1) ―Multinational

Corporations

are

great

contributors

to

many

economies in the world, at the same time few are criticized for their remedies‖ Discuss (Pg 81) 2) ―FDI are essential for long term prosperity of the country.‖ Justify (Pg 38) 3) ―IB is completely different from Domestic business both in planning and operations – Discuss (Pg 8) 4) ―Globalization is not a quick process, it is an outcome of long term strategy moves for companies and countries‖ Justify (Pg 101) 5) WTO lost its objectives and control due to emerging FTA‘s and RTA‘s in force - Discuss 6) ― Trade theories are losing their relevance today‖ – Analyze the statement with a. Theory of absolute advantage (Pg 164) b. Purchasing power parity (Pg 173) c. Competitive advantage of nation (Pg 165) 7) Categorize different modes and methods of entry in IB practices by MNC‘s (Pg 12) 8) Discuss different challenges encounterd by global 2day (Pg190) 9) India in developing close trade ties with ASEAN through initiatives such as, FTA.. Discuss the potential for business in ASEAN bloc. (Pg 229) 10) 11) 12) Enumerate various aspects of foreign exchange management What is your opinion on world class management – illustrate What is the risk analysis? Categories all the risk and their applicable to international business.(Pg 344) with current example. impact on IB. HR personnal

1. what are the various methods of entry into a foreign market? OR What are the various collaborative strategies employed in IB? (R. Chandra Pg 12)

2. what are the various environmental factors that impact IB? give examples.(Pg 25) 3. Give reasons why FDI happens? (Pg 38 R chandran) (Notes) 4. Compare FDI figures vis-à-vis India,China, Vietnam (NET) 5. What are the various international trade theories? (Pg 163 R chandran) 6. Impact of WTO on India esp. Seattle and Doha. (Pg 113) 7. Various organizational structures in IB 8. NAFTA (Pg 213) (Notes) 9. ASEAN (Pg 229) (Notes) 10.Swaps, Options and futures (From Derivatives) 11.ADR/GDR (From AFM) 12.International logistics and its importance in IB (Pg 153) 13.Country evaluation and selection.(Notes)

Solve any 4 out of 7 4 Q’s 10 marks each – 40 1 case study – 20 marks Q1) Define International Business? Domestic and International Business - difference? Mode of entry into IB? Q2) Risk analysis in IB? Q3) Foreign direct investment , Doha round – impact in India Q4) How do we raise funds from international markets? Q5) What is globalization? Role of Global organization? Structure of MNC ? Q6) Explain WTO, Hongkong round? Q7) International trade theories? Q8) Culture in global organization? International Logistics and Distribution? Q9) Short notes on - European union - G20 - LAFTA - NAFTA - G8 Trade Barriers - IMF, IPR, TRIPS, MERGERS and Acquisition Q10) Case Study on international trade

1. Discuss the challenges involved in Global Human Resource Management? 16. Discuss the environmental factors in international business? 9. domestic business? 2. discuss the major criteria to set up business in another country? 19. What is Multinational Corporation? Classify MNC's depending upon their structure and country of origin? 4. discuss the role played by the government of India to promote international trade? 18. discuss the Intellectual Property Rights and their commercializations? what is international business? how does it differ from . Discuss modern foreign trade theories and implications in trade? 6. what is risk analysis? how do companies overcome risks? 8. discuss the importance of international organisations and their rate to promote international business? 11. How will you do business with NAFTA? 12. Compare and contrast the business potential in India and China? 15. how will u evaluate the competitive force in international business? 20. What is globalization? how do global organisation focus on strategies to prospect? 7. Discuss FDI and strategies to attract FDI from the investors point of view? 5. What is WTO? how does it functions to maintain its agenda? discuss its limitations and achievements? 10. Discuss all the barriers related to international business? 17. how will u do business with ASEAN? 14. Discuss the prime motive behind companies and nation going in for international business? 3. discuss the business strategy to do business in EU? 13.

