MB0053 – International Business Management - 4 Credits Assignment Set- 1 (60 Marks) Q.1 What is globalization? What are its benefits?

How does globalization help in international business? Give some instances?

Globalization (or globalisation) describes the process by which regional economies, societies, and cultures have become integrated through a global network of political ideas through communication, transportation, and trade. The term is most closely associated with the term economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, the spread of technology, and military presence.[1] However, globalization is usually recognized as being driven by a combination of economic, technological, sociocultural, political, and biological factors.[2] The term can also refer to the transnational circulation of ideas, languages, or popular culture through acculturation. An aspect of the world which has gone through the process can be said to be globalized. Against this view, an alternative approach stresses how globalization has actually decreased intercultural contacts while increasing the possibility of international and intra-national conflict.[3] Globalization has various aspects which affect the world in several different ways

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Industrial - emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies. Particularly movement of material and goods between and within national boundaries. International trade in manufactured goods increased more than 100 times (from $95 billion to $12 trillion) in the 50 years since 1955.China's trade with Africa rose sevenfold during 2000-07 alone. Financial - emergence of worldwide financial markets and better access to external financing for borrowers. By the early part of the 21st century more than $1.5 trillion in national currencies were traded daily to support the expanded levels of trade and investment Economic - realization of a global common market, based on the freedom of exchange of goods and capital Job Market- competition in a global job market. In the past, the economic fate of workers was tied to the fate of national economies. With the advent of the information age and improvements in communication, this is no longer the case. Because workers compete in a global market, wages are less dependent on the success or failure of individual economies. This has had a major effect on wages and income distribution Political - some use "globalization" to mean the creation of a world government which regulates the relationships among governments and guarantees the rights arising from social and economic globalization. Politically, the United States has enjoyed a position of power among the world powers, in part because of its strong and wealthy economy. With the influence of globalization and with the help of the United States’ own economy, the People's Republic of China has experienced some tremendous growth within the past decade. If China continues to grow at the rate projected by the trends, then it is very likely that in the next twenty years, there will be a major reallocation of power among the world leaders. China will have enough wealth, industry, and technology to rival the United States for the position of leading world power.

Most of us assume that international and global business are the same and that any company that deals with another country for its business is an international or global company. In fact, there is a considerable difference between the two terms. International companies – Companies that deal with foreign companies for their business are considered as international companies. They can be exporters or importers who may not have any investments in any other country, apart from their home country. Global companies – Companies, which invest in other countries for business and also operate from other countries, are considered as global companies. They have multiple manufacturing plants across the globe, catering to multiple markets. The transformation of a company from domestic to international is by entering just one market or a few selected foreign markets as an exporter or importer. Competing on a truly global scale comes later, after the company has established operations in several countries across continents and is racing against rivals for global market leadership. Thus, there is a meaningful distinction between a company that operates in few selected foreign countries and a company that operates and markets its products across several countries and continents with manufacturing capabilities in several of these countries. Companies can also be differentiated by the kind of competitive strategy they adopt while dealing internationally. Multinational strategy and global competitive strategy are the two types of competitive strategy. · Multinational strategy – Companies adopt this strategy when each country’s market needs to be treated as self contained. It can be for the following reasons: ° Customers from different countries have different preferences and expectations about a product or a service. ° Competition in each national market is essentially independent of competition in other national markets, and the set of competitors also differ from country to country. ° A company’s reputation, customer base, and competitive position in one nation have little or no bearing on its ability to successfully compete in another nation. Some of the industry examples for multinational competition include beer, life insurance, and food products. · Global competitive strategy – Companies adopt this strategy when prices and competitive conditions across the different country markets are strongly linked together and have common synergies. In a globally competitive industry, a company’s business gets affected by the changing environments in different countries. The same set of competitors may compete against each other in several countries. In a global scenario, a company’s overall competitive advantage is gauged by the cumulative efforts of its domestic operations and the international operations worldwide.

A good example to illustrate is Sony Ericsson, which has its headquarters in Sweden, Research and Development setup in USA and India, manufacturing and assembly plants in low wage countries like China, and sales and marketing worldwide. This is made possible because of the ease in transferring technology and expertise from country to country. Industries that have a global competition are automobiles, consumer electronics (like televisions, mobile phone), watches, and commercial aircraft and so on. Table 1.2 portrays the differences in strategies adopted by companies in international and global operations. Table 1.2: Differences between International and Global Strategies Strategy Location International Global Selected target countries and Most global businesses operate in North America, Europe, trading areas Asia Pacific, and Latin America Business Custom strategies to fit the Same basic strategy worldwide with minor country circumstances of each host customisation where necessary country situation Product-line Adopted to local culture and Mostly standardised products sold worldwide, moderate particular needs and customisation depending on the regulatory framework expectations of local buyers Production Plants scattered across many Plants located on the basis of maximum competitive host countries, each advantage (in low cost countries close to major markets, producing versions suitable geographically scattered to minimise shipping costs, or use for the surrounding of a few world scale plants to maximise economies of scale) environment Source of supply Suppliers in host country Attractive suppliers from across the world of raw materials preferred Marketing and Adapted to practices and Much more worldwide coordination; minor adaptation to distribution culture of each host country host country situations if required Cross country Efforts made to transfer ideas, Efforts made to use almost the same technologies, connections technologies, competencies competencies, and capabilities in all country markets (to and capabilities that work promote use of a mostly standard strategy), new successful successfully in one country to competitive capabilities are transferred to different country another country whenever markets such a transfer appears advantageous Company Form subsidiary companies to All major strategic decisions closely coordinated at global organisation handle operations in each host headquarters; a global organisational structure is used to country; each subsidiary unify the operations in each country operates more or less autonomously to fit host country conditions

Benefits of globalisation We have moved from a world where the big eat the small to a world where the fast eat the slow", as observed by Klaus Schwab of the Davos World Economic Forum. All economic analysts must agree that the living standards of people have considerably improved through the market growth. With the development in technology and their introduction in the global markets, there is not only a steady increase in the demand for commodities but has also led to greater utilization. Investment sector is witnessing high infusions by more and more people connected to the world's trade happenings with the help of computers. As per statistics, everyday more than $1.5 trillion is now swapped in the world's currency markets and around one-fifth of products and services are generated per year are bought and sold. Buyers of products and services in all nations comprise one huge group who gain from world trade for reasons encompassing opportunity charge, comparative benefit, economical to purchase than to produce, trade's guidelines, stable business and alterations in consumption and production. Compared to others, consumers are likely to profit less from globalization. Another factor which is often considered as a positive outcome of globalization is the lower inflation. This is because the market rivalry stops the businesses from increasing prices unless guaranteed by steady productivity. Technological advancement and productivity expansion are the other benefits of globalization because since 1970s growing international rivalry has triggered the industries to improvise increasingly. Globalization can be described as a process by which the people of the world are unified into a single society and functioning together. This process is a combination of economic, technological, sociocultural and political forces. Globalization, as a term, is very often used to refer to economic globalization, that is integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and spread of technology. The word globalization is also used, in a doctrinal sense to describe the neoliberal form of economic globalization.Globalization is also defined as internationalism, however such usage is typically incorrect as "global" implies "one world" as a single unit, while "international" (between nations) recognizes that different peoples, cultures, languages, nations, borders, economies, and ecosystems exist(http://en.wikipedia.org/). Globalization has two components: the globalization of market and globalization of production....
Some other benefits of globalization as per statistics

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Commerce as a percentage of gross world product has increased in 1986 from 15% to nearly 27% in recent years. The stock of foreign direct investment resources has increased rapidly as a percentage of gross world product in the past twenty years. For the purpose of commerce and pleasure, more and more people are crossing national borders. Globally, on average nations in 1950 witnessed just one overseas visitor for every 100 citizens. By the mid-1980s it increased to six and ever since the number has doubled to 12.

Worldwide telephone traffic has tripled since 1991. The number of mobile subscribers has elevated from almost zero to 1.8 billion indicating around 30% of the world population. Internet users will quickly touch 1 billion. · Promotes foreign trade and liberalisation of economies.

· Increases the living standards of people in several developing countries through capital investments in developing countries by developed countries. · Benefits customers as companies outsource to low wage countries. Outsourcing helps the companies to be competitive by keeping the cost low, with increased productivity. · Promotes better education and jobs. · Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best practices, and culture. · Provides better quality of products, customer services, and standardised delivery models across countries. · Gives better access to finance for corporate and sovereign borrowers. · Increases business travel, which in turn leads to a flourishing travel and hospitality industry across the world. · Increases sales as the availability of cutting edge technologies and production techniques decrease the cost of production. · Provides several platforms for international dispute resolutions in business, which facilitates international trade. Some of the ill-effects of globalisation are as follows: · Leads to exploitation of labour in several cases. · Causes unemployment in the developed countries due to outsourcing. · Leads to the misuse of IPR, copyrights and so on due to the easy availability of technology, digital communication, travel and so on. · Influences political decisions in foreign countries. The MNCs increasingly use their economical powers to influence political decisions. · Causes ecological damage as the companies set up polluting production plants in countries with limited or no regulations on pollution. · Harms the local businesses of a country due to dumping of cheaper foreign goods.

Adaptations must be made to the product where there is demand or the message must be advertised by the company. and other abilities and habits gained by people as part of society. healthcare. globalisation has improved our lives in various fields like communication. other than their culture. transportation. even though the marginalised groups represent a majority or a minority in the society. Culture is the part of environment. laws. Research shows that national ‘‘cultures’’ generally characterise the dominant groups’ values and practices in society. Culture is an important factor for practising international business. In spite of its disadvantages. Culture is very important to understand international business. · Culture is not similar to cultural practice. customs. · Globalisation does not characterise a rupture with the past but is a continuation of prior trends. 1. civilisation. which human has created.· Leads to adverse health issues due to rapid expansion of fast food chains and increased consumption of junk food. What is culture and in the context of international business environment how does it impact international business decisions? Answer: Culture is defined as the art and other signs or demonstrations of human customs. it is the total sum of knowledge. morals. The company must modify the product to meet the demand of the customers in a specific location and use different marketing strategy to advertise their product to the customers. The following are the factors which a company must consider while dealing with international business: . It is the duty of people to respect other cultures. · Globalisation is only one of many processes involved in cultural change. and education. arts. and not of the marginalised groups. Culture determines every aspect that is from birth to death and everything in between it. and the way of life of a specific society or group. The following are the four factors that question assumptions regarding the impact of global business in culture: · National cultures are not homogeneous and the impact of globalisation on heterogeneous cultures is not easily predicted. This shows a close relation between culture and international business. beliefs. Culture affects all the business functions ranging from accounting to finance and from production to service. Cultural differences affect the success or failure of multinational firms in many ways. · Causes destruction of ethnicity and culture of several regions worldwide in favour of more accepted western culture.

the fact that job turnover among Japanese workers is still lower than the American workers is true. even if a worker can go to another Japanese entity. The training may include language training. and perform activities as they are different in different nations. particularly those with an ancient cultural heritage. they know that the conditions may not change considerably at another place. India. As such. The kinds of products and services that consumers can afford are determined by the level of per capita income. This is due to varied preferences and tastes. South Korea. product differentiation has become business strategy all over the world. Hence the management style. they know that the management style and practices will be quite alike to those found in their present firm. The following are the necessary implications in international business: . The following are the three mega trends in world cultures: · The reverse culture influence on modern Western cultures from growing economies. Also. however the production levels stayed high. even if Japanese workers were not satisfied with the specific aspects of their work. While this trend is changing. Before manufacturing any product. This study showed the fact that it is tough for Japanese workers to change jobs. in underdeveloped countries. which help the candidate to work in a foreign environment. These models show that there is a relation between job satisfaction and production. Thus. · The organisation must manage and motivate people with broad different cultural values and attitudes. and Japan and also the ASEAN. For example. · The trend is Asia centric and not European or American centric. the organisation has to be aware of the customer choice or preferences. ° Manage employees – It is said that employees in Japan were normally not satisfied with their work as compared with employees of North America and European countries. practices. because of the growing economic and political power of China. · The increased diversity within cultures and geographies. they have come up with models. discontent might not impact their level of production. the demand for luxury products is limited. corporate training. To motivate employees in North America. and systems must be modified. · The organisation must identify candidates and train them to work in other countries as the cultural and corporate environment differs. · The organisation must consider the concept of international business and construct guidelines that help them to take business decisions. The following are the two main tasks that a company must perform: ° Product differentiation and marketing – As there are differences in consumer tastes and preferences across nations. training them on the technology and so on.· The consumers across the world do not use same products.

