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SRM UNIVERSITY – SCHOOL OF MANAGEMENT

MBA II – THIRD SEMESTER – L SECTION


MBN609 – INTERNATIONAL BUSINESS [IB]

IB SYLLABUS:
Globalization – WTO Important Provisions & Agreements – International
Trade & WTO – Trade Liberalization & Imports, Industry wise Analysis – WTO,
Intellectual Property Rights, Industrial Sector – Trips Agreements & Pharmaceutical
Industry – WTO, Gats & Telecom Sector – Legal Environment & Dispute Settlement
Mechanism – Cultural Difference & Cross Cultural Factors, Foreign Directory
Investment – Concepts, Theory - Determinants – Benefits – Economics Reforms –
Regional Trade Blocks – India’s Trade Policy, Foreign Exchange Market – Exchange
rate Theory – FEMA – Euro Vs Dollar – Currency Crisis in developing countries, Global
Strategic Management – Contractual Agreements – Joint Venture – Turnkey Projects –
Global Hex Model – Major Players in the International Market – Staffing Policy in the
Global Scenario, Structure & Trends in Foreign Trade – Global Sun Rise Industry (Bio-
Technology) – SWOT Analysis of various sectors – EXIM Policy – SEZ

GLOBALIZATION:
Globalization describes an ongoing process by which regional economies,
societies, and cultures have become integrated through a globe-spanning network of
communication and exchange. The term is sometimes used to refer specifically to
economic globalization: the integration of national economies into the international
economy through trade, foreign direct investment, capital flows, migration, and the
spread of technology. However, globalization is usually recognized as being driven by a
combination of economic, technological, sociocultural, political, and biological factors.
The term can also refer to the transnational circulation of ideas, languages, or popular
culture.

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WTO:
The World Trade Organization (WTO) is an international organization designed
by its founders to supervise and liberalize international capital trade. The organization
officially commenced on January 1, 1995 under the Marrakesh Agreement, replacing the
General Agreements on Tariffs and Trade (GATT), which commenced in 1947. The
World Trade Organization deals with regulation of trade between participating countries;
it provides a framework for negotiating and formalizing trade agreements, and a dispute
resolution process aimed at enforcing participants' adherence to WTO agreements which
are signed by representatives of member governments and ratified by their parliaments.
Most of the issues that the WTO focuses on derive from previous trade negotiations,
especially from the Uruguay Round (1986-1994). The organization is currently
endeavouring to persist with a trade negotiation called the Doha Development Agenda (or
Doha Round), which was launched in 2001 to enhance equitable participation of poorer
countries which represent a majority of the world's population. However, the negotiation
has been dogged by "disagreement between exporters of agricultural bulk commodities
and countries with large numbers of subsistence farmers on the precise terms of a 'special
safeguard measure' to protect farmers from surges in imports. At this time, the future of
the Doha Round is uncertain."

INTERNATIONALTRADE:

International trade is exchange of capital, goods, and services across international


borders or territories. In most countries, it represents a significant share of gross domestic
product (GDP). While international trade has been present throughout much of history, its
economic, social, and political importance has been on the rise in recent centuries.
Industrialization, advanced transportation, globalization, multinational corporations, and
outsourcing are all having a major impact on the international trade system. Increasing
international trade is crucial to the continuance of globalization. International trade is a
major source of economic revenue for any nation that is considered a world power.
Without international trade, nations would be limited to the goods and services produced
within their own borders.

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International trade is in principle not different from domestic trade as the
motivation and the behavior of parties involved in a trade does not change fundamentally
depending on whether trade is across a border or not. The main difference is that
international trade is typically more costly than domestic trade. The reason is that a
border typically imposes additional costs such as tariffs, time costs due to border delays
and costs associated with country differences such as language, the legal system or a
different culture. International trade uses a variety of currencies, the most important of
which are held as foreign reserves by governments and central banks. Here the
percentage of global cummulative reserves held for each currency between 1995 and
2005 are shown: the US dollar is the most sought-after currency, with the Euro in strong
demand as well. Another difference between domestic and international trade is that
factors of production such as capital and labor are typically more mobile within a country
than across countries. Thus international trade is mostly restricted to trade in goods and
services, and only to a lesser extent to trade in capital, labor or other factors of
production. Then trade in goods and services can serve as a substitute for trade in factors
of production. Instead of importing the factor of production a country can import goods
that make intensive use of the factor of production and are thus embodying the respective
factor. An example is the import of labor-intensive goods by the United States from
China. Instead of importing Chinese labor the United States is importing goods from
China that were produced with Chinese labor. International trade is also a branch of
economics, which, together with international finance, forms the larger branch of
international economics.