3. 4. How Multinational Enterprise can be classified.Instructions: 1. Discuss the role of Culture in International Business and enumerate all the challenges encountered by global human resource division operating in a cross border business environment. How can the Porter’s Model of competitive advantage be used to assess competitive advantages for India’s Textile Industries? Q4. Depreciation of Rupee has created trouble for Indian Exporters and Importers. Q5. Discuss the contemporary theories of International Trade with suitable examples. Developing countries welcome FDI as part of reform process. illustrations. . Explain fundamental difference between domestic business operations and International Business operations using business characteristics. BPO / KPO sector companies can deal with this scenario? Q7. “ WTO aims at removing non-tariff barriers and reducing tariff Barriers”. Explain briefly International Subsidiary Strategy. If so. 2. State features of MNE’S. Q6. Define “International Business”. Discuss the advantages to both the Investor and the country of destinations. Textile. Answer any six questions All questions carry equal marks Case study is compulsory Candidates are required to give clear concepts. Q3. critically evaluate achievements and problem areas which WTO has encounter in order to succeed in the above objective. Q2. Enumerate the risk factors which an investor takes into account before deciding to invest. examples and analysis. State and Explain how Pharma Companies. Q1.

As demand for property increased the value of commercial and residential real estate in Bangkok soared.Q8. Much of Thailand’s economic growth was powered by Exports. but as long as property values continued to rise. Writ short notes on any two of the following:a) G-20 – The London Summit b) Balance of Payments c) WORLD BANK and IMF d) Purchasing Power Theory Q9. industrial assets and infrastructure. while keeping its annual inflation rate at only 5 percent. CASE STUDIES THE COLLAPSE OF THE THAI BAHT IN 1997 During the 1980s and 1990s. From 1990 to 1996. Case Study.4 percent. This fed a building boom seen in Thailand. Thailand emerged as one of Asia’s most dynamic tiger economies. the banks were happy to lend to property companies. . for Example. The wealth created by Export-led growth fueled an investment boom in commercial and residential property. Offices and Apartment buildings were going up all over the city. the value of exports from Thailand grew by 16 percent per year compounded. Heavy borrowing from Banks financed much of this construction. From 1985 to 1995. Thailand achieved an annual average economic growth rate of 8.

including Finance One.By early 1997. Thailand was purchasing capital equipment and materials from America. factories and office building. the country’s largest financial institutions. many of the country’s financial institutions.000 units scheduled to be completed in 1997.65. In the aftermath of Somprasong’s default. however. years of excess of demand in the Thai property market had been replaced by excess supply. Thai property developer. Primarily on concerns that several property companies might be forced into bankruptcy. As a consequence. it was clear that the boom had produced excess capacity in residential and commercial property. it became clear that.7% in the news. Things started to fall apart February 5th 1997. By 1995. The stock market fell another 2. The Thai stock market had already declined by 45% since its high in early 1996. Imports grew faster. Somprasong Land was the first victim of speculative overbuilding in the Bangkok property market. industrial capacity and commercial real estate were sucking in foreign goods at unprecedented rates. In theory. (2) To build infrastructure. Thailand was running a current account deficit equivalent of 8. By one estimate. but it was only the beginning. this practice made sense because Finance one was able to . Dollars and using the proceeds to finance lending to the country’s booming property developers. had pioneered a practice that had become widespread among Thai Institutions-issuing bonds denominated in U. Now one had been. At the same time. effectively entering into default.1% percent of its GDP.S. Despite strong export growth. Europe and Japan.000 apartment units were unoccupied in Bangkok in late 1996. Bangkok’s building boom by 1997 had produced enough excess space to meet its residential and commercial needs for at least five years. When Somprasong Land. announced it had failed to make a schedule $3. Thailand’s investment in infrastructure. An estimated 3. along with several other property developers. the current account of the Balance of Payment shifted strongly into the red during the mid-1990s.1 million interest payment on an $80 billion Eurobond loan. With another 100.