These cultures support extended families and collectives where everyone takes responsibility for fellow members of their group. Individuals in these societies form a larger number of looser relationships. a fifth dimension called ‘long-term outlook’ was added. At that time he gathered and analysed data from many people from several countries. and culture. Geert Hofstede. values and viewpoints. A country with high masculinity ranking shows the country experiences high level of gender differentiation. ‘Culture is more often a source of conflict than of synergy. · Follow a philosophical viewpoint that considers that many perspectives of a single observation or phenomenon can be true. A low individualism ranking characterises societies of a more collective nature with close links between individuals. and making them accessible so that. Cultural differences are a trouble and always a disaster. The following are the five cultural dimensions: · Power Distance Index (PDI) – This focuses on the level of equality or inequality. capital. A country with low power distance ranking depicts the society and de-emphasises the differences between its people’s power and wealth. between individuals in the nation’s society. A country with high power distance ranking depicts that inequality of power and wealth has been allowed to grow within the society. A high individualism ranking depicts that individuality and individual rights are dominant within the society. one’s own upbringing. Professor Hofstede established a model using the results of the study which identifies four dimensions to differentiate cultures. In these cultures.’ Professor Hofstede carried out a detailed study of how values in the workplace are influenced by culture. · Discover and identify global segments and global niche markets. and control. men dominate a major part of the society and power structure. Later. · Individualism – This dimension focuses on the extent to which the society reinforces individual or collective achievement and interpersonal relationships. He worked as a psychologist in IBM from 1967 to 1973. power. These societies follow caste system that does not allow large upward mobility of its people. · Grow the total share market by innovating affordable products and services. people. · Masculinity – This focuses on the extent to which the society supports or discourages the traditional masculine work role model of male achievement. In these societies equality and opportunity is stressed for everyone. they are affordable for even subsistence level consumers rather than fighting for market share. as national markets are diverse with growing mobility of products. Hofstede’s cultural dimensions According to Dr. · Organise global enterprises around global centres of excellence.· Avoid self reference criterion such as. with women being .

Many western cultures score considerably low on this dimension. A country with low uncertainty avoidance ranking shows that the country has less concern about ambiguity and uncertainty and has high tolerance for a variety of opinions. A country with low masculinity ranking shows the country. In low masculinity cultures. having a low level of differentiation and discrimination between genders. women are treated equal to men in all aspects of the society. the Cadbury Kraft Acquisition. . regulations. and takes greater risks reflects a low uncertainty avoidance ranking. believe in many truths. 2009 was a landmark international deal. when people involved have diverse cultural identities.controlled and dominated by men. Every society has its own unique culture. These countries have a long term orientation. Cultures recording little on this dimension. LTO dimension rank is 61. and controls is created to minimise the amount of uncertainty. and masculinity dimension rank is 62. Cadbury which were in complete extremes in terms of culture. laws. A society which is less rule-oriented. trust in absolute truth is conventional and traditional. Cultural elements that relate business The most important cultural components of a country which relate business transactions are: · Language. Let us discuss the major cultural elements that are related to business. Cross cultural management is defined as the development and application of knowledge about cultures in the practice of international management. · Uncertainty Avoidance Index (UAI) – This focuses on the degree of tolerance for uncertainty and ambiguity within the society that is unstructured situations. accept change easily. · Religion. and have thrift for investment. The Asian countries are scoring high on this dimension. They have a small term orientation and a concern for stability. Culture must not be imposed on individuals of different culture. · Conflicting attitudes. For example. A ruleoriented society that incorporates rules. PDI is the highest Hofstede dimension for culture with a rank of 77. based company Kraft acquired the British chocolate giant.S. In India. · Long-Term Orientation (LTO) – Describes the range at which a society illustrates a pragmatic future oriented perspective instead of a conventional historic or short term point of view. A country with high uncertainty avoidance ranking shows that the country has low tolerance for uncertainty and ambiguity. readily agrees to changes. in which a U.

The organisation’s capability to draw. the work experience helps to overcome gender. The managers must adapt to other culture and have the ability to lead its members. save. It is functionally linked to achieving a performance goal. The factors to be considered in cross cultural management are: Cross cultural management skills The ability to demonstrate a series of behaviour is called skill. problem solving. racial. the production of two or more individuals or groups working in cooperation is larger than the combined production of their individual work. . · Identifying the importance of informal structures. · Identifying and solving disagreements. The manager has to possess the skills linked with the following: · Providing inspiration and appraisal systems. Diverse groups require time to solve issues of working together. Cultural diversity offers key chances for joint work and co-operative action. and organisational and functional discriminations. The managers cannot expect to force members of other culture to fit into their cultural customs. Economy is benefited when the work groups are managed successfully. · Formulating and applying plans for modification. Any organisation that tries to enforce its behavioural customs on unwilling workers from another culture faces conflict. which is the main assumption of cross cultural skills learning. over time. Group work is a joint venture where. and adjusting to change. The most important aspect to qualify as a manager for positions of international responsibility is communication skills.International managers in senior positions do not have direct interaction that is face-to-face with other culture workforce. · Establishing and applying formal structures. and inspire people from diverse cultures can give the organisation spirited advantages in structures of cost. In diverse groups. but several home based managers handle immigrant groups adjusted into a workforce that offers domestic markets. creativity. Factors controlling group creativity On complicated problem solving jobs diverse groups do better than identical groups. Handling cultural diversity Cultural diversity in a work group offers opportunities and difficulties.

It is better to ignore. where the members are tolerant of differences. This rejection to identify diversity happens when management: · Fails to have sufficient awareness and skills to identify diversity. · Down-play the importance of cultural diversity. They also provide diversity training. · Respect each other’s skills and share their own. · Value the chance for cross-cultural learning. · Thinks the likely benefits of identifying and managing diversity do not validate the expected expenses. · Recognises the negative consequences of identifying diversity probably cause greater issues than ignoring it. . Diverse groups do well when the members: · Assist to make group decisions. and the group members are rewarded for their commitment. A diverse group is known to be more creative. Factors related with the industry and company culture are also important. · Tolerate uncertainty and try to triumph over the inefficiencies that occur when members of diverse cultures work together. · Value the exchange of different points of view. · Identifies that the job provides no chances for drawing advantages from diversity. Ignore diversity It may be difficult to manage diversity. which is an alternative. and gives time for the group to overcome the usual process difficulties. The top management level provides its moral and administrative support. · Identifies diversity but does not have the skill to manage the diversity.But the impact cannot be evaluated and there is always risk in creating a diverse group. A successful group is profitable with respect to quick results and the creation of concern for the future. The management must: · Ignore cultural diversity within the employees. Negative stereotypes are emphasised if it fails.

Groups and group members are equally incorporated and work together. economic structures. and avoids countries with excessive risk. confusion occurs when the diverse value systems are not identified that are held by different staff groups. and sharing required resources are independent in the workplace. For example. 2. Exchange risk can be defined as a form of risk that arises from the change in price of one currency . Some categories relevant to a plant investment contain a much higher degree of risk because the MNE remains exposed to risk for a longer period of time. or wealth distribution or creation). Therefore. · Exchange risk – This risk occurs due to an unfavourable movement in the exchange rate. the financial markets are being refined with the introduction of new products. These additional risks are called country risks which include risks arising from national differences in socio-political institutions. An increasing number of companies involving in external trade indicate huge business opportunities and promising markets. country risk analysis has become essential for the international creditors and investors Overview of Country Risk Analysis Country Risk Analysis (CRA) identifies imbalances that increase the risks in a cross-border investment. It is used to survey countries where the firm is engaged in international business.Strategies to ignore diversity may be possible when culture groups are given various jobs. Risk arises from the negative changes in fundamental economic policy goals (fiscal. international. · Transfer risk – Transfer risk arises from a decision by a foreign government to restrict capital movements. It is analysed as a function of a country’s ability to earn foreign currency. and geography. With globalisation. When business transactions occur across international borders. CRA represents the potentially adverse impact of a country’s environment on the multinational corporation’s cash flows and is the probability of loss due to exposure to the political. Analysts have categorised country risk into following groups: · Economic risk – This type of risk is the important change in the economic structure that produces a change in the expected return of an investment. In such cases. All business dealings involve risks. a multinational enterprise (MNE) that sets up a plant in a foreign country faces different risks compared to bank lending to a foreign government. The MNE must consider the risks from a broader spectrum of country characteristics. The CRA monitors the potential for these risks to decrease the expected return of a cross-border investment. Cosmos Limited wants to enter international markets. monetary. Will country risk analysis help Cosmos Limited to take correct decisions? Substantiate your answer Answer: Country risk analysis is the evaluation of possible risks and rewards from business experiences in a country. economic. and social upheavals in a foreign country. it implies that effort in earning foreign currency increases the possibility of capital controls. Since the 1980s. currencies. they bring additional risks compared to those in domestic transactions. policies.

relationships of various groups in a country and the history of the country. Country risk is composed of all the uncertainty that defines the risk of country exposure. war. The techniques used by the banks and other agencies for country risk analysis can be classified as qualitative or quantitative. It includes effects caused by problems in a region or in countries with similar characteristics. For example. investment projects and their cash flows. corruption and bureaucracy also contribute to the element of political risk. It can be used to monitor countries where the MNC is engaged in international business. or in countries with similar perceived characteristics. in trading partner of a country. Analysing the country risk helps in evaluating the risk for a planned project considered for a foreign country and assesses gain and loss possibility outcomes of cross-border investment or export strategy. · Location risk – This type of risk is also referred to as neighborhood risk. The analysis of country risks distinguishes between the ability to pay and the willingness to pay. including the decision-making process in the government. It is mainly used by MNCs. they face currency risk if their positions are not hedged. Country risk is due to unpredicted events in a foreign country affecting the value of international assets. The assessment of country risk is used to incorporate country risk in capital budgeting and modify the discount rate. expropriation of assets. Purpose of Country Risk Analysis Risk arises because of uncertainty and uncertainty occurs due to the lack of reliable information. tariffs. It also relates to political risk in which a government may decide not to honor its commitments for political reasons. Country detailed risk refers to the unpredictability of returns on international business transactions in view of information associated with a particular country. Country risk is determined by the costs and benefits of a country’s repayment and default strategies. The international trade growth and the financial programs development demand periodical improvement of risk methodology and analysis of country risks. It is essential to analyse the sustainable amount of funds a country can borrow. in order to avoid countries with excessive risk. Whenever investors or companies have assets or business operations across national borders. Risk assessment requires analysis of many factors.against another. · Sovereign risk – This risk is based on a government’s inability to meet its loan obligations. Location risk includes effects caused by troubles in a region. Sovereign risk is closely linked to transfer risk in which a government may run out of foreign exchange due to adverse developments in its balance of payments. The ways of evaluating country risks by different firms and financial institutions differ from each other. · Political risk – This is the risk of loss that is caused due to change in the political structure or in the politics of country where the investment is made. tax laws. or restriction in repatriation of profits. A survey . CRA regulates the estimated cash flows and explores the main techniques used to measure a country’s overall riskiness. Many agencies merge both qualitative and quantitative information into a single rating.

logit analysis and classification and regression tree method 5. during a period) and its evolution through the years means a strong source of data. and social conditions and prediction. and consumers. In structured qualitative method. Fully qualitative method can be adapted to the unique strengths and problems of the country undergoing evaluation. · Checklist method – The checklist method involves scoring the country based on specific variables that can be either quantitative. · Structured qualitative method – The structured method uses a uniform format with predetermined scope. principal component analysis. the first step is to make sure that the historical series of official data are reliable. The variables must consider the particularities of each country and the needs of the model used. services. As applied to country risk analysis. the MNC can assess definite employees who have the capability to evaluate the risk characteristics of a particular country. The balance of payments (summary account of economic transactions among a country and the others nations of the world. It includes general discussion of a country’s economic. The analysis must consider the . as it balances the transactions (balances the prices of goods. · Other quantitative methods – The quantitative models used in statistical studies of country risk analysis can be classified as discriminant analysis.conducted by the US EXIM bank classified the various methods of country risk assessment used by the banks into four types. it is easier to make comparisons between countries as it follows a specific format across countries. in which the scoring does not need personal judgment of the country being scored or qualitative. Therefore. They are: · Fully qualitative method – The fully qualitative method involves a detailed analysis of a country. and capital) between residents and non-residents. The exchange rate (currency risk) is another important variable considered. business executives. These meetings clarify any vague opinions the firm has about the country. financial and currency risk components are based on the variables (quantitative and qualitative variables). The standard economic variables that are found mainly in the varied approach adopted by financial institutions and rating agencies. All items are scaled from the lowest to the highest score. in which the scoring needs subjective determinations. The standard variables are used to maintain the regular analysis comparable with similar works of other countries.4. are associated with the country’s real ability to repay its commitments. consistent and comparable. The economic.1 Data sourcing The basic data is important to analyse a country. · Delphi technique – The technique involves a set of independent opinions without group discussion. · Inspection visits – Involves travelling to a country and conducting meeting with government officials. political. The MNC gets responses from its evaluation and then may determine some opinions about the risk of the country. This technique was the most popular among the banks during the late seventies. The sum of scores is then used to determine the country risk.

