4.

2 International Business

Ashish J. Shah
profajshah-bnsb@yahoo.com
2009 – 11
 Module 2 Agenda
• International Business Environment:
– Globalisation of Business
– WTO and Trade Liberalisation
– Emerging Issues
– Implications for India
– Regional Trade Blocks
– Inter-Regional Trade among Regional Groups
 Globalisation of Business
• Pls. see case on ‘The Globalisation of Health Care’
on P 4
• Has led to fundamental shift in world economy
• Countries have reduced trade barriers; no longer
content with self-sustenance concept
• A manufactured product or service today unlikely
to have components from one country alone
• Our breakfast is an international potpourri of
ingredients too
 Globalisation of Business
• Amazon, eBay deliver from the US to your
doorstep
• DHL, TNT become your international value-chain
partners
• Collapse of communism and environmental
concerns in the West sped up globlsn
• $ 1 billion of currency exchange/day
• $ 10 trillion worth of products and $ 3 trillion
worth of services transacted annually
 Globalisation of Business
• However, fears of job security are high
• Influx of immigrants into the EU, South Pacific
and North America creating nervousness
• More Asian companies beginning to dominate
car industry now; GM finding it difficult to
protect market share
• Globalisation thus refers to the shift to a more
integrated and interdependent world economy
 Globalisation of Business
• Globalisation of markets – merging of historically
distinct markets into one, global market
• Increasingly firms are talking less of country
markets and more of the global market as a whole
• Globalisation of production – sourcing of goods
and services from locations around the globe to
take advantage of national differences in cost and
quality of factors of production (labour, energy,
land and capital) e.g. Airbus
 Globalisation of Business
• Dimensions of Globalisation
– Disembedding/delocalisation
– Acceleration
– Standardisation e.g. The English language
– Interconnectedness
– Movement
– Mixing
– Vulnerability e.g. AIDS, avian flu
– Re-embedding
 Globalisation of Business
• Drivers of Globalisation
– Increase and Expansion of technology
– Liberalisation of cross-border trade and resource
movements because governments find:
• Their citizens want so
• Manufacturers will become more competitive
• May induce other countries to lower barriers
– Development of services that support international
business e.g. SEZs
– Growing consumer pressures
– Increased global competition
 Globalisation of Business
– Changing political situations e.g. Collapse of communism
– Expanded cross-national cooperation:
• To gain reciprocal advantages
• To solve problems jointly that one country alone cannot solve
• To deal with concerns outside the territory of all countries
• Stages in Globalisation
1. Domestic company (ethnocentric)
2. International company (ethnocentric)
3. MNC (polycentric)
4. Global company (Regiocentric)
5. Transnational company (Geocentric)
 Globalisation of Business
• Levels of Globalisation
1. World-level globalisation
2. Country-level Globalisation
3. Industry-level Globalisation
4. Firm-level Globalisation
• Components of Globalisation
– Globalisation of markets e.g. Coca Cola
– Globalisation of production e.g. Hyundai
– Globalisation of investment e.g. FDI
– Globalisation of technology
 Globalisation of Business
• Implications of Globalisation
– Implications of the globalisation of:
• Markets
• Production e.g. Dell
• Investment e.g. FDI
• Technology
• Trends in Globalisation
– Cooperation among countries
– Liberalisation of cross-border movements
– Transfer of technology
 Globalisation of Business
• Obstacles to Globalisation
– Government policies and procedures
– High cost
– Poor infrastructure
– Obsolescence
– Resistance to change
– Poor quality image
– Supply problems
– Small size
– Lack of experience
– Limited R & D and marketing research
– Growing competition
– Trade barriers e.g. Non-tariff barriers
 WTO
• WTO: organisation meant to monitor
international trade amongst its member states
• Birth of WTO:
– GATT (1947) – mainly host to developed nations
– UNCTAD (UN conference on trade and
development): estd. in response to US reluctance
in 1963
– WTO: 1995 – Uruguay round
 WTO
• Differences between GATT and WTO and
features of WTO?
– GATT:
• more of a provisional agreement among exclusive
states
• Less scope under agreement to decide on disputes
• Applied to merchandised goods, not services
• Multilateral, WTO more plurilateral; many new
agreements were signed in 80s
 WTO
• Objectives of WTO:
– Improve standard of living of people in member
countries
– Ensure full employment and broad increase in
effective demand
– Enlarge production and trade of goods
– Realising these aims consistently with sustainable
development and environmental protection
– Ensuring that developing countries secure a proper
share in the growth of international trade
 WTO
• Principles of WTO:
– Transparency
– MFN (Most favoured Nation) treatment
– National treatment: non-discrimination within a country
– Free trade principle: optimal utilisation of resources
– Dismantling trade barriers
– Rule-based trading system
– Treatment for LDCs
– Competition principle
– Environment protection
 WTO
• Structure of WTO:
1. Ministerial conference
2. General council
• Dispute settlement body
• Trade policy review body
3. Councils
• Council for trade in goods
• Council for trade in services
• Council for trade related aspects of intellectual property
rights
 WTO
4. Committee and management bodies
– Committees
• Committee on trade and development
• Committee on balance of payments
• Committee on budget, finance and administration
– Management bodies in plurilateral agreements:
civil aircraft, government procurement...