In this context. Currency traders. The only problem with this financing strategy was that when the Thai Property market began to unravel in 1996 and 1997. (3) In Feb. Dollars at a low interest rate and Lent in Thai baht at high interest rates). It didn’t work. By this time bad loans in the Thai property market were swelling daily and had risen to more than $30 billion.exploit the interest rate differential between Dollar-denominated debt and Thai Debt. the Property developers could no longer pay back the Cash they had borrowed from Finance One. Thai baht had been pegged to the US Dollars at an exchange rate of about $1=Bt25. It was at this point that currency traders began a concerned attack on the Thai currency. had become increasingly difficult to defend. and when trading resumed in Finance One Shares in May. This peg. There were several attempts to force a devaluation of the Baht in late 1996 and early 1997. short selling involves a currency trader borrowing baht from a financial institutions and immediately reselling those baht in the Foreign Exchange . This made it difficult for Finance One to pay back its creditors. Finance One was bankrupt. Finance One’s non performing loans doubled. looking at Thailand’s growing current account deficit and dollar denominated debt burden. reasoned that demand for dollars in Thailand would rise while demand for Baht would fall. they fell 70% in a single day. These speculative attacks typically involved traders selling baht short to profit from a future decline in the value of the baht against the dollar. As the effects of overbuilding became evident in 1996.( Finance One borrowed in U. and it was feared that others would follow. trading in the shares of Finance One was suspended while the government tried to small Thai Bank in a deal sponsored by the Thai Central Bank. however.1997.S. then doubled again in the first quarter of 1997. For the previous 13years.

it will cost her fewer dollars than she received from the initial sale of Baht. short sellers were swarming over the Thai Government used its foreign Exchange reserves( which were denominated in US Dollars) to purchase Baht. For examples. the Thai government raised key interest rates from 10% to 12. The reality was that Thailand had only $1. Defending the Peg was now impossible. . In addition. What the world financial community did not know at this point.14 billion in available foreign exchange reserves left to defend the dollar peg.5% to make holding baht more attractive. (4) In May 1997. it will cost the trader only $2 to repurchase the Bt100 in six months and pay back the bank. was that with the blessings of his superiors. which reduced its “officially reported” foreign exchange reserves to a twoyear low of $ 33 Billion. a trader might borrow Baht 100 from a Bank for $4 ( at an exchange rate of $1=Baht 25). than when the trader has to buy the baht back to repay the financial institutions. leaving the trader with a 100 percent profit. If the exchange rate subsequently declines to $1=Baht50. The theory is that if the value of the baht subsequently fall against the dollar.market for Dollars. It cost the Thai government $5 billion to defend the baht. a foreign exchange trader at the Thai central bank had locked up most of Thailand’s foreign exchange reserves in forward contracts. but because this also raised corporate borrowing costs it exacerbated the debt crisis.

This made more bankruptcies and further pushed down the battered Thai stock market.On July 2. The Baht immediately lost 18 percent of its value and started a slide that would bring the exchange rate down to $1=Bt55 by January 1998. As the Baht declined. (5) Questions: 1. the Thai debt bomb exploded. 2. A 50 percent decline in the value of the Baht against the dollar doubled the amount of baht required to serve the dollar-denominated debt commitments taken on by Thai Financial institutions and business. Do you think the sudden collapse of the Thai baht can be explained by the purchasing power parity theorem? . Identify the main factors that led to the collapse of the Thai Baht in 1997. The Thailand set stock market index ultimately declined from 787 in January 1997 to a low of 337 in December of that year. the Thai Government bowed to the inevitable and announced it would allow the Baht to float freely against the dollar. 1997. and this on top of a 45 percent decline in 1996.

. How will the collapse of the Thai baht affect business in Thailand. particularly those that purchase inputs from abroad or export finished products? THE END.3. What role did speculators play in the fall of the Thai Baht? Did they cause its fall? 4. What steps might the Thai Government have taken to preempt the financial crisis that swept the nation in 1997? 5.