domestic financial system. · Strength and weakness chart – Focus the key aspects that warn the country. public debt and its service. The analysis must be accomplished with qualitative variables. The main historical data provides a good understanding of the key factors which draw the behaviour of the society. and so on. Apart from the macroeconomic variables which deal with the external sector of the economy. the government. external environment. money supply. there are some other relevant variables such as the interest rate. and the relationships to neighbour nations and the world as a whole. which consider social aspects as population. dependency level. ratios for economic risk evaluation and strength and weakness chart. · Table of financial markets performance – Follow up the behavior of bonds and stocks already issued and to be issued. internal savings.2 Corporate risk Both country risk studies and business risk analysis enhances wealth from the available resources. natural resources. external and internal environment. corporate risk. inflation rate and so on.historical behavior of the exchange rate and the policy which made clear whether the country follows a rational economics approach or it uses the exchange rate as a tool to maintain a forced macroeconomic equilibrium. level of investments. the private sector. rate of unemployment.2 Tools The risk management demands a regular follow up regarding governmental policies. reducing the ability to payback any external commitment. outlook provided by rating agencies.5. Following are the tools recommended: · Chain of value – Includes the main countries that sustain trade relationships with the nation. life expectancy. consumption. The content of country risk analysis mainly involves country history. This clarifies that those kind of . · Table of macroeconomic variables – Provides alert signals when the behavior of any ratio presents a relevant change. Country history The historical brief helps to identify aspects that interfere in the future behavior of the country. 5. broken by sectors and products.4. The social-political aspects are necessary for all kind of analysis as they describe the whole setting of the running economy. the legal environment. in terms of capital. level of literacy and so on. political. the economical. rate of birthday. GDP or GNP. 5. technology and labour forces.

after the international crisis. the improvement of the economic blocks. is a clear definition about how the country is positioned in the world in terms of its wide relationships. the maturity of debts (internal and external) and the available sources of financing also help to measure the freedom grades of the country. The figures must be presented in historic series (at least five years) to provide information about its progress. 5. by evaluating information provided by the Central Banks and. or relations. The mainly used ratios and variables in case of domestic economy are the following: · Gross domestic product (GDP) –· GDP per capita –· GDP growth rate –· Unemployment rate –· Internal savings or GDP –· Investment or GDP –· Gross domestic fixed investment or . the forecasts for conflicts among nations.5 Domestic financial system The banking sector has implemented many actions to avoid losses. Therefore. Basel Committee has defined some strong measures to be followed by the financial houses and Central Banks are trying to monitor their jurisdictions.4 External environment The external trade is an important factor to the development of societies. All these aspects are significant to identify the dependency level of the country. In this case. Globalisation has brought international business to the center of the discussions and the external environment has become vital for all countries. When domestic banks do not have a consistent risk management policies and adequate provisions to theirs credits. a complete vision on economic trends. The financial dependency to meet the needs of a country is also a strong concern for the analyst. 5. The international banks had developed many tools to deal with international crisis. 5. Thus. the analysis must consider the health of the domestic financial system. the behavior of financial markets. financial crisis and international liquidity is a framework over which the analysis must start.5.3 Dependency level The next step after the history in brief. including financial theory. Apart from those procedures. Accessing Centrals Bank policies and supervising procedures also help to evaluate the health of the financial system. which can be real values. from the principal banks of the country. the country risk happens to be the worst. percentages. recently Asia and Turkey crisis have shown that the inspection is not enough to keep the reliability of some domestic system. importance of international trade and so on. They can be separated into two groups such as domestic and external. economic block in which it belongs to.analysis procures extensive knowledge from the business approach for companies.6 Ratios for economic risk evaluation Cross-border economic risk analysis evaluates the probable macroeconomic ratios among some variables.5.5. 5. the level of openness of the world economy.5.

3. Business ethics is almost similar to the generally accepted norms and principles. All major religions preach the need for high ethical standards. and is a matter of concern in the corporate world.· Budget deficit or GDP –· Internal debt or GDP – The monetary policy is essential as it deals with the price stability. and the . the strength and weakness chart can be used to merge each strength and weakness with the related scenario. an orderly social system. Business ethics pertains to the application of ethics to business. and stress on social responsibility as contributing factors to general well-being. An economy which presents less instability in its prices of goods and services. Behaviour that is considered unethical and immoral in society. Managers are influenced by three factors affecting ethical values. Civilisation is the collective experience that people have passed on through three distinct phases: the hunting and gathering phase. and standards of human conduct and its application in daily life to determine acceptable human behaviour. applies to business as well. for example dishonesty. Culture – Culture refers to a set of values and standards that defines acceptable behaviour passed on to generations. is a model of relationships among several variables (quantitative and qualitative) to show their interdependency and the complexity of analysis. Religion – Religion is one of the oldest factors affecting ethics. provides huge facilities to decision makers based on their predictions to expected returns of investments and a firm social. How can managers in international companies adjust to the ethical factors influencing countries? Is it possible to establish international ethical codes? Briefly explain? Answer: Ethics can be defined as the evaluation of moral values. 5. economical and political environment.5. agriculture phase. Despite the differences in religious teachings.variation of GDP – Gini Index –· Growth domestic fixed investment or gross domestic savings –. All these aspects request a systematic approach over price indicators such as the following: · Real interest rate –· Percentage increase in the money supply The mainly used ratios and variables in case of external economy are the following: · External debt or GDP –· Short term debts and reserves –· Exchange currency rate –· External debt services and exports –. principles. These values and standards are important because the code of conduct of people reflects on the culture they belong to.7 Strength and weakness chart In order to explain the significant aspects provided by the analysis. religions agree on the fundamental principles and ethics. These factors have unique value systems that have varying degrees of control over managers.

laws are frequently violated. Employees feel proud to be a part of an organisation that is respected by the public. its employees. Law – Law refers to the rules of conduct. These phases reflect the changing economic and social arrangements in human history. The services or products of a business affect the lives of thousands of people. but in the pursuit of profit.industrial phase. organisations are responsible to practice ethics and ensure mechanisms to prevent unlawful events. Public image – In order to gain public confidence and respect. and the public. A company that practices good ethical creates a positive impression among its stakeholders. In an organisation. Costs of audit and investigation are lower in an ethical company. Most countries have similar ethical values. Thus. a business organisation can save government resources and protect the society from exploitation. economic and ethical factors. by propagating ethical values. The most common breach of law in business is tax evasion. a business that is inspired by ethics is a profitable business. even though they lose money in the short run. This section deals with the way individuals in different countries approach ethical issues. People tend to favour the products and services of such organisations. Thus. Investors’ trust is just as important as public image for any business. Laws change and evolve with emerging and changing issues. Ethics is significant in all areas of business and plays an important role in ensuring a successful business. approved by the legal system of a country or state that guides human behaviour. producing inferior quality goods. A company that is ethically and socially responsible has a better public image. customer service. Better decision-making – Decisions made by an ethical management are in the best interests of the organisation. finance. and their ethically acceptable . organisation ethics is equally significant. companies benefit from being ethical because they attract and retain good and loyal employees. Protection of society – In the absence of proper enforcement. The role of business ethics is evident from the conception of an idea to the sale of a product. organisations must ascertain that they are honest in their transactions. every division such as sales and marketing. but are practiced differently. and accounting and taxation has to follow certain ethics. Ethical decisions take into account various social. Management’s credibility with employees and the public are intertwined. Every organisation is expected to abide the law. Hence. Management’s credibility with employees – Common goals and values are developed when employees feel that the management is ethical and genuine. It is important for the top management to impart high ethical standards to their employees. and disregard for environmental protection laws. who develop these services or products. Generous compensations and effective business strategies do not always guarantee employee loyalty. Profit maximisation – Companies that emphasise on ethical conduct are successful in the long run.

Hence. issues related to ethical values and traditions become more common. The issue arises when workers are exploited and are underpaid compared to the workers in the parent country who are paid more for the same job. but now this perception has immensely changed. considered unlawful. we believed that ethics is a prerogative of individuals.behaviour. Corruption is the abuse of public office for personal gain. The issue arises when there are differences in perception in different countries. These rules prescribe the duties and limitations of a manager. · Maintain high standards of local political involvement. · Transfer technology. in the Middle East. Two of the most prominent issues that managers in MNCs operating in foreign countries face are bribery and corruption and worker compensation. Many companies use management techniques to encourage ethical behaviour at an organisational level. Bribery and corruption – Bribery can be defined as the act of offering. · Minimise any negative impact on local economic policies. With the rise in global firms. and hence. The disparity arises due to the differences in the regulatory standards in the two countries. it is perfectly acceptable to offer an official a gift. For example. · Protect the environment. Code of conduct for MNCs The code of conduct for MNCs refers to a set of rules that guides corporate behaviour. . The top management must communicate the code of conduct to all members of the organisation along with their commitment in enforcing the code. · Protect the consumer. which enables them to offer goods and services at a lower price than their competitors. or soliciting something of value for the purpose of influencing the action of officials in the discharge of their duties. These ethical issues create complications to Multi-National Companies (MNCs) while dealing with other countries for business. Earlier. Some of the ethical requirements for international companies are as follows: · Respect basic human rights. In Britain it is considered as an attempt to bribe the official. many companies have formulated welldesigned codes of conduct to help their employees. accepting. Worker compensation – Businesses invest in production facilities abroad because of the availability of low-cost labour.

Taking into account the various conditions on which markets vary and depend. Protectionism on the long run results in inefficiency of local firms as it is inept towards competition from foreign firms and other technological advancements.5 Discuss the international marketing strategies. it will have an effect on the firm. Strategic reasons for global expansion are: · Diversifying markets that provide opportunistic global market development. To counter this scenario firms must learn how to enter foreign markets and increase their global competitiveness. . · Pursuing a global logic or imperative to harvest new markets and profits. For example. and marketing practices all vary. the decision to compete abroad is always a strategic down to business decision rather than simply a reaction. Market sizes. customer preferences. How is it different from domestic marketing strategies? Answer: International marketing refers to marketing of goods and products by companies overseas or across national borderlines. When a manager of an international firm faces an ethical problem. But. · Following customers abroad (customer satisfaction). appropriate marketing strategies should be devised and adopted. Some firms go abroad as the result of potential opportunities to exploit the market and to grow globally. · Exploiting different economic growth rates. And for some it is a policy driven decision to globalise and to take advantage by pressurising competitors. The decision of a firm to compete internationally is strategic. The techniques used while dealing overseas is an extension of the techniques used in the home country by the company. It also increases the living costs and protects inefficient domestic firms. including its management and operations locally. as showcasing some aspects of women clothing is considered immodest and immoral Q. certain models help in solving these ethical issues Culture is a major factor which influences marketing decisions and practices in a foreign country. Firms that plan to do business in foreign land find the marketplace different from the domestic one. some countries prevent foreign firms from entering into its market space through protective legislation. therefore the firms planning to venture abroad must analyse all segments of the market in which they expect to compete. The decision of a firm to compete in foreign markets has many reasons.· Employ labour practices that are not exploitative. Like. in the middle-eastern countries the prior approval of the governing authorities should be taken if a firm plans to advertise a product related to women’s apparel.

values. opinions. Likewise. Markets can be segmented into nine categories. Each such cluster is termed as a segment. a firm makes a decision about its extent of globalisation by taking a stance that may span from entirely domestic to a global reach where the company devotes its entire marketing strategy to global competition. In global markets product positioning is categorised as high-tech or high– touch positioning. which include the behavioural. In the process of developing an international marketing strategy. and perishability. · Globalising for defensive reasons. the firms should position their product in the global market. One challenge that firms face is to make a trade-off between adjusting their products to the specific demands of a country and gaining advantage of standardisation such as the maintenance of a consistent global brand image and cost savings. The basis of behavioural segmentation is the general behavioural aspects of the customers. stressing on service characteristics such as heterogeneity (variation in standards among providers. · Pursuing potential abroad. comparative advantage.· Pursuing geographic diversification. products are composed of some service . This is task is not easy. personalities. attitudes. a firm should carefully look at their geographic expansion and global marketing strategy. International product policy Some thinkers of the industry tend to draw a distinction between conventional products and services. In order to succeed. Demographic segmentation considers the factors like age. and demographic segmentations. psychographic. Segmentation Firms that serve global markets can be segregated into several clusters based on their similarities. there can be other reasons like competition at home. Typically. culture. education and gender. Product positioning is the process of creating a favourable image of the product against the competitor’s products. lifestyles and so on. economic trends. and the stage in the product life cycle. tax structures. To a certain extent. demographic conditions. Market positioning The next step in the marketing process is. the firm may decide to do business in its home-country (domestic operations) only or host-country (foreign country) only. Segmentation helps the firms to serve the markets in an improved way. intangibility. inseparability from consumption. income. Psychographic segmentation takes into account: beliefs. but the most common method of segmentation is on the basis of individual characteristics. frequently even among different locations of the same firm). · Exploiting product life cycle differences (technology).