IPR:

Intellectual property (IP) is a number of distinct types of legal monopolies over


creations of the mind, both artistic and commercial, and the corresponding fields of law.
Under intellectual property law, owners are granted certain exclusive rights to a variety of
intangible assets, such as musical, literary, and artistic works; discoveries and inventions;
and words, phrases, symbols, and designs. Common types of intellectual property include
copyrights, trademarks, patents, industrial design rights and trade secrets in some
jurisdictions.

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GATS:

The General Agreement on Trade in Services (GATS) is a treaty of the World


Trade Organization (WTO) that entered into force in January 1995 as a result of the
Uruguay Round negotiations. The treaty was created to extend the multilateral trading
system to service sector, in the same way the General Agreement on Tariffs and Trade
(GATT) provides such a system for merchandise trade. All members of the WTO are
signatories to the GATS. The basic WTO principle of most favoured nation (MFN)
applies to GATS as well. However, upon accession, Members may introduce temporary
exemptions to this rule.

DISPUTE SETTLEMENT MECHANISM / BODY:

The Dispute Settlement Body (DSB) of the World Trade Organization (WTO)
makes decisions on trade disputes between governments that are adjudicated by the
Organization. Its decisions generally match those of the Dispute Panel. The DSB is, in
effect, a session of the General Council of the WTO: that is, all of the representatives of
the WTO member governments, usually at ambassadorial level, meeting together. It
decides the outcome of a trade dispute on the recommendation of a Dispute Panel and
(possibly) on a report from the Appellate Body of WTO, which may have amended the
Panel recommendation if a party chose to appeal. Only the DSB can make these
decisions: Panels and the Appellate Body are limited to making recommendations.

The DSB uses a special decision procedure known as 'reverse consensus' or


'consensus against' that makes it almost certain that the Panel recommendations in a
dispute will be accepted. The process requires that the recommendations of the Panel (as
amended by the Appellate Body) should be adopted "unless" there is a consensus of the
members against adoption. This has never happened, and because the nation 'winning'
under the Panel's ruling would have to join this reverse consensus, it is difficult to
conceive of how it ever could.

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Once it has decided on the case, i.e., whether the complaint had been shown to be
right or wrong, the DSB may direct the 'losing' Member to take action to bring its laws,
regulations or policies into conformity with the WTO Agreements. This is the only
direction that emerges from a WTO dispute. There is no concept of "punishment" or even
restitution. The DSB will give the losing party a "reasonable period of time" in which to
restore the conformity of its laws etc. If the losing party fails to restore the conformity of
its laws within the "reasonable period of time", the DSB may—on an exceptional basis—
authorise a successful complainant to take retaliatory measures to induce action on the
part of the losing party. This is very rare. Almost all WTO members "voluntarily"
implement DSB decisions in time. Of course, when a losing country brings its laws etc.
into conformity it may choose how to do so; indeed, it may not necessarily make the
changes that the winning party would prefer.

CULTURE DIFFERENCE / GAP:

A culture gap is any systematic difference between two cultures which hinders
mutual understanding or relations. Such differences include the values, behavior, and
customs of the respective cultures. The term was originally used to describe the
difficulties encountered in interactions between early twentieth century travellers and pre-
industrial cultures, but has since been used more broadly to refer to mutual
misunderstandings and incomprehension arising with people from differing backgrounds
and experiences. Culture gaps can relate to religion, ethnicity, age, or social class.
Examples of cultural differences that may lead to gaps include social norms and gender
roles. The term can also be used to refer to misunderstandings within a society, such as
between different scientific specialties.

FDI:

Foreign direct investment (FDI) in its classic form is defined as a company from
one country making a physical investment into building a factory in another country. It is
the establishment of an enterprise by a foreigner.