 WTO
• Role of WTO
– Helping developing and transition economies
– Specialised help for exports
– WTO in global economic policy making
– Taking information
– Giving information to public
– Encouraging development and economic reform
 WTO
• Key subjects in WTO
– Agriculture
– Health and safety measures
– Helping least developed and food importing countries
– Textiles and clothing
– TRIPS
– TRIMS (Trade Related Investment Measures)
– GATS (General Agreement on Trade in Services); covers four modes of
international service delivery:
• Cross-border supply (data flow)
• Commercial presence (FDI...)
• Consumption abroad (tourism)
• Movement of personnel (foreign consultants)
 WTO and Trade Liberalisation
• WTO and India:
– No commitment made for agri sector w.r.t.:
• Market access
• Reduction of tariffs
• Amount of subsidies attached
• WTO and Trade Liberalisation in India
– Reduction in excise and customs duties
– Peak customs duty reduced from 220 % in ‘91 to 30 % in ’02 (EPCG)
– Lowering corporate tax (35 % + 5 % vs. 40 % + 5 %)
– Widening of tax base and toning-up the tax administration:
• equity (ability-to-pay),
• efficiency (against market failure) and
• simplicity (compliance and admin costs to be minimised)
 WTO and Trade Liberalisation
• Advantages of WTO to India
– Boost to exports
– Security and predictability
– Policy assistance
– Trade links
– Settlement of disputes
– Special concessions
– Promotion of competition
– Technical assistance
– Sustainable development
– Policy review mechanism
 WTO and Trade Liberalisation
• Disadvantages of WTO to India
– No export push
– Prominence to developed nations
– Price rise
– Danger to services sector
– Not really free trade
– Erosion of autonomy
 Regional Trade Blocks
• Characteristics of Regional Trade Blocks :
1. Implies a reduction or elimination of trade
barriers
2. Are discriminatory and applies only to member
countries
• Importance of Regional Trade Blocks :
– Discussion?
 Regional Trade Blocks
• Types of Regional Trade Blocks
– Preferential trading agreement
– Free trade area
– Customs union
– Common market
– Economic union
– Political union
 Regional Trade Blocks
• Impact of Regional Trade Blocks on
International Business
– Trade creation and trade diversion
– Prices and competition
– Economies of scale
– Dynamic effects of integration
– Impact of opportunities
– Impact of threats
 Regional Trade Blocks
• Factors responsible for Regional Trade Blocks:
– Emphasis on removal of trade barriers
– Feeling of comfort to trade among countries close to
each other
– Improve bargaining power against other stronger blocks
• Trade among regional groups
– Intra-regional e.g. EEC
– Inter-regional e.g.
• 7 groups identified: EAP, ECA, LAC, MNA, SAS, SSA, developed
regions (Nam, EUR, AAs)
 Regional Trade Blocks
• Major Regional Trade Blocks
– EU
• European Commission
• European Council
• European Parliament
• European Court of Justice
• Benefits of the EU and challenges faced
– NAFTA
• US, Canada and Mexico
 Regional Trade Blocks
– Scope of NAFTA
• Market Access
• Trade rules
• Services
• Investment
• Intellectual Property
• Dispute settlement
– ASEAN
• Vision 2020
• AFTA – ASEAN Free Trade Agreement
 Regional Trade Blocks
– Mercosur (South America)
• Brazil, Argentina, Paraguay and Uruguay
– EFTA – European Free Trade Association (1959)
• Austria, Norway, Portugal, Sweden and Switzerland
• Enable free trade in Western Europe
– CARICOM: Central American Common Market
(early 60s)
• Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua
• Collapsed in 69 after war broke out between Honduras
and El Salvador after a soccer match riot!
 Regional Trade Blocks
– South Asian Association for Regional Cooperation
(SAARC)
• SAPTA: SAARC Preferential Trading Agreement
• SAFTA: South Asian Free Trade Agreement
– Asia Pacific Economic Cooperation (APEC)
• 18 countries
– Latin American Integration Association (LAIA)
• Argentina, Brazil, Chile, Mexico, Paraguay, Peru,
Uruguay, Colombia, Ecuador, Venezuela, Bolivia
 Regional Trade Blocks
– Economic and Social Commission for Asia and The
Pacific (ESCAP)
• 48 members and 10 associate members
• Subdivided into:
1. Pacific island countries
2. Developing ESCAP countries
3. ASEAN – 4 nations
4. Developed ESCAP countries
5. China and new industrialising countries
6. South Asian countries
• Extends to: Cook Islands (E), Azerbaijan (W), Mongolia (N),
Aus and NZ (S)
 Regional Trade Blocks
• Andean pact (69)
• Bolivia, Chile, Ecuador, Colombia Peru signed the
Cartagena Agreement
• Based on the EU model
• Collapsed in the 80s