3.4 International pricing decisions Pricing is the process of ascertaining the value for the product or service that will be offered for sale. making pricing decisions is entangled in difficulties as it involves trade barriers. multiple currencies. standardisation proposes the marketing of one global product.S. much of the design is identical or similar. The approach taken by company towards pricing when operating in international markets are ethnocentric. Intel microprocessors are the same irrespective of the country in which they are sold. These service components are an integral part of the product and its positioning. In international markets. 8. therefore cars have larger engines than the cars in Asia and Europe. the firm must know its target market well because when the firm is clear about the market it is serving. Many a times. The pricing policy must be consistent with the firms overall objectives. Firms have a choice in marketing their products across markets. nature of product or industry and competitive behaviour. Here. For example. · Change quantity –· Change quality –· Change terms – . documentation. The strategies for international pricing can be classified into the following three types: · Market penetration· Market holding: · Market skimming: The factors that influence pricing decisions are inflation.component like. Finally. status quo. with the belief that the same product can be sold in different countries without significant changes. and transfer pricing. then it can determine the price appropriately. survival. in U. and longer distribution channels. devaluation and revaluation. additional cost considerations. and geocentric. a warranty. For example. and distribution. believing that tastes differ so much between countries that it is necessary to create a new product for each market. polycentric. Before establishing the prices. fuel is relatively cheap. in most cases firms will go for some kind of adaptation. Price can be defined by the following equation: The pricing decision enables us to change the price in many ways. through which the firm introduces a unique product in each country. market demand. some of them are: · “Sticker” price changes –. firms opt for a strategy which involves customisation. and product quality. market share. Some common pricing objectives are: profit. return on investment. when moving a product between markets minor modifications are made to the product. On the other hand. and then again.

The acquisition of local firms by global players has resulted in a number of local brands. The reason for transfer pricing may be internal or external. In other cases. Many managers consider transfer pricing as non-market based. where transfer pricing is the act of pricing commodities or services. and propagates certain values worldwide. External factors include taxes. values. perception or interpretation of symbols and stimuli and level of literacy. The target audience differ from country to country in terms of the response towards humour or emotional appeals. and consumption patterns. Sometimes. It involves advertisers and advertising agencies that create ads and buy media in different countries. This industry is growing worldwide. The purpose of international advertising is to reach and communicate to target audiences in more than one country. International advertising can be thought of as a communication process that transpires in multiple cultures that vary in terms of communication styles.Transfer pricing Transfer pricing is the process of setting a price that will be charged by a subsidiary (unit) of a multi-unit firm to another unit for goods and services. Internal transfer pricing include motivating managers and monitoring performance. a firm can use different brand names for historic reasons. The Arm’s Length pricing rule is used to establish the price to be charged to the subsidiary. However. transfer pricing generally refers TPM. Some companies directly perform the distribution service by contacting others whereas a few companies take help from other companies who perform the distribution services. . International advertising International advertising is usually associated with using the same brand name all over the world. Transfer pricing is determined in three ways: market based pricing. in common terminology. tariffs. A firm may find it unfavourable to change those names as these local brands have their own distinctive market. and other charges. Companies have their own ways of distribution. Transfer Pricing Manipulation (TPM) is used to overcome these reasons. The distribution services include: · The purchase of goods. However. International advertising is also reckoned as a major force that mirrors both social values. which are sold between such related units. transfer at cost and cost-plus pricing. local subsidiaries handle their budget. resulting in greater use of local advertising agencies. International advertising is a business activity and not just a communication process. globalised firms use the same advertising agencies and centralise the advertising decisions and budgets. International promotion and distribution Distribution of goods from manufacturer to the end user is an important aspect of business. Governments usually discourage TPM since it is against transfer pricing.

the number of countries in which the firm is doing business gets bigger than that in the earlier stage. customer preferences. there is no international phenomenon.· The assembly of an attractive assortment of goods. Selecting the distribution channel is very important for agents and distributors. The selection of distribution channel is helpful to gain the competitive advantage. International marketing Domestic marketing refers to the practice of marketing within a firm’s home country. The distribution channel is also dependent on the way to manage and control the channel. assuming that the people living in this region have similar choice and at the same time offering different product for American countries. For example. foreign marketing deals with these questions and tries to find answers according to the foreign market conditions and it provides a micro view of the market at the firm’s level. Whereas International or foreign marketing is the practice of marketing in a foreign country. This approach is termed ‘regiocentric approach’. Hence. In domestic marketing a firm has insight of the marketing practices. companies usually take the advantage of other countries for the distribution of their products. Domestic marketing finds the "how" and "why" a product succeeds or fails within the firm’s home country and how the marketing activity affects the outcome. . · Export marketing – Firms start exporting products to other countries. climate and so on of its home country. Sri lanka and Pakistan. culture. the marketing is for the domestic operations of the firm in that country. the company identifies the regions to which the company can deliver same product instead of producing different goods for different countries. making different products for different countries. Domestic vs. · Multinational marketing – In this stage. · The physical movement of goods. · Holding stocks. while it is not totally aware of the policies and the market conditions of the foreign country. In international marketing. Firms start to sell products to various countries and the approach is ‘polycentric’. that is. · International marketing – Now. Here. And hence. · Promoting sale of goods to the customer. The stages that have led to achieve global marketing are: · Domestic marketing – Firms manufacture and sell products within the country. the products are developed based on the company’s domestic market although the goods are exported to foreign countries. a firm may decide to sell same products in India. Whereas. This is a very basic stage of global marketing.

The domestic financial management refers to managing financial services within the country. This is achieved by analysing the requirements and the choice of the customers in those countries. The firm must not have a ’single marketing plan’. · Joint partnership with a local firm – finding a firm that has already established credibility will benefit a lot. A firm that is successful internationally first obtains success locally. it is vital to manage the finance and business accounts appropriately. Q. the product will be considered as genuine and original in some countries. · Licensing – You can sell the rights of your product to a foreign firm.· Global marketing – Company operating in various countries opts for a common single product in order to achieve cost efficiencies. The Financial Management can be categorised into domestic and international financial management. The rise in significance and complexity of financial administration in a global environment creates a great . For example. Here the problem is that the firm may not maintain the quality standard and therefore may hurt the image of the brand. as showcasing some aspects of women clothing is considered immodest and immoral. International trade gave way for the growth of international business. This approach is called ‘Geocentric approach’. in the middle-eastern countries the prior approval of the governing authorities should be taken if a firm plans to advertise a product related to women’s apparel. entrepreneurs capitalised the opportunity to step their foot to conduct business in different parts of the world. When the doors of liberalisation opened. The firm is not considered as the corporate citizen of the world as it has a home base. International financial management refers to managing finance and share between the countries. The main aim of international finance management is to maximise the organisation’s value that in turn will increase the impact on the wealth of the stockholders. There should never be a rigid marketing campaign. The product will be considered as a local product by following this marketing approach. because there are differences between the target markets (that is domestic or international markets).6 Explain briefly the international financial management components with examples and applicability Answer: The term ‘Financial Management’ refers to the proper maintenance of all the monetary transactions of the organisation. Culture is a major factor which influences marketing decisions and practices in a foreign country. It also means recording of transactions in a standard manner that will show the financial position and performance of the organisation. The practice of marketing at the international stage does not designate any country as domestic or foreign. For a corporation to be successful. Few approaches that you can consider for an international marketing are: · Advertise as a foreign product – By doing so.

It is considered to be the leading financial market in the world. Furthermore. trade in services and currency speculation. The firms of all types are now opting to operate their business and deploy their resources abroad. central banks. but is created from a global network of computers that connects the participants from all over the world. · “Spot” and “Forward” contracts – A Spot contract is a binding obligation to buy or sell a definite amount of foreign currency at the existing or spot market rate. But after the end of the Second World War. commercial companies. and multicurrency bonds have necessitated the accurate management of the flow of international funds through the study of international financial management. The spot deal will come to an end in two working days after the deal is struck. The trading in the foreign exchange market may take place in the following forms: · Outright cash or ready – foreign exchange currency deals that take place on the date of the deal. loans. The foreign exchange market is immense in size and survives to serve a number of functions ranging from the funding of cross-border investment. The participant in a foreign exchange market will normally ask for a price. This phenomenon is also called as liberalisation. investment management firms and retail foreign exchange brokers and investors. · Swap – Simultaneous sale and purchase of identical amounts of currency for different maturities. the integration in terms of foreign activities has grown substantially. trade in goods. on or before a certain date. The spot rate that is intended to receive will be set by current market conditions.challenge for financial managers. international stock listing. It is vital to realise that the foreign exchange is not a single exchange. a better spot rate can be received if the amount of dealing is high. hedge funds. A forward contract is a binding obligation to buy or sell a definite amount of foreign currency at the pre-agreed rate of exchange. the differences between the countries have persisted that has given rise to the prevalence of market imperfections Components of International Financial Management Foreign exchange market The Foreign exchange or the forex markets facilitates the participants to obtain. the demand and supply of currency being traded and the amount to be dealt. It carries the greatest risk of exchange rate fluctuations due to lack of certainty of the rate until the deal is carried out. . exchange and speculate foreign currency. The advantage of spot dealing has resulted in a simplest way to deal with all foreign currency requirements. The contributions of different financial innovations like currency derivative. trade. The International Financial Management (IFM) came to its existence when the countries all over the world started opening their doors for each other. The foreign exchange market consists of banks. · Next day – foreign exchange currency deals that take place on the next working day. In general.

The currency derivative trades in markets correspond to the spot (cash) market. currency options and currency swaps are usually traded. but the likely problem to arise is the involvement of premium of particular kind. currency derivatives like the currency features. The premium involved might be a cash amount or it could also influence into the charge of the transaction. · A currency option will prevent unfavourable exchange rate movements in the similar way as a forward contract does. Managing the business becomes difficult if it depends on the selling or buying the currency in the spot market.3. For example. The derivatives can be hedged with other derivatives. The main advantage from derivative hedging is the basket of currency available. This will help to fix the exchange rate immediately and will give a clear idea of knowing the exact cost of foreign currency and the amount to be received at the time of settlement whenever this due occurs. A forward rate is based on the existing spot rate plus a premium or discounts which are determined by the interest rate connecting the two currencies that are involved. These will help the businessmen to enhance their foreign exchange dealings. a currency option is often demonstrated as a forward contract that can be left if it is not followed. · The decision must be made to book a foreign exchange contract with the bank whenever the foreign exchange risk is likely to occur.A forward market needs a more complex calculation. This is often referred to as ‘Economic’ foreign exchange and most difficult to protect a business. For this base. The agreement undertaken to exchange cash flow streams in one currency for cash flow streams in another currency in future is provided by currency swaps. 7. These are usually traded through organised exchanges. It can also be termed as the agreement where the value can be determined from the rate of exchange of two currencies at the spot. the spot market exposures can be enclosed with the currency derivatives. The duration will be up to two years for a forward contract. The authority to buy or sell the foreign currencies in future at a specified rate is provided by currency option. It will permit gains if the markets move as per the expectations. .1 describes the examples of currency derivatives. The three ways of managing risks are as follows: · Choosing to manage risk by dealing with the spot market whenever the need of cash flow rises. Often banks provide currency options which will ensure protection and flexibility. The standard agreement made in order to buy or sell foreign currencies in future is termed as currency futures. A variation in foreign exchange markets can be affected to any company whether or not they are directly involved in the international trade or not.2 Foreign currency derivatives Currency derivative is defined as a financial contract in order to swap two currencies at a predestined rate. Hence. the interest rates of UK are higher than that of US and therefore a modification is made to the spot rate to reflect the financial effect of this differential over the period of the forward contract. Figure 7. In the foreign exchange market. This will result in a high risk and speculative strategy since one will not know the rate at which a transaction is dealt until the day and time it occurs. These will help to increase the funds of foreign currency from the cheapest sources.

the investment across cross-borders and the reallocation of capital between the states. It also consists of set of rules that govern international scenario. · Settlement risks similar to the credit risks occur when the parties involved in the contract fail to provide the currency at the agreed time.1: Example for Foreign Currency Derivatives Some of the risks associated with currency derivatives are: · Credit risk takes place.3. 7. · Legal risks pertain to the counterparties of currency swaps that go into receivership while the swap is taking place. · Liquidity risks occur due to the requirement of available counterparties to take the other side of the trade.Figure 7. · Operational risks are one of the biggest risks that occur in trading derivatives due to human error.3 International monetary systems The international monetary systems represent the set of rules that are agreed internationally along with its conventions. . supporting institutions which will facilitate the worldwide trade. arising from the parties involved in a contract. · Market risk occurs due to adverse moves in the overall market.

