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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 (BioTechnology) – 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.
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.
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. 3
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.
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 preindustrial 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.
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. 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. 6
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.
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
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its trading volumes, the extreme liquidity of the market, its geographical dispersion, its long trading hours: 24 hours a day except on weekends (from the variety of factors that affect exchange rates. the low margins of profit compared with other markets of fixed the use of leverage
22:00 UTC on Sunday until 22:00 UTC Friday),
income (but profits can be high due to very large trading volumes)
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:
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Economies of scale from access to more customers and markets Exploit another country's resources - labor, raw materials Extend the product life cycle - older products can be sold in lesser developed countries Operational flexibility - shift production as costs, exchange rates, etc. change over time
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First mover advantage and only provider of a product to a market Cross subsidization between countries Transfer price
Diversify macroeconomic risks (business cycles not perfectly correlated among countries) Diversify operational risks (labor problems, earthquakes, wars)
Broaden learning opportunities due to diversity of operating environments
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
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-tobusiness supplier providing complete packages for business start-up.
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.
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.
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).
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. 2. International Business Management – Francis Cherunilam International Business – Justin Paul
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