1. Expansion into foreign markets can be achieved via the following four mechanisms:     Exporting Licensing Joint Venture Direct Investment Exporting Exporting is the marketing and direct sale of domestically-produced goods in another country. potential returns from manufacturing and marketing activities may be lost. risk/reward sharing. technology sharing and joint product development. . patents. because the licensee produces and markets the product. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance. no investment in foreign production facilities is required. What are the various method to entry in the foreign market? Ans: The decision of how to enter a foreign market can have a significant impact on the results. Exporting is a traditional and well-established method of reaching foreign markets. Since exporting does not require that the goods be produced in the target country. such as trademarks. and production techniques. Joint Venture There are five common objectives in a joint venture: market entry. and conforming to government regulations. Exporting commonly requires coordination among four players:     Exporter Importer Transport provider Government Licensing Licensing essentially permits a company in the target country to use the property of the licensor. Such property usually is intangible. Most of the costs associated with exporting take the form of marketing expenses. Because little investment on the part of the licensor is required. Other benefits include political connections and distribution channel access that may depend on relationships. However. licensing has the potential to provide a very large ROI.

it requires a high level of resources and a high degree of commitment. but each firm wants to develop and protect its own proprietary resources. how. and personnel. The joint venture attempts to develop shared resources. However. and partners' are able to learn from one another while limiting access to their own proprietary skills. the partners' size. It involves the transfer of resources including capital. while each firm would like to have hierarchical control. The key issues to consider in a joint venture are ownership. length of agreement. Foreign Direct Investment Foreign direct investment (FDI) is the direct ownership of facilities in the target country. technology transfer.how to split the pie lack of parent firm support cultural clashes if.Such alliances often are favorable when:    the partners' strategic goals converge while their competitive goals diverge. local firm capabilities and resources. The joint venture is controlled through negotiations and coordination processes. Potential problems include:       conflict over asymmetric new investments mistrust over proprietary knowledge performance ambiguity . but they also want to maximize their own competitive position. . pricing. technology. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. and resources are small compared to the industry leaders. and when to terminate the relationship Joint ventures have conflicting pressures to cooperate and compete:    Strategic imperative: the partners want to maximize the advantage gained for the joint venture. market power. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise. control. and government intentions.

Liberal import policies High political risk Import and investment barriers Legal protection possible target environment.The Case of Euro Disney Different modes of entry may be more appropriate under different circumstances. existing facilities. future success is not guaranteed. as Disney had been with its California. The appropriate adjustments for national differences always should be made. become and Disadvantages Trade barriers & tariffs add to costs. owning 49% with the remaining 51% held publicly. Transport costs Limits access to local information Company viewed as an outsider Exporting uses Speed of entry Licensing Able to circumvent trade Low sales potential in target barriers Knowledge spillovers country. and Tokyo theme parks. in Minimizes investment. Florida. and a company carefully must define and evaluate the criteria for choosing a location. The problems with the EuroDisney project illustrate that even if a company has been successful in the past. little product adaptation required Minimizes risk Distribution channels close to investment. especially when moving into a different country and culture. Besides the mode of entry. Disney's mode of entry in Japan had been licensing. Walt Disney Co. faced the challenge of building a theme park in Europe. High ROI License period is limited . the firm chose direct investment in its European theme park. However. risk and Lack of control over use of assets. plants Speed of entry High target country production costs Maximizes scale. and the mode of entry is an important factor in the success of the project. Licensee may competitor. There are many factors in the site selection decision. another important element in Disney's decision was exactly where in Europe to locate. Comparision of Market Entry Options The following table provides a summary of the possible modes of foreign market entry: Comparison of Foreign Market Entry Modes Mode Conditions Favoring this Advantages Mode Limited sales potential in target country.