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More specifically, Foreign direct investment is a cross-border corporate
governance mechanism through which a company obtains productive assets in another
country. Its definition can be extended to include investments made to acquire lasting
interest in enterprises operating outside of the economy of the investor.[3] The FDI
relationship consists of a parent enterprise and a foreign affiliate which together form an
international business or a multinational corporation (MNC). In order to qualify as FDI
the investment must afford the parent enterprise control over its foreign affiliate. The
IMF defines control in this case as owning 10% or more of the ordinary shares or voting
power of an incorporated firm or its equivalent for an unincorporated firm; lower
ownership shares are known as portfolio investment.

For FDI, Please also refer International Business by Francis Cherunilam

ECONOMIC REFORMS:

The term microeconomic reform (or often just economic reform) refers to policies
directed to achieve improvements in economic efficiency, either by removing distortions
in individual sectors of the economy or by reforming economy-wide policies such as tax
policy and competition policy with an emphasis on economic efficiency (rather than other
goals such as equity or employment growth). Economic reform usually refers to
government action to improve efficiency in economic markets to overcome regulatory
and statutory impediments. It may sometimes also refer to legislative efforts to reduce the
size of government, in order to improve economic efficiency.

ECONOMIC REFORMS IN INDIA:

The economic liberalisation of 1991, initiated by then Indian prime minister P. V.


Narasimha Rao and his finance minister Manmohan Singh, did away with investment,
industrial and import licensing and ended many public monopolies, allowing automatic
approval of foreign direct investment in many sectors. Since then, the overall direction of
liberalisation has remained the same, irrespective of the ruling party, although no party
has yet tried to take on powerful lobbies such as the trade unions and farmers, or
contentious issues such as reforming labour laws and reducing agricultural subsidies.

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The effect of these reforms have been positive, and since 1990, India has had high
growth rates, and has emerged as one of the wealthiest economies in the developing
world. During this period, the economy has grown constantly with only a few major
setbacks. This has been accompanied by increases in life expectancy, literacy rates and
food security.

INDIA’S TRADE POLICY:

The policy changes initiated in July 1991, are designed to attract significant
capital inflows into India on a sustained basis and to encourage technology collaboration
agreements between Indian and foreign firms. It marked a watershed change in the policy
environment, which had formerly restricted foreign investment to projects connected with
foreign technology transfer. Today, India welcomes direct foreign investment in virtually
every sector of the economy except those of strategic concern such as defence, railway
transport and atomic energy. Salient features of the new policies towards foreign
investment are:

• Foreign equity upto 100% is allowed, subject to certain conditions.


• Automatic approval for foreign equity participation upto 51% is granted in several
key areas. These automatic approvals are normally granted within two weeks by
the Reserve Bank of India (RBI).
• The Foreign Investment Promotion Board (FIPB), a specially empowered Board
has been set up in the office of the Prime Minister to speed up the approval
process. Clearance of proposals by the FIPB takes around six weeks on an
average.
• Foreign investors need not have a local partner.
• Free repatriation of profits and capital investment is permitted, except for a short
specified list of consumer goods industries where it is subject to dividend
balancing against export earnings.
• Use of foreign brand names/trade marks for sale of goods in India is permitted.
• Indian capital markets are now open to foreign institutional investors.

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• Indian companies have been permitted to raise funds from international capital
markets.
• India has become a member of MIGA and is also willing to sign Bilateral
Investment Protection Agreements with investing countries.
• Corporate taxes have been reduced by 5-10%. Further progressive reductions are
planned.
• Special investment and tax incentives are given for exports and certain sectors
such as Power, Electronics and Food Processing.

FOREIGN EXCHANGE MARKET:

The foreign exchange market trades currencies. It lets banks and other institutions
easily buy and sell currencies. The purpose of the foreign exchange market is to help
international trade and investment. A foreign exchange market helps businesses convert
one currency to another. For example, it permits a U.S. business to import European
goods and pay Euros, even though the business's income is in U.S. dollars. In a typical
foreign exchange transaction a party purchases a quantity of one currency by paying a
quantity of another currency. The modern foreign exchange market started forming
during the 1970s when countries gradually switched to floating exchange rates from the
previous exchange rate regime, which remained fixed as per the Bretton Woods system.
The foreign exchange market is unique because of

• its trading volumes,


• the extreme liquidity of the market,
• its geographical dispersion,
• its long trading hours: 24 hours a day except on weekends (from
22:00 UTC on Sunday until 22:00 UTC Friday),
• the variety of factors that affect exchange rates.
• the low margins of profit compared with other markets of fixed
income (but profits can be high due to very large trading volumes)
• the use of leverage