The gold happened to be the only standard of value under the system. reversed their currencies with gold bullion and determined to buy and sell the bullion at a fixed cost. This standard was substituted by the gold bullion standard during the 1920s. The gold standard was suspended and the values of different currencies were determined in the market. The drain on the US gold reserves continued up to the 1970s. at the same time the US dollar diminished its significance. which in turn will result in the increase of price abruptly.3. Many large companies opt to use euro rather than the dollar in bond trading with a goal to receive better exchange rates. 7. The sudden increase in the supply of gold may be due to the discovery of rich deposit. The global balance can be corrected by providing sufficient liquidity for the variations occurring in trade. The ‘Japanese yen’ and the ‘German Deutschmark’ strengthened and turned out to be increasingly important in international financial market. In this system. the International Monetary Fund (IMF) was created at the ‘Bretton Woods international Conference’ held in 1944. the value of the currency is fixed by the nations with respect to some foreign currency but not with respect to gold. With a view to maintain a stable exchange rate at the global level. the gold convertibility was abandoned by the United States leaving the world without a single international monetary system. the standard provided for the free circulation between nations of gold coins of standard specification. The higher prices lead to the decreased demands for exports. it became the second most commonly used currency after the dollar in the international market. thereby the nations no longer minted gold coins. It was operating during the late 19th and early 20th centuries. with addition to deferred payment. Instead. the IMF in 1976 decided to be in agreement on the float exchange rates.4 International financial markets . This system was also discarded in the 1930s.International monetary systems provide the mode of payment acceptable between buyers and sellers of different nationality. Most of the nations fixed their currency to the US dollar funds in the United States. The advantages of this system depend in its stabilising influence. The gold-exchange system Trading was conducted internationally with respect to the gold-exchange standard following World War II. This in turn has resulted in the lowered value of domestic currency. Hence. The gold and gold bullion standards The gold standard was the first modern international system. Iraq have opted to trade petroleum in Euro than in Dollar. The Euro was set up in financial market in 1999 as a replacement for the currencies. Any nation which exports more than its import would receive gold in payment of the balance. Later in 1971. Floating exchange rates and recent development After the abundance of the gold convertibility by the US. Very recently the some of the members of Organisation of Petroleum Exporting Countries (OPEC) such as Saudi Arabia. Thereby it can be operated successfully.

· International security markets – The banks have experienced the greatest growth in the past decade because of the continuity in providing large portion of the international financial needs of the government and business. fixed or floating interest rates and maturities varying from one month to thirty years in an international capital markets. international capital markets and international securities markets are as follows: · The foreign currency markets – The foreign currency market is an international market that is familiar in structure. . · International money markets – A money market can be conventionally defined as a market for accounts. This has resulted greatly to the capacity of individuals on these markets to accomplish instantaneous arbitrage. The majority of the deregulation that has differentiated government policy over the past 10 to 15 years. · International capital markets – The international capital provides links among the capital markets of individual countries. Hence the purchase of goods and services is preceded by the purchase of currency. deposits or deposits that include maturities of one year or less. The purpose of the foreign currency markets. it is extremely simple to move the currencies and capital around the globe. · Gain in technology and transaction cost efficiency – The advancements in technology is not only taking place in the distribution of information. The following are the reasons given for the enormous growth in the trading of foreign currency: · Deregulation of international capital flows – Without the major government restrictions. This is also termed as the Euro currency markets which constitute an enormous financial market that is beyond the influence and supervision of world financial and government authorities. The firms enjoy the freedom to raise capital. Also. Euro currencies are bank deposits and loans existing outside any particular country. in addition to the performance of exchange or trading. international money markets. The Euro currency market is a money market for depositing and borrowing money located outside the country where that money is officially permitted tender. The heart of the international financial market is being governed by the market of currency where the foreign currency is denominated by the international trade and investment. This means that there exists no central place where the trading can take place. It also comprises a separate market of their own. debit. The greater part of the worlds that deal in foreign currencies is still taking position in the cities where international financial activity is centred. The ’market’ is actually the telecommunications like among financial institutions around the globe and opens for business at any time. the capital market that flows in to the Euro markets. The private placements.International foreign markets provide links connecting the financial markets of each country and independent markets external to the authority of any one country. bonds and equities are included in the international security market.

The WTO is the successor to the General Agreement of Tariffs and Trade (GATT). The scope of international financial management includes management of working capital. The other major functions include: · Helping trade flows by encouraging nations to adopt discriminatory trade policies.What is WTO? Explain its objectives. In April 1994. There are faster swings in the stock values and interest rates. The agreements comprise the rights and obligations of the government that are enforceable in multilateral framework. adding to the enthusiasm for moving further capital at faster rates. The Marrakesh Declaration of 15th April 1994 was formed to strengthen the world economy that would lead to better investment. It is the only international body that deals with the rules of trades between nations. WTO represents the latest attempts to create an organisational focal point for liberal trade management and to consolidate a global organisational structure to govern world affairs. The agreements mainly cover goods. Assignment Set. .2 (60 Marks) 1 .· Market upwings – The financial markets have become increasingly unstable over recent years. WTO created a qualitative change in international trade. functions and structure WTO World Trade Organisation (WTO). and to open services markets. · Promoting employment. trade. WTO was established on 1st January 1995. income growth and employment throughout the world. India is one of the founder members of WTO. WTO has attempted to create various organisational attentions for regulation of international trade. services and intellectual property.1 Objectives and functions The key objective of WTO is to promote and ensure international trade in developing countries. Morocco. expanding productions and trade and raising standard of living and income and utilising the world’s resources. The agreement supports individual countries’ commitments to lower customs tariffs and other trade barriers. · Providing forum for trade negotiations. According to the agreement. financing decisions and taxation. The agreements recommend governments to make their trade policies transparent.3. the Final Act was signed at a meeting in Marrakesh. · Ensuring that developing countries secure a better share of growth in world trade. The WTO agreements are a set of rules that are followed by the member governments while formulating policies and practices in the area of international trade. the government must notify the WTO about the measures adopted to make their trade policies transparent 12.

The center also provides assistance in establishing export promotion and marketing services. The negotiations can be on matters already in the WTO agreements or matters not addressed in the WTO law. The dispute settlement system is prohibited from adding or deleting the rights and obligations provided in the WTO agreements. This depends on the country’s individual export interest and their participation in WTO-bodies. The center accepts requests from member countries. · Administrating dispute settlement – The important function of WTO is the administration of the WTO dispute settlement system. It helps in settling multilateral trading dispute. The export promotion is done through the International Trade Center established by the GATT in 1964. · Cooperating in global economic policy-making – The main function of the WTO is to cooperate in global economic policy-making. WTO analyses the impact of liberalisation on the growth and development of national economies which is the important factor in the success of the economy. China. · Providing forum for negotiations – The WTO provides a permanent forum for negotiations among members. The WTO helps in solving the problems of developing economies. a separate declaration was adopted to achieve this objective. The developing states are provided with trade and tariff data. International Monetary Fund (IMF) that are involved in monetary and financial matters. The developing countries such as India. . to improve and maintain the cooperation with international organisations such as the World Bank. usually developing countries for support in formulating and implementing export promotion programmes. Brazil and others have an important role in the organisation. The Dispute Settlement Body (DSB) is responsible for the settlement of disputes. Mexico. The WTO dispute settlement system helps to: ° Preserve the rights and responsibilities of the members. The member-governments sign and confirm all WTO agreements on attainment. In the Marrakesh Ministerial Meeting in April 1994. Through this WTO proves its commitment in the upliftment of the world economy. The declaration specifies the responsibility of WTO as. A dispute arises when a member country adopts a trade policy and other fellow members consider it as a violation of WTO agreements.· Resolving trade disputes. The new members benefit hugely from these services. It is operated by the WTO and the United Nations. The important functions of the WTO as stated in the WTO agreement are the following: · Developing transitional economies – Majority of the WTO members belong to developing countries. · Monitoring implementation of the agreement – The WTO administers sixty different agreements that have the statue of international legal documents. · Providing help for export promotion – The WTO provides specialised help for export promotion to its members. The center provides information on export market and marketing techniques.

· The Committee on Balance of Payments conducts consultations between WTO members and countries that take trade-restrictive measures to handle balance-of-payments difficulties.3. sell and deliver products and services worldwide". The daily activities of the WTO are conducted by subsidiary bodies and principally by the General Council which is composed of WTO members. which is the highest authority. 12. in short an electronic medium in support of all the activities of business. It also acts as the Trade Policy Review Body that conducts regular reviews of the trade policies of the individual WTO members. · Committee on Budget and Administration manages issues relating to financing and budget of WTO. The e-business mainly stands for the internet enabled business. There are four entities in the internet enabled business. customers and also the competitors coordinate the e-business. The WTO members meet in every two years and take decisions on all matters under the multilateral trade agreements.1. The members report to the Ministerial Conference.2 Explain briefly the nature of e-business and the challenges involved. Answer: The e-business denotes a major trend in the management like any other trends such as the supply chain management. The General Council on behalf of the Ministerial Conference administers as the Dispute Settlement Body to manage the dispute settlement procedures. The General Council delegates responsibility to other major bodies. E-business. · Trade in Services and Trade of Intellectual Property Rights are the two councils that have responsibility for their respective WTO agreements and can establish their own subsidiary bodies if required. market.2 Structure The structure of the WTO consists of the Ministerial Conference. buy.° Clarify the current provisions of the agreements. mail order service or the service economy. These four entities are as shown in the figure 11. The e-business is done by many asynchronous experts across the globe. They are: · Council for Trade in Goods manages the implementation and functioning of all agreements covering trade in goods. Q. Nature of E-Business E-business can be defined as "the use of networks and information technology in order to electronically design. The suppliers. This body consists of the representatives from all WTO members. meaning ‘electronic-business’. deals with application of information and communication technologies. . · The Committee on Trade and Development manages issues relating to the developing countries.

The e-business is mainly the extension of the products and services. there are many technical and business trends that are associated with it. . These factors are explained as follows: · Strategic factors. There are some important trends in the e-business that are described as follows: · Technology focus is on e-business – The hardware. Some important trends in e-business are explained below. ° The strategic position of the company in the market has strengthened. In this section let us learn about the challenges of e-business. software. profit. As the e-business is growing.The Challenges of E-Business In the previous section. service and features. · E-business produces cumulative effects – E-business is long lasting. ° The web centric marketing strategy. There are some major success factors for e-business. E-business is crucial to business success. we have studied about the e-business models. and employees changes as we implement e-business. ° The technologies related to the internet are used as a complement for the existing technologies. The relationship with customers. focus on providing the tools for e-business. The failures become dramatic with e-business as it is more visible externally. The process of e-business is long lasting than that of the re-engineering. These factors include the strategic factors. structural factors and the management oriented factors. Many companies come out with changes that are necessary for e-business to become profitable. quality. ° The basis of competition that is not shifted from traditional competitive advantages such as cost. ° The new competitors and market shares are tracked. · E-business implementation effects success and failure of a business – There will be both the success and the failures that are associated with any kind of business. and network vendors. suppliers.