Import barriers Small cultural distance Greater knowledge local market Can better specialized skills Minimizes spillover of Higher risk than other modes Requires more resources and commitment difficult to the local apply Direct Investment Assets cannot be fairly priced knowledge High sales potential Low political risk May be manage Can be viewed as an resources. Import barriers Large cultural distance Assets cannot be fairly priced High sales potential Overcomes ownership Difficult to manage restrictions and cultural distance Dilution of control Combines resources of 2 Greater risk than companies. Less investment required resources. distribution network. insider . Joint Ventures Some political risk Local company can provide skills. brand name.Large cultural distance Licensee lacks ability to become a competitor. exporting a & licensing Potential for learning Government restrictions foreign ownership on Viewed as insider Knowledge spillovers Partner may become a competitor. etc.

In case when a company is ready to start international project in terms of its internal situation. Legal and political factors are essential for the implementation of the project abroad and each country has its own laws and regulations that could be of negative or positive influence which greatly depends on the nature of business. risk levels that a company is able to undertake and growing international demand are those few questions that need to posed before a firm can make any projections as to doing business abroad. While analyzing foreign environment companies have to pay close attention to various factors that will effect. As was already said. major role in deciding whether or not the project will be successful is comprehending macro . Adequate financial resources. Such environmental issues as GDP.2. Working in a foreign country requires a great deal of preparation and assessment of all possible differences that the business is about to encounter. or help if used efficiently. future success of business in a new economy. successful global ventures in the past. There are also factors that are directly connected to specific projects and situations and that influence the outcome of the venture and have to be considered. Economic condition of the host county is a core issue in deciding where and when project will be carried out and if it is feasible at all. people make things happen and if they are in a dangerous environment it is priory impossible to do business. What are various environmental factors that affect International Business? Ans: A company that chooses to implement an international project is obligated to conduct a thorough research in order to understand if such project is viable and can be brought to life in a certain country. Numerous factors have to be taken into consideration and investigated. Workers who are knowledgeable about cultural differences in a host country are more likely to perform successfully as traditions and holidays can play a huge role in certain marketing campaigns and serve for the good image of the company. it has to be done objectively from the point of view of the host country in which business will be performed. Infrastructure and geography are among other factors that will affect the project or not allow its execution in case a host county has severe weather conditions or undeveloped infrastructure. First of all it is necessary to carefully examine the firm’s competitive position and understand if a project is able to bring profit in the global industry. Thus the home company can ensure the realization of the project in specified terms with regards to projected profits and spending funds. for instance unpaved roads and no electrical power can easily fail the project in the very beginning and thus knowing such conditions is necessary. Security of the country in which project will be developed is essential as well. inflation fluctuations and population growth have to be considered in order to comprehend conditions in which business will operate. it has to study issues and challenges that are caused by macro economical and other environmental factors.

Selecting and training employees for the international project is very important for the future success of the company. Studying its economical condition. Culture shock and coping with it are issues that have to be addressed to potential workers. Those intermediaries who are familiar with host country’s traditions and have social connections are great helpers in establishing a good image of the company abroad and in avoiding mistakes in a setting up period. Thus businesses must attentively analyze what changes have to be made in the business plan and what people are best suit for its implementation. Consequently firms need to inform and train employees on how to cope with cultural diversities and benefit from them to better manage in the new environment. it is important to bear in mind that cultural differences can make all efforts void. companies hire professionals already experienced in such ventures with foreign education who speak two or more languages. security levels and infrastructure system is a core competence of a company who wants to be more successful that its competitors. Often. . In case when all of those factors are studied and considered advantageous for a new enterprise.environment of a new country.