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FEMA:
The Foreign Exchange Management Act (1999) or in short FEMA has been
introduced as a replacement for earlier Foreign Exchange Regulation Act (FERA).
FEMA came into act on the 1st day of June, 2000. The main objective behind the Foreign
Exchange Management Act (1999) is to consolidate and amend the law relating to
foreign exchange with objective of facilitating external trade and payments and for
promoting the orderly development and maintenance of foreign exchange market in
India. FEMA is applicable to the all parts of India. The act is also applicable to all
branches, offices and agencies outside India owned or controlled by a person who is
resident of India.

GLOBAL STRATEGIC MANAGEMENT:


During the last half of the twentieth century, many barriers to international trade
fell and a wave of firms began pursuing global strategies to gain a competitive advantage.
However, some industries benefit more from globalization than do others, and some
nations have a comparative advantage over other nations in certain industries. To create a
successful global strategy, managers first must understand the nature of global industries
and the dynamics of global competition.

SOURCES OF COMPETITIVE ADVANTAGE FROM A GLOBAL STRATEGY

A well-designed global strategy can help a firm to gain a competitive advantage.


This advantage can arise from the following sources:

• EFFICIENCY
o Economies of scale from access to more customers and markets
o Exploit another country's resources - labor, raw materials
o Extend the product life cycle - older products can be sold in lesser
developed countries
o Operational flexibility - shift production as costs, exchange rates, etc.
change over time

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• STRATEGIC
o First mover advantage and only provider of a product to a market
o Cross subsidization between countries
o Transfer price

• RISK
o Diversify macroeconomic risks (business cycles not perfectly correlated
among countries)
o Diversify operational risks (labor problems, earthquakes, wars)

• LEARNING
o Broaden learning opportunities due to diversity of operating environments

• REPUTATION
o Crossover customers between markets - reputation and brand
identification

JOINT VENTURES [JV]:


A joint venture (often abbreviated JV) is an entity formed between two or more
parties to undertake economic activity together. The parties agree to create a new entity
by both contributing equity, and they then share in the revenues, expenses, and control of
the enterprise.

REASONS FOR JV:

INTERNAL REASONS

1. Build on company's strengths


2. Spreading costs and risks
3. Improving access to financial resources
4. Economies of scale and advantages of size
5. Access to new technologies and customers
6. Access to innovative managerial practices

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COMPETITIVE GOALS

1. Influencing structural evolution of the industry


2. Pre-empting competition
3. Defensive response to blurring industry boundaries
4. Creation of stronger competitive units
5. Speed to market
6. Improved agility

STRATEGIC GOALS

1. Synergies
2. Transfer of technology/skills
3. Diversification

EXAMPLES FOR JV:

 LG – Philips Components
 Sony Ericsson

TURN KEY PROJECTS:

Turn-key refers to something that is ready for immediate use, generally used in
the sale or supply of goods or services. The term is common in the construction industry,
for instance, in which it refers to the bundling of materials and labor by sub-contractors.
A "turnkey" job by a plumber would include the parts (toilets, tub, faucets, pipes, etc.) as
well as the plumber's labor, without any contribution by the general contractors. This is
commonly used in motorsports to describe a car being sold with drive train (engine,
transmission, etc.) as a racer may prefer to keep the pieces to use in another vehicle to
preserve a combination. Similarly, this term may be used to advertise the sale of an
established business, including all the equipment necessary to run it, or by a business-to-
business supplier providing complete packages for business start-up.

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An example would be the creation of a "turnkey hospital" which would be
building a complete medical center with installed high-tech medical equipment.

GLOBAL HEX MODEL: (HEXAGON MODEL)

1. Proactive and Planned Participation


2. Export led Growth Strategy
3. Infrastructure Development
4. Agriculture Promotion
5. Safeguards against Unrealistic Imports
6. Import of Raw Materials

GLOBAL SUN RISE INDUSTRY:

1. How Biotechnology is emerging as a Global Sunrise sector? (Opportunities)


2. Recent Trends in Biotechnology sector (Stem Cells, Cloning & Drugs)
3. Country wise analysis of market structure

SWOT:

SWOT Analysis is a strategic planning method used to evaluate the Strengths,


Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It
involves specifying the objective of the business venture or project and identifying the
internal and external factors that are favorable and unfavorable to achieving that
objective.

EXIM POLICY:

EXPORT POLICY:

Exports are the major focus of India's trade policy. The export promotion package
compares favorably with incentives offered elsewhere in the world. It makes special
effort to attract foreign investors to set up export-oriented units in India.

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• Export profits are exempt from income tax. Export profits are computed in the
proportion of export turnover to total turnover.
• Higher royalty payments of 8% (net of taxes) are permitted on export sales as
compared to 5% on domestic sales.
• Export commissions up to 10% are also permissible.
• The EPCG scheme allows import of capital goods at concessional rates of duty,
subject to an export obligation. The scheme is also applicable to hotels,
restaurants, travel agents and diagnostic centers.
• Inputs required to be imported for export production are exempted from customs
duty under the Advance License Scheme. It allows free transfer of advance
licenses and can be availed of by any exporter.
• Export Oriented Units (EOUs) and Export Processing Zones (EPZs) enjoy special
incentives such as duty free imports of capital goods and raw materials for the
purpose of export production.

IMPORT POLICY:

All goods can be imported freely except for a small Negative List consisting of:

• Prohibited items: 3 items, import of which is not allowed.


• Restricted items: Here, import is allowed against an import license or under
general schemes notified separately. According to the latest changes in EXIM
policy announced on 31st March'95, the number of items in this list has been
reduced to 65 from the earlier count of 72.
• Canalised items: 7 items, import of which is permissible only through designated
agencies.

Quantitative restrictions on imports of capital goods and intermediates have been


almost completely removed. The import of second hand capital goods is allowed,
provided they have a residual life of 5 years. Import of all items, except those included in
the Prohibited List, is permissible free of duty for export production under a Duty
Exemption scheme.

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In order to facilitate expeditious approvals of import proposals under this scheme,
input-output norms for more than 3,000 items have been announced. Import of capital
goods, either new or second hand, is also permitted at a concessional customs duty rate of
15% under the Export Promotion Capital Goods (EPCG) scheme, subject to the
fulfillment of specified export obligations.

The Government has clearly stated its commitment to bringing tariff rates down to
international levels in a phased manner. There has been a consistent decline in these rates
over the past three years from the peak rate of 300% in June 1991 to a peak rate of 50%
at present. Capital goods imports, which were earlier subject to tariff rates of around 100
per cent, now attract duties in the range of 20-40 per cent, with the basic import duty on
general capital goods at 25 per cent. Import duties on equipment are even lower for
projects in specific sectors and nil for export-oriented projects. A duty rate of 20% is
levied on equipment for power projects and there is no duty on equipment for fertilizer
projects. The reduction in tariff rates are specifically significant on an import weighted
basis. Published tariff rates do not fully reflect the nominal levels of protection, due to
numerous exemptions. Collection rates (the ratio of the realized customs revenue to the
value of imports of a commodity) provides a more accurate picture.

SEZ:
A Special Economic Zone (SEZ) is a geographical region that has economic laws
that are more liberal than a country's typical economic laws. The category 'SEZ' covers a
broad range of more specific zone types, including Free Trade Zones (FTZ), Export
Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Ports, Urban
Enterprise Zones and others. Usually the goal of a structure is to increase foreign direct
investment by foreign investors, typically an international business or a multinational
corporation (MNC).

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SEZ IN INDIA:

Considering the need to enhance foreign investment and promote exports from the
country and realising the need that a level playing field must be made available to the
domestic enterprises and manufacturers to be competitive globally, the Government of
India had in April 2000 announced the introduction of Special Economic Zones policy in
the country, deemed to be foreign territory for the purposes of trade operations, duties
and tariffs. As of 2007, more than 500 SEZs have been proposed, 220 of which have been
created. This has raised the concern of the World Bank, which questions the
sustainability of such a large number of SEZs. The Special Economic Zones in India
closely follow the PRC model. India passed special economic zone act in 2005. In India,
the government has been proactive in the development of the SEZs. They have
formulated policies, reviewed them occasionally and have ensured that ample facilities
are provided to the developers of the SEZs as well as to the companies setting up units in
the SEZs.

REFERENCE:
1. International Business Management – Francis Cherunilam
2. International Business – Justin Paul

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