There are so many mechanisms for technology innovation and diffusion.° The frequent review of the distribution and supply chain model is done in order to maximise the company’s gain. · Management-oriented factors. ° Good e-business education and training to employees. ° Good cost control. These areas are explained in the following sections. ° Current systems expanded to cover entire supply chain.1 Technology The technology plays a major role in the concept of new economy. ° Correct digital infrastructure. ° The buyer’s behaviour and the customer personalisation. The e-business is facing challenges mainly in the areas of technology. ° The e-business offered good products and services. The technology has two dimensions. and legal issues. · Structural factors. ° The necessary support for e-business from the top management. ° The top management has to communicate about the value of e-business throughout the organisation. one is the shift from manufacturing to services and second is the shift from physical resources to the knowledge resources. Many of the organisations will include different technologies both for quantitative and qualitative terms. 11. ° The awareness and understanding of capabilities of technology by executives. management and customers. logistics. . ° The organisation wide commitment to e-business leadership. ° The customer’s and partner’s expectations from the well managed. both within and outside the countries.5. ° The innovation was allowed when risks are low. ° The first-mover advantage and quick time to start.

11. Now-–aday with the help of wireless phones. credit and debit card handling. an ebusiness needs the special infrastructure for tuning and managing the interactions. They have added more value in terms of population. E-business is all about the trust between buyer and the seller so one must be careful while dealing with the transactions which involve the handling of credit and debit cards. Personal Digital Assistants (PDAs). Now–a-day. shipping companies. The logistics presents e-business with challenges that exceeds the expectations of the customers with a reasonable cost. Disclaimer notice is required at the start of any business website. and also the customers. Internet also plays a vital role as it helps the small and medium enterprises in providing the cost effective possibilities to advertise their products. When some concepts are copyright then it is necessary to credit the original authors.2 Logistics The logistics is defined as the planning framework for maintaining the material.3 Legal concerns As there is tremendous usage of internet. There are uncertainties in e-business when compared with direct business. internet marketing and advertising frauds and e-business email scams and hence one must be careful while performing e-business.Small scale enterprises play a vital role in the implementation of new technologies. In order to meet the high expectations of the customers. internet can be accessed from anywhere in the world. The introduction of technologies like the common database. information. illegal. Internet also provides the contacts to buyers and suppliers on a global basis. privacy. 11. electronic networks and value added services are helpful for speeding up the transactions and these are fundamental at the industrial level. and capital flow.5. logistic providers. The logistics includes the complex information. it is better to consider the legal concerns behind the internet. We also have an option of going back and seeing the basics of that information. E-business is helps the radical transformation in the way that the business is done. There will also be copyright issues that is copying something from other sites and presenting the same content as their own. The uncertainties are related to the security. attempt has been made to reduce the inventory costs. The PCI Data Security standard (PCI DSS) needs to be followed by one who handles the credit card information. It becomes very difficult to trust the actual with the unethical. communication and control systems required in the business environment. It is important to check for plagiarism when the company is publishing their own articles. and services that they are offering. .5. This is because whatever is printed on the net will be accessed by public throughout the world. The security is the primary concern in e-business. employment. As a result the customers must be provided proper security and privacy to access internet. The e-business has to undergo lot of challenges in implementing the technologies that are helpful for the organisation since many of the people in the organisation will not be interested to shift to the new technology and learn the new skills. It is necessary to concern the privacy and legal matters while writing a copy and maintaining a client’s e-business. The interactions can be in between the shippers.

i. the issuing bank and the confirming bank. for deals between a supplier in one country and a customer in another. the documents a beneficiary has to present in order to receive payment include a commercial invoice. The letter of credit can also be source of payment for a transaction. The cryptographic methods for eliminating the risks those are associated with the non repudiation and security. etc. and documents proving the shipment was insured against loss or damage in transit. Almost all letters of credit are irrevocable. The legal action is taken against the false advertisements also. bill of lading.[2] They are also used in the land development process to ensure that approved public facilities (streets.If the webmasters include some unethical information about the client then that can cause everlasting negative consequences for the client. . · There is a need for matching both the e-customers and e-merchants with the legally responsible parties in the real world. · Contract information – The advent of the e-business over the net is responsible for various legal issues regarding the formation of the electronic contracts. This e-business creates the legal relationship between the seller and buyer.Letter of credit. The parties to a letter of credit are usually a beneficiary who is to receive the money.) will be built.. This type of contract is mainly found on the web site that offers goods and services for the sale. if any. There is a jurisdiction problem in the disputes between the buyer and seller regarding where the contract was formed and which state law applies for the contract. Answer: Letter of credit: A standard. sidewalks. the issuing bank of whom the applicant is a client. meaning that redeeming the letter of credit will pay an exporter. Typically. In executing a transaction. The risks associated with conducting e-business over the internet are explained as follows: · Jurisdiction – Contracting over the cyberspace is a challenge for the website owners and the internet is the form of communication that rises above the spatial boundaries.e. · Contact validity – The emerging issue is the legal validity of web wrap or click on contracts. In such cases the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits applies (UCP 600 being the latest version). 3 Mention the relevance of these terms in International business . Letters of credit are used primarily in international trade transactions of significant value. storm water ponds. Bill of Lading and Factoring. letters of credit incorporate functions common to giros and Traveler's cheques. used primarily in trade finance. There is a need for on cryptographic methods for reducing the risks associated with the identification and authentication. and the advising bank of whom the beneficiary is a client. commercial letter of credit (LC[1]) is a document issued mostly by a financial institution. which usually provides an irrevocable payment undertaking. cannot be amended or canceled without prior agreement of the beneficiary.

buyer's bank supplies a letter of credit to seller.sometimes referred to as BOL or B/L) is a document issued by a carrier to a shipper. acknowledging that specified goods have been received on board as cargo for conveyance to a named place for delivery to the consignee who is usually identified. [citation A bill of lading (BL .[citation needed] Negotiation means the giving of value for draft(s) and/or document(s) by the bank authorized to negotiate. not goods. A sight LC means that payment is made immediately to the beneficiary/seller/exporter upon presentation of the correct documents in the required time frame. Whereas in a revocable LC changes to the LC can be made without the consent of the beneficiary. The description of charges and who would be bearing them would be indicated in the field 71B in the Letter of Credit. After a contract is concluded between buyer and seller. The LC could be irrevocable or revocable. viz the nominated bank. reimbursements and other charges like courier are to the account of applicant or as per the terms and conditions of the Letter of credit. An irrevocable LC cannot be changed unless both the buyer and seller agree. without giving of value / agreed to give. rail. The term . and sea. does not constitute a negotiation. Mere examination of the documents and forwarding the same to the letter of credit issuing bank for reimbursement. A through bill of lading involves the use of at least two different modes of transport from road.Letters of credit (LC) deal in documents. air. negotiation of documents. A time or date LC will specify when payment will be made at a future date and upon presentation of the required documents. If the letter of credit is silent on charges. then they are to the account of the Applicant. All the charges for issuance of Letter of Credit.

Description of goods. The BL also contains other details such as the name of the carrying vessel and its flag of nationality. Shipper's name. The BL must contain the following information: • • • • • • • Name of the shipping company. the short form simply refers to the main contract as an existing document. irrespectively of who the actual holder of the B/L. and owner of the goods.e. i. the importer's name is not shown as consignee.derives from the verb "to lade" which means to load a cargo onto a ship or other form of transportation. In general. Order and notify party. It is a receipt signed by the carrier confirming whether goods matching the contract description have been received in good condition (a bill will be described as clean if the goods have been received on board in apparent good condition and stowed ready for transport). or a chartering contract. A BL endorsed in blank is transferable by delivery. the marks and numbers on the packages in which the . however. a BL may be consigned to the order of the shipper. The bill of lading has also provision for incorporating notify party. A bill of lading can be used as a traded object. This is the person whom the shipping company will notify on arrival of the goods at destination. it may be endorsed affecting ownership of the goods actually being carried. like a cheque or other negotiable instrument.e. The standard short form bill of lading is evidence of the contract of carriage of goods and it serves a number of purposes: • • • It is evidence that a valid contract of carriage. the shipper may endorse it in blank or to a named transferee. and it may incorporate the full terms of the contract between the consignor and the carrier by reference (i. The carrier's duty is to deliver goods to the first person who presents any one of the original BL. and It is also a document of transfer. It is therefore essential that the exporter retains control over the full set of the originals until payment is effected or a bill of exchange is accepted or some other assurance for payment has been made to him. may be at a specific moment. whereas the long form of a bill of lading (connaissement intégral) issued by the carrier sets out all the terms of the contract of carriage). being freely transferable but not a negotiable instrument in the legal sense. Once the goods arrive at the destination they will be released to the bearer or the endorsee of the original bill of lading. it binds the carrier to its terms. Flag of nationality. it governs all the legal aspects of physical carriage. Gross/net/tare weight. exists. is separate from any contract for the sale of the goods to be carried. and Freight rate/measurements and weighment of goods/total freight While an air waybill (AWB) must have the name and address of the consignee. and. Where the word order appears in the consignee box. This matches everyday experience in that the contract a person might make with a commercial carrier like FedEx for mostly airway parcels. The carrier need not require all originals to be submitted before delivery.

when we hand over the bill of lading we surrender title to the goods and our power of sale over the goods. Main types of bill [edit] Straight bill of lading In this importer/consignee/agent is named in the bill of lading. it can be indorsed (legal spelling of endorse.goods are packed. . This direct liability is called Surrender Bill of Lading (SBL). First.e. in which a seller agrees to use a certain transportation to ship a good to a certain location. maintained in all statute.g. The opposite term is a soiled bill of lading.'s intention to transfer. It details to the quality and quantity of goods. including Bills of Exchange Act 1909 (CTH)) by A Ltd. Thus. Factoring differs from a bank loan in three main ways. invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. whether freight costs have been paid or whether payment of freight is due on arrival at the destination. i. If the date on which the goods are loaded on board is different from the date of the bill of lading then the actual date of loading on board will be evidenced by a notation the BL. it is called straight bill of lading. the number of packages. Factoring is a financial transaction whereby a business job sells its accounts receivable (i. their weight and measurement. or the right to take delivery can be transferred by physical delivery of the bill accompanied by adequate evidence of A Ltd. a brief description of the goods. [edit] Order bill of lading This bill uses express words to make the bill negotiable. e. a BL that reflects the fact that the carrier received the goods in good condition. Such bill may be created explicitly or it is an order bill that fails to nominate the consignee whether in its original form or through an endorsement in blank. The document is dated and signed by the carrier or its agent. which reflects that the goods are received by the carrier in anything but good condition. In certain cases a carrier may issue a separate on board certificate to the shipper. Consequently. A clean bill of lading states that the cargo has been loaded on board the ship in apparent good order and condition. The particulars of the container in which goods are stuffed are also mentioned in case of containerised cargo. It is a document. [edit] Surrender bill of lading Under a term import documentary credit the bank releases the documents on receipt from the negotiating bank but the importer does not pay the bank until the maturity of the draft under the relative credit. [edit] Bearer bill of lading This bill states that delivery shall be made to whosoever holds the bill. A bearer bill can be negotiated by physical delivery. Such a BL will not bear a clause or notation which expressively declares a defective condition of goods and/or the packaging. it states that delivery is to be made to the further order of the consignee using words such as "delivery to A Ltd. where the bill assigned to a certain party. The date of the BL is deemed to be the date of shipment. or to order or assigns"..e.

and makes accommodation for this when determining the amount that will be given to the seller. and the factor. the remainder of the total invoice amount held until the payment by the account debtor is made and c. b. as well as interest based on how long the factor must wait to receive payments from the debtor.) the fee. with the receivables used as collateral. By reducing the size of its cash balances."[6] or when the financial transaction is substantially a transfer of all of the rights associated with the receivables and the seller's monetary liability under any "recourse" provision is well established at the time of the sale. under the Generally Accepted Accounting Principles receivables are considered sold when the buyer has "no recourse. less the amount lost due to non-payment. The seller then sells one or more of its invoices (the receivables) at a discount to the third party. The receivable is essentially a financial asset associated with the debtor's liability to pay money owed to the seller (usually for work performed or goods sold). whereas invoice discounting is borrowing where the receivable is used as collateral.[4] The three parties directly involved are: the one who sells the receivable. the cost associated with the transaction which is deducted from the reserve prior to it being paid back the seller. A company sells its invoices at a discount to their face value when it calculates that it will be better off using the proceeds to bolster its own growth than it would be by effectively functioning as its "customer's bank. the specialized financial organization (aka the factor).factoring is the sale of receivables.[3] while factoring is a Financial Transaction that involves the Sale of any portion of the firm's Receivables. to obtain cash. the debtor. a bank loan involves two parties whereas factoring involves three.[1][2] not the firm’s credit worthiness.[2] In the United States. Secondly. It is different from forfaiting only in the sense that forfaiting is a transaction-based operation involving exporters in which the firm sells one of its transactions. otherwise the seller could potentially risk further advances from the factor. The factor's overall profit is the difference between the price it paid for the invoice and the money received from the debtor. Critical to the factoring transaction. Finally.[2][1] Accordingly. indicating the factor obtains all of the rights and risks associated with the receivables. [5] The factor also estimates the amount that may not be collected due to non-payment. the factor obtains the right to receive the payments made by the debtor for the invoice amount and must bear the loss if the debtor does not pay the invoice amount. the financial transaction is treated as a loan. The sale of the receivables essentially transfers ownership of the receivables to the factor. and the factor bills the debtor and makes all collections. There are three principal parts to the factoring transaction.) the reserve. The use of factoring to obtain the cash needed to accommodate the firm’s immediate Cash needs will allow the firm to maintain a smaller ongoing Cash Balance.[7] Otherwise. a percentage of the invoice face value that is paid to the seller upon submission. the account debtor is notified of the sale of the receivable.[2][1] Factoring is a word often misused synonymously with invoice discounting[citation needed] . factoring is not a loan – it is the purchase of a financial asset (the receivable)."[8] Accordingly.the emphasis is on the value of the receivables (essentially a financial asset). Sometimes the factor charges the seller a service charge. the seller should never collect the payments made by the account debtor. more money is made available for investment in the firm’s growth. a. Factoring is a method used by a firm to obtain cash when the available cash balance held by the firm is insufficient to meet current obligations and accommodate its other cash needs. Factoring occurs when the rate of return on . Usually.) the advance. such as new orders or contracts.

against the costs associated with the use of Factoring. The Cash Balance a business holds is essentially a Demand for Transactions Money. firms find it necessary to both maintain a Cash Balance on hand. the size of the Cash Balance the firm decides to hold is directly related to its unwillingness to pay the costs necessary to use a Factor to finance its short term cash needs. and how large a Cash Balance it wants to maintain in order to ensure it has enough Cash on hand during periods of low Cash Flow. the business must balance the opportunity cost of losing a return on the Cash that it could otherwise invest. the more cash is needed from another source (Cash Balances or a Factor) to cover its obligations during this time. Many businesses have Cash Flow that varies. the variability in the cash flow will determine the size of the Cash Balance a business will tend to hold as well as the extent it may have to depend on such financial mechanisms as Factoring. and to use such methods as Factoring. If cash flow can decrease drastically. As stated. the business must balance the cost of obtaining cash proceeds from a Factor against the opportunity cost of the losing the Rate of Return it earns on investment within its business. Generally. Cash flow variability is directly related to 2 factors: 1. The extent Cash Flow can change. As indicated. The length of time Cash Flow can remain at a below average level. Because of this. the trade off between the return the firm earns on investment in production and the cost of utilizing a Factor is crucial in determining both the extent Factoring is used and the quantity of Cash the firm holds on hand. in order to enable them to cover their Short Term cash needs in those periods in which these needs exceed the Cash Flow. the longer a relatively low cash flow can last.the proceeds invested in production exceed the costs associated with Factoring the Receivables. the business will find it needs large amounts of cash from either existing Cash Balances or from a Factor to cover its obligations during this period of time. In this situation. A business might have a relatively large Cash Flow in one period. Therefore. Each business must then decide how much it wants to depend on Factoring to cover short falls in Cash.[9] The solution to the problem is: [10] where • • • • CB is the Cash Balance nCF is the average Negative Cash Flow in a given period i is the [Discount Rate] that cover the Factoring Costs r is the rate of return on the firm’s assets[11] . The problem faced by the business in deciding the size of the Cash Balance it wants to maintain on hand is similar to the decision it faces when it decides how much physical inventory it should maintain. 2. Likewise. and might have a relatively small Cash Flow in another period.

to spearhead the initiative to promote and support Agri-exports. Reserve Bank of India. which include: Research & Planning. Small and Medium Enterprise: The group handles credit proposals from SMEs under various lending programmes of the Bank. The volume of B2B (Business-to-Business) transactions is much higher than the volume of B2C transactions. glass for windscreens. For example. Export Credit Guarantee Corporation of India. Loan Recovery.[2] Exim Bank is managed by a Board of Directors. Information Technology. Contrasting terms are business-to-consumer (B2C) and business-to-government (B2G).Q. Project Finance / Trade Finance Group handles the entire range of export credit services such as supplier's credit. Answer: Export-Import Bank of India is the premier export finance institution of the country. and the business community. Internal Audit. such as between a manufacturer and a wholesaler. Importers. • • • • • b) What are B2B and C2B business models? Business-to-business (B2B) describes commerce transactions between businesses. Export Marketing Services Bank offers assistance to Indian companies. Legal. to enable them establish their products in overseas markets. which has representatives from the Government. Human Resources Management and Corporate Affairs. Management Information Services.4 a) Explain the role played by EXIM bank. and . Export Services Group offers variety of advisory and value-added information services aimed at investment promotion. and overseas investment by Indian companies. an automobile manufacturer makes several B2B transactions such as buying tires. Besides these. specifically sale of the finished product to the end customer. or between a wholesaler and a retailer. The Group handles projects and export transactions in the agricultural sector for financing. pre-shipment Agri Business Group. the Support Services groups. set up in 1982 under the Export-Import Bank of India Act 1981. The primary reason for this is that in a typical supply chain there will be many B2B transactions involving sub components or raw materials. and only one B2C transaction. The Bank's functions are segmented into several operating groups including: • Corporate Banking Group which handles a variety of financing programmes for Export Oriented Units (EOUs). a financial institution. Corporate Finance. public sector banks.

to achieve maximum benefit the intermediary should be linked seamlessly to the buyer’s purchasing . Buyer-Oriented Marketplace Under this model.makers and customers. A supplier-oriented marketplace may also provide an auctioning facility to offload surplus inventory or offer discounts to customers. With the transaction handled electronically. is a single (B2C) transaction. One company that has successfully exploited this model is GE Lighting. instruments. and tools in Europe. a percentage may be charged in the case of value-added services such as auctions. they are now using similar tools within the business so employees can connect with one another. and VerticalNet that provides intermediaries for many industries including electronics. It is established by an electronic intermediary that runs a marketplace where suppliers and buyers have a central point to come together. electrical. In this model. some intermediaries may charge a flat fee per transaction to both the buyer and suppliers.com).com. a number of models have begun to emerge that manage transactions between buyers and suppliers: 1. Many professional institutions and the trade publications focus much more on B2C than B2B. this can be referred to as "B2B" communication The term "business-to-business" was originally coined to describe the electronic communications between businesses or enterprises in order to distinguish it from the communications between businesses and consumers (B2C). In relation to payment. Due to the aforementioned limitations associated with EDI. RS Components is a leading distributor of electronic. and utilities.or open to all-comers. An example of this model is RS Components (rswww. a finished vehicle sold to the consumer. An example is iMark. The final transaction. impacting upon the buyer-supplier relationship in a number of areas. although most sales and marketing personnel are in the B2B sector. a buyer opens an electronic market on its own server and invites potential suppliers to bid on the announced Requests for Quotation (RFQs).where members and trading partners are vetted for legal and financial probity . Today it is widely used to describe all products and services used by enterprises. The purchasing department receives electronic requisitions from internal customers that are then sent to potential suppliers over the Internet. however. Supplier-Oriented Marketplace In this model. 3. Business-to-Business Intermediary This model is sometimes referred to as a ‘hub’ or ‘exchange’. Exchanging information via extranets costs less and is more effective than through older traditional methods such as faxes and voicemail. 4. combined with personalized customer promotions based on the buying profiles of its major customers. Established Buyer-Supplier Relationship This is a pre-determined one-to-one relationship between a buyer and supplier that is supported by electronic commerce technologies. The marketplace provides fast search and retrieval of 100. An intermediary may be closed .focus on an industry and provide content that is specific to the industry’s value system of buyers and suppliers. Companies are now pursuing a more intensive and interactive relationship with their suppliers. NEC has developed an advanced information system to carry out a large part of its procurement activities. These intermediaries may attempt to aggregate demand for buyers in order to obtain reduced prices and more favorable terms from suppliers.provide the same function for a variety of industries. repetitive transactions. Although the exploitation of Internet technologies at the business-to-business level is in its infancy. suppliers are notified of incoming RFQs and are given seven days to prepare bids and send them back over the extranet to GE. which acts as an intermediary between buyers and suppliers of used capital equipment in different industries.000 products. telecommunications. both organizations and consumers use the supplier-provided marketplace. Horizontal . Within two hours of the purchasing department starting the process. It eventually came to be used in marketing as well. Supply-side intermediaries may be run by consortia of manufacturers such as Chemdex that acts as an intermediary for suppliers to the life sciences industry. process. This is the most common type of B2B model. In the case of large. including the integration of manufacturing systems and supplier involvement in new product development. the procurement function has been able to concentrate on more strategic activities rather than clerical and administration tasks. These B2B hubs tend to focus mainly on non-core items that may range from stationery and computers to catering services and travel. with the marketplace itself acting as a trusted intermediary. Alternatively. initially describing only industrial or capital goods marketing. It is important to note that intermediaries may be biased towards either buyers or suppliers. buy-side intermediaries may be run by a consortia of customers such as Covisint for car makers or by independent organizations such as Achilles for utilities. For example. There are two types of hubs: • • Vertical . Similarly. Many businesses are now using social media to connect with their consumers (B2C). and mechanical components. Examples include e-Steel that acts as an intermediary between steel. companies have now turned their attention towards the Internet to support these types of buyer-supplier relationships. both business buyers and individual consumers use the same supplier-provided marketplace.rubber hoses for its vehicles. 2. B2B is also used in the context of communication and collaboration. ranging from procurement notices to settlement on the Internet. When communication is taking place amongst employees.

and what they term ‘TouchPoints’ in the company. Consumer A consumer in the C2B business model can be any individual who has something to offer either a service or a good. powerful software) C2B business models like most of C2C models like Ebay are based on 3 players: a consumer acting as seller. In the context of competitive advantage and the influence of the Internet.and the suppliers’ systems so that the entire purchasing process can be executed electronically.com).com affiliation program) A photographer or a designer offering stock images to companies by selling his artwork through Fotolia or istockphoto for example Any individual answering a poll through a survey site Any individual with connections offering job hiring service by referring someone through referral hiring sites like jobster. Depending on the model. The advent of the C2B scheme is due to major changes: • • Connecting a large group of people to a bidirectional network has made this sort of commercial relationship possible. A successful electronic business strategy will alter the nature of the product or service being offered. as well as those of their customers. The large traditional media outlets are one direction relationship whereas the internet is bidirectional one. This framework provides a way of distinguishing between buying and selling activities to better understand the interrelationships between customers and suppliers’ business processes. high performance computer. a business acting as buyer and an intermediary dealing with the connection between sellers and buyers.com or h3. the "consumer" can be: • • • • A webmaster/ blogger offering advertising service (through Google Adsense program for example or amazon. and competitors. Consumer-to-business (C2B) is an electronic commerce business model in which consumers (individuals) offer products and services to companies and the companies pay them. and the author might receive affiliate revenue from a successful sale. Decreased cost of technology : Individuals now have access to technologies that were once only available to large companies ( digital printing and acquisition technology. The individual is paid for the work provided to the companies. suppliers. This kind of economic relationship is qualified as an inverted business type. Here are some examples of potential companies which can be such clients: .com Business Business in the C2B business model represents any companies buying goods or services to individual trough intermediaries. or the buyer-supplier relationship. We can see this example in blogs or internet forums where the author offers a link back to an online business facilitating the purchase of some product (like a book on Amazon. its value in the marketplace. This business model is a complete reversal of traditional business model where companies offer goods and services to consumers (business-to-consumer = B2C). customer/supplier lifecycle is a useful framework for understanding an organization’s business processes.

Google Adsense for web publisher) whereas other companies like Fotolia have only one access because buyers and sellers can be the same.com through its affiliation program. For example. Flash animations Job Hiring Service H3 Josbster Jobmeeters September 24. 2005 in C2B Business Model | Permalink | Comments (2) | TrackBack (0) . We can differentiate two kinds of intermediaries: • • Extern intermediary : they act as a extern agent within the relation between companies and individual (ex : referral hiring site) Intern intermediary: they play the role both of business and intermediary. Vectors. The intermediary plays two roles: • • It promotes goods and services offered by individuals by proposing a distribution channel. technical expertise It offers buyers a contact to a mass of individuals and takes care of money transactions and legal aspects We can notice that some intermediaries prefer creating two different accesses one for buyers and one for sellers (Google Adwords for advertiser . logistic and financial support.• • • Any company which wants to fill a job (through referral hiring sites) Any company needing to advertise online (through Google Adwords program for example) Any advertising agency which needs to buy a stock photo (through microstock sites) Intermediary The Intermediary is the crucial element since it creates the connection between business which needs a service or a good and a mass of individuals. Intermediary is usually a portal both for buyers (businesses) and seller (individuals). It offers what individuals can't do themselves : large promotion. it is the case of amazon. Amazon pays individual to promote its own products. Few types of intermediaries Intermediar Examples y Advertising Site Microstock Site Refferal Hiring Site Google Adwords/Adsense Tradedoubler Commission Junction Fotolia Shutterstock Istockphoto What do they sell? Advertising services through search engines and websites Stock Photos.

But globalisation has also thrown up new challenges like growing inequality across and within nations. diseases and pollution Impact on India: . investment and financial flows initiated in the nineties has progressively lowered the barriers to competition and hastened the pace of globalisation Though the precise definition of globalisation is still unavailable a few definitions worth viewing. Another negative aspect of globalisation is that a great majority of developing countries remain removed from the process. internationalisation of financial markets. population migrations and more generally increased mobility of persons. goods. development of advanced means of communication.C2B vs B2C : Graphical Representation Q. Stephen Gill: defines globalisation as the reduction of transaction cost of transborder movements of capital and goods thus of factors of production and goods. The frontiers of the state with increased reliance on the market economy and renewed faith in the private capital and resources. growing importance of MNC's.5 What kind of impact will globalization and international business environment create on Indian businesses? [10 marks] Globalisation is the new buzzword that has come to dominate the world since the nineties of the last century with the end of the cold war and the break-up of the former Soviet Union and the global trend towards the rolling ball. Guy Brainbant: says that the process of globalisation not only includes opening up of world trade. Greater access to developed country markets and technology transfer hold out promise improved productivity and higher living standard. a process of structural adjustment spurred by the studies and influences of the World Bank and other International organisations have started in many of the developing countries. data and ideas but also infections. volatility in financial market and environmental deteriorations. Till the nineties the process of globalisation of the Indian economy was constrained by the barriers to trade and investment liberalisation of trade. Also Globalisation has brought in new opportunities to developing countries. capital.

including almost all quantitative restrictions. Peak tariff rates are to be reduced to be reduced to the minimum with a peak rate of 20%. Korea and Indonesia.India opened up the economy in the early nineties following a major crisis that led by a foreign exchange crunch that dragged the economy close to defaulting on loans. The new policy regime radically pushed forward in favour of amore open and market oriented economy. When GDP is calculated on a purchasing power parity basis. and Mexico was more than twice that of India. Though growth rates has slumped to the lowest level 4. start of the privatisation programme.1% in 2001-02.9% it was still lower than the growth rate in China. reduction in the number of areas reserved for the public sector. The response was a slew of Domestic and external sector policy measures partly prompted by the immediate needs and partly by the demand of the multilateral organisations. Consequently India's position in the global economy has improved from the 8th position in 1991 to 4th place in 2001. Though India's average annual growth rate almost doubled in the eighties to 5. in another 2 years most non-tariff barriers have been dismantled by march 2002. Over the years there has been a steady liberalisation of the current account transactions. This is major improvement given that India is growth rate in the 1970's was very low at 3% and GDP growth in countries like Brazil.8% in 1996-97. India is Global: The liberalisation of the domestic economy and the increasing integration of India with the global economy have helped step up GDP growth rates. airports. ports. roads. Growth rates have slowed down since the country has still bee able to achieve 5-6% growth rate in three of the last six years. which picked up from 5. . insurance and other major sectors.6% in 1990-91 to a peak level of 77. The Indian tariff rates reduced sharply over the decade from a weighted average of 72.3% in 2002-03 mainly because of the worst droughts in two decades the growth rates are expected to go up close to 70% in 2003-04. A Global comparison shows that India is now the fastest growing just after China. more and more sectors opened up for foreign direct investments and portfolio investments facilitating entry of foreign investors in telecom. India is committed to reduced tariff rates.Though tariff rates went up slowly in the late nineties it touched 35. Korea. amendment of the monopolies and the restrictive trade practices act. The pick up in GDP growth has helped improve India's global position. reduction in tariff rates and change over to market determined exchange rates.5% in 1991-92 to 24. Major measures initiated as a part of the liberalisation and globalisation strategy in the early nineties included scrapping of the industrial licensing regime. Indonesia.6 in 1996-97.

But the proportion of the world population living in poverty has been steadily declining and since 1980 the absolute number of poor people has stopped rising and appears to have fallen in recent years despite strong population growth in poor countries. India has to concentrate on five important areas or things to follow to achieve this goal. If the proportion living in poverty had not fallen since 1987 alone a further 215million people would be living in extreme poverty today. For all nations to reap the full benefits of globalisation it is essential to create a level playing field. good national polices . Understanding the current status of globalisation is necessary for setting course for future. After implementing the new economic policy the role of villages got its own significance because of its unique outlook and branding methods. But it is not the only reason for this often unrecognised progress. GDP Growth rate: .Globalisation and Poverty: Globalisation in the form of increased integration though trade and investment is an important reason why much progress has been made in reducing poverty and global inequality over recent decades. tariffs of 5% or less on all manufactured goods will be eliminated by 2005 and higher than 5% will be lowered to 8%.2 billion of the developing world 4. President Bush's recent proposal to eliminate all tariffs on all manufactured goods by 2015 will do it. For example food processing and packaging are the one of the area where new entrepreneurs can enter into a big way. It may be organised in a collective way with the help of co-operatives to meet the global demand. sound institutions and domestic political stability also matter.8 billion people still live in extreme poverty. According to this proposal. poverty remains one of the most serious international challenges we face up to 1. The manufacturing of technology and management of technology are two different significant areas in the country. Starting 2010 the 8% tariffs will be lowered each year until they are eliminated by 2015. new prospects in rural areas and privatisation of financial institutions. In fact it may exacerbate the prevalent inequalities. Despite this progress. new business openings for small and medium enterprises. There will be new prospects in rural India. importance of quality management. The growth of Indian economy very much depends upon rural participation in the global race. The areas like technological entrepreneurship.

Agriculture exports account for about 13 to 18% of total annual of annual export of the country.4% during the past year growth in real GDP in 2001-02 was 5.1%. proximity to markets and labour cost advantages. India under trades by 7080% given its size. Lets look at a few indicators how much we lag. Number of countries have a clear lead among them China. •Over the past decade FDI flows into India have averaged around 0. Cereals (mostly basmati rice and non-basmati rice). •India's share of global trade is similar to that of the Philippines an economy 6 times smaller according to IMF estimates.07% over the pat 20 years. Whereas FDI inflows into China now exceeds US $ 50 billion annually.5% for Brazil. large part of east and far east Asia and eastern Europe. .The Indian economy is passing through a difficult phase caused by several unfavourable domestic and external developments. Marine products in recent years have emerged as the single largest contributor to the total agricultural export from the country accounting for over one fifth of the total agricultural exports.572 and 38. The global economy experienced an overall deceleration and recorded an output growth of 2.4% as per the Economic Survey in 2000-01. Where does Indian stand in terms of Global Integration? India clearly lags in globalisation.5% of GDP against 5% for China 5.India's share of world merchandise exports increased from .8% and second quarter is 6. tea and coffee are the other prominent products each of which accounts fro nearly 5 to 10% of the countries total agricultural exports. Over the same period China's share has tripled to almost 4%. The performance in the first quarter of the financial year is5. It is only US $ 4billion in the case of India •Consider global trade .05% to .362 million respectively. Domestic output and Demand conditions were adversely affected by poor performance in agriculture in the past two years. oil seeds. In 2000-01 Agricultural products valued at more than US $ 6million were exported from the country 23% of which was contributed by the marine products alone. Export and Import: India's Export and Import in the year 2001-02 was to the extent of 32. Many Indian companies have started becoming respectable players in the International scene.

The member states sign an agreement called . denting of political and economic sovereignty and greater acceptance of democracy as a way of life. while formulating and evaluating its domestic policy cannot afford to ignore the possible actions and reactions of policies and developments in the rest of the world. Despite all the talk. Regional Trading Arrangements The European Union (EU) The European Union (EU) is an economic and political union established in 1993. in decisionmaking at the national level. 4. Rather. It is thus clear that a globalising economy. This constrained the policy option available to the government which implies loss of policy autonomy to some extent. As a result domestic economic developments are not determined entirely by domestic policies and market conditions. Governor of RBI. The cooperation is overseen by rules and regulations decided upon by the states entering into an understanding. cultural and economic cooperation. This is reflected in Interdependence in regard to trading in goods and services and in movement of capital. politico-cultural entity has been interacting with the outside world throughout history and still continues to do so. we are now where ever close being globalised in terms of any commonly used indicator of globalisation.•It is interesting to note the remark made last year by Mr. It has to adapt. as a geographical. •As Amartya Sen and many other have pointed out that India. This goes without saying even as we move into what is called a globalised world which is distinguished from previous eras from by faster travel and communication. assimilate and contribute. This came into effect because of the Treaty of Maastricht. Discuss any 3 regional trading agreements and its effect on international business Answer: Regional integration is bonding between nations and states through political. Globalisation has intensified interdependence and competition between economies in the world market. they are influenced by both domestic and international policies and economic conditions. The EU comprises of 27 member states committed to regional integration. signed on 7th February 1992 by the European Communities. Bimal Jalan. greater trade linkages. In fact we are one of the least globalised among the major countries however we look at it. Consequences: The implications of globalisation for a national economy are many. The EU has developed a single market for all the member states and sixteen member states have adopted a common currency called the Euro.

In addition. It operates parallel to the EU. This agreement prompted the EFTA states to modernise their convention to guarantee that it will continue to provide guidelines for the expansion and liberalisation of trade among them and with the rest of the world. EU ambassadors head the EU delegations. including movement of persons. the European Council. goods. Mexico and Canada. the EFTA states have jointly arranged free trade agreements with many other countries. The Stockholm Convention was replaced by the Vaduz Convention. the Court of Justice of the European Union. In 1994. and the European Central Bank. and maintains common policies on trade. The EU citizens elect the European Parliament every five years. covering a wide range of areas.4. 14. the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labour Cooperation (NAALC). The Commission for Environmental Cooperation (CEC) was set up as part of the agreement. The EFTA was formed at the Stockholm Convention between seven countries. The NAFTA is divided into two sections.Schengen Agreement. In 1999. fisheries and regional development. Switzerland. The North American Agreement on Environmental Cooperation (NAAEC) was established in 1994. The EU has established diplomatic missions around the world and they represent the member states at the United Nations. allowing countries to join EFTA if they were not willing to join EU.3 North American Free Trade Agreement (NAFTA) The North American Free Trade Agreement (NAFTA) was signed in 1994 by three governments. the Council of the European Union. Important organisations of the EU include the European Commission. This Convention provides a framework for a free and liberal trade amongst its member states. This trade agreement is the largest in the world in terms of combined purchasing power parity Gross Domestic Product (GDP) and second largest by nominal GDP comparison. Norway. It is an environmental agreement between the United States of America. transport and technical barriers to trade. G8 and G-20 summits. The agreement enacts legislation in justice and home affairs. and the United States. Mexico. 14. presently only four countries remain as the members of EFTA. EU has also devised a common foreign and security policy for its member states. Switzerland established a number of bilateral agreements with the EU. Canada.4. The agreement comprises of a declaration of objectives and principles regarding conservation and the protection of the environment. WTO. capital and services. Iceland and Liechtenstein. three of the EFTA countries signed European Economic Area (EEA) agreement and became a part of the European Union Internal Market.2 European Free Trade Association (EFTA) The European Free Trade Association (EFTA) is a free trade organisation established in 1960 between four European counties. agriculture. which ensures the free movement of people. Switzerland opted to arrange bilateral agreements with the EU. including the abolition of passport controls. The EFTA was formed as an alternative to EU. .

North American Agreement on Labour Cooperation (NAALC) was also established in 1994 to achieve the following goals: · Improve working conditions and living standards. NAALC provides various means such as exchanges of information. and consultations for achieving the above goals. · Promote a set of guiding labour principles. technical assistance. · Encourage cooperation to promote innovation. . · Improve the levels of productivity and quality.

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