in a lot of ways . Give ten reasons why FDI is beneficial to developing Economy? Ans: Foreign direct investment (FDI) was founded by Aziz Mahdi and is a measure of foreign ownership of productive assets. a government body. A foreign direct investor may be classified in any sector of the economy and could be any one of the following:         an individual. trust or other societal organisation. a group of related enterprises.enabled India to achieve a certain degree of financial stability. The primary aim of these policies is to create a friendly business environment where foreign investors feel comfortable with the legal and financial framework of the country. Developed countries also seek to bring in more FDI and use various policies and incentives to attract overseas investors. an incorporated or unincorporated entity. Attracting FDI inflows with conductive policies has therefore become a key battleground in the emerging markets. The prospect of new growth opportunities and outsized profits encourages large capital inflows across a range of industry and opportunity types. a public company or private company. IN INDIA (FDI) in India has played an important role in the development of the Indian economy. a group of related individuals. mines and land. such as factories. and have the potential to reap profits from economically viable businesses. This money has allowed India to focus on the areas that may have needed economic attention. FDI in India has . Increasing foreign investment can be used as one measure of growing economic globalization. Foreign direct investment (FDI) policies play a major role in the economic growth of developing countries around the world. and address the various problems that continue to challenge the country. particularly for capital-intensive industries and advanced technology. an estate (law). In 1998 and . or any combination of the above.3. India has continually sought to attract FDI from the world’s major investors. growth and development.

approximately $352. all of the criteria for automatic approval are considered by the Government through the FIPB (Foreign Investment Promotion Board). These services include the non-banking financial services sector.6 billion that flowed into China. Foreign investors can buy up to 40% of the equity in private banks. Why does India. which do not fulfil any or. FDI is not permitted in the arms. big growth compared to previous years. INVESTMENT BY NON RESIDENT INDIANS & OVERSEAS CORPORATE BODIES For all sectors. Local authorities are not part of the approvals process and have their own rights.1999. nuclear. including the growing credit card business. but with a limit on foreign equity of INR 1. A number of projects have been announced in areas such as electricity generation. NRIs (which also includes PIOs) and OCBs (an overseas corporate body means a company or other entity owned directly or indirectly to the extent of at least 60% by NRIs) are eligible to bring investment through the automatic route of RBI.3 billion in FDI. India actually receives less than half the FDI that the federal government approves. By 2004. The NRIs and OCBs are allowed to invest in housing and real estate development sector. but less than 10% of the $60. through private equity or preferential allotments. lag so far behind China in FDI amounts? Although the Chinese approval process is complex.500 crores. with opportunities for foreign investors. Up to 45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased. and in joint ventures. excluding those falling under Government approval. as well as the development of roads and highways. India received $5. They are allowed to hold up to 100 percent equity in civil aviation sector in which otherwise foreign equity only up to 40 per cent is permitted. with a stable democracy and a smoother approval process. the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors.5m. FDI investments are permitted through financial collaborations. All other proposals. Currently. coal & lignite or mining industries. by way of capital markets through Euro issues. and this often leads to projects getting bogged down in red tape and bureaucracy. Federal democracy is perversely an impediment for India. it includes both national and regional approval in the same process. distribution and transmission. railway. although there is condition that stipulates that these banks must be multilateral financial organizations. . The Indian national government also provided permission to FDIs to provide up to 100% of the financing required for the construction of bridges and tunnels. FDI is allowed in financial services. in which foreign direct investment is not permitted.

The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Indian market.FDI has also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of India. Foreign direct investment may entail high travel and communications expenses.This is one of the major sectors. Trade. This causes a lot of inconvenience to the investor. At times it has been observed that there is considerable instability in a particular geographical region.FDI apparently helps in the outsourcing of knowledge from India especially in the Information Technology sector. at times. It helps in developing the know-how process in India in terms of enhancing the technological advancement in India. This has often caused many companies to approach foreign direct investment with a certain amount of caution. . which is enormously benefited from foreign direct investment. Yet another major disadvantage of foreign direct investment is that there is a chance that a company may lose out on its ownership to an overseas company.BENEFITS OF FDI: Economic growth. DISADVANTAGES OF FDI: At times it has been observed that certain foreign policies are adopted that are not appreciated by the workers of the recipient country. Employment and skill levels. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country. Linkages and spillover to domestic firms. Technology diffusion and knowledge transfer. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country. The differences of language and culture that exist between the country of the investor and the host country could also pose problems in case of foreign direct investment.Various foreign firms are now occupying a position in the Indian market through Joint Ventures and collaboration concerns. Foreign direct investment.Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in India both in terms of import and export production. is also disadvantageous for the ones who are making the investmentthemselves.

The Foreign Investment Promotion Board has rejected a proposal by the Jaipur IPL Cricket Pvt to induct 100% foreign equity by issuing shares for a non-cash consideration. The FIPB. has said there is an urgent need to attract and sustain foreign direct investment in the textiles sector if India is to achieve the goals of employment generation and technology upgradation. Mr Dayanidhi Maran.159 crore at its October 30 meet. While approving 17 foreign direct investment proposals worth Rs 1. The panel will have representatives from various government departments. The Textiles Minister.CURRENT EVENTS RELATED TO FDI: IAF Vice Chief Air Marshal P K Barbora said that private industry's participation be increased in the defence sector and India should be "bold enough" to allow more FDI in the area. will refer foreign investments in sensitive sectors to a committee of secretaries. . besides attaining four per cent share in the global trade in textiles and clothing. The crucial difference will be that the committee will be time bound and will have specific parameters to weigh the risks.

Bridges and Ports Sick Industrial Units Industries Requiring Compulsory Licensing Industries Reserved for Small Scale Sector Private banking (49%) Insurance (26%) Telecommunication (49% / 74 %) Retail (51% in single brand) .4. via Euro issues Through private placements or preferential allotments Sectors in which 100% equity allowed is             100% allowed is not     Hotel & tourism Trading companies Power generation/ transmission/distributio n Drugs & Pharma Shipping Deep Sea Fishing Oil Exploration Housing and Real Estate Development Highways. Discuss the FDI climate between India. China and Vietnam. Ans: PARAMETER FDI IN 2008-09 How to enter India 23885 $     Through financial alliance Through joint schemes and technical alliance Through capital markets.

gypsum. I] CLIMATE IN INDIA: Several factors being attributed to the revival in foreign direct investments (FDI) in the country include liberal investment policies and reforms. gold. Horizontal FDI: It happens when a multinational company carries out a similar business operation in different nations. zinc Highest FDI is in Financial & which sector? services (22%) Topmost country investing Mauritius (44%) Non-Financial 1) 2) 3) 4) FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor Types: Outward FDI: An outward-bound FDI is backed by the government against all types of associated risks. It would double the inflows by 2017. copper. Among those projects approved were FDI . sulfur.56 million. diamonds. India is targeting annual foreign direct investments worth $50 billion by 2012. chrome. innovative and technologically advanced products being manufactured in India and low cost and effective solutions.532 billion were received during April-July 2009. This form of FDI is subject to tax incentives as well as disincentives of various forms Inward FDI: Here. FDI equity inflows amounting to US$ 10. which supplies input for it or uses the output produced by the MNC. The government has approved 17 (FDI) proposals amounting to US$ 250.FDI not allowed at all      Arms and ammunition Atomic Energy Coal and lignite Rail Transport Mining of metals like iron.31 million will be brought in by Essel Grouppromoted DTH service provider. manganese. investment of foreign capital occurs in local resources. Vertical FDI: It takes place when a multinational corporation owns some shares of a foreign enterprise. The largest FDI of US$ 153.

They are also often applied in a manner that is not transparent. and Taiwan. While FDI in China shot higher. they appear to give regulators significant discretion to shield inefficient or monopolistic enterprises from foreign competition. followed by India.  in sectors where China is seeking to cultivate “national champions. Russia. mandatory foreign investment approval process. First. like foodstuffs and heavily polluting industries. Canada. the inflow of FDI into India is likely to further accelerate. In many ways. the United States. in 2007. The growth rate of foreign direct investment (FDI) into China accelerated to 23% in 2008 to $92. and an unreliