to opt for FDI to enter international market is stated as follows: 1. FDI is a means to bypassing protective instruments in the importing country. It did not buy Toyota.

the deeper level of values. acceptance and tolerance of diversity. . organizations. which is invisible and taken for granted. R&D vs manufacturing). but that differ from each other in their unit culture on the basis of the differences in their functions (e. or nations). which is testable by social consensus. the values that dominate the global context are often based on a free market economy. it becomes a shared value that characterizes the aggregated unit (group.. 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. respect of freedom of choice. democracy. and openness to change. Within each organization are sub-units and groups that share the common national and organizational culture. In the model. etc. and although all of them share some common values of their national culture. the type of ownership.g. which are also shaped by the type of industry that they represent. 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 behaviour. Figure-1: The dynamic of top-down–bottom-up processes across levels of culture.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 behaviours. and then. Further down are local organizations. and the deepest level of basic assumption. Given the dominance of Western MNCs. when shared by individuals who belong to the same cultural context. individual rights. the most macro-level is that of a global culture being created by global networks and global institutions that cross national and cultural borders. the values of the founders. they vary in their local organizational cultures.

which differentiate them from other organizational units. Groups that share similar values create the organizational culture through a process of aggregation. Thus. 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. These global rules and values filter down to the local organizations that constitute the global company. That means that there is a continuous reciprocal process of shaping and reshaping organizations at both levels. and explain how culture at different levels is being shaped and reshaped by changes that occur at other levels. Reciprocally. . For example. all members of this unit share similar core values. For example. and. Both top-down and bottom-up processes reflect the dynamic nature of culture. Global organizations and networks are being formed by having local-level organizations join the global arena. Their leader also typically facilitates the display of these personal characteristics because they are crucial for developing innovative products. and upper levels through a bottom-up process of aggregation.their leaders’ values. changes at each level affect lower levels through a topdown process. employees of an R&D unit are selected into the unit because of their creative cognitive style and professional expertise. 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. and local organizations that share similar values create the national culture that is different from other national cultures. either above it through top-down processes or below it through bottom-up processes. and different parts of the multinational company. Similarly. and the professional and educational level of their members. over time. they shape the local organizations. 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. Individuals who belong to the same group share the same values that differentiate them from other groups and create a group – level culture through a bottom-up process of aggregation of shared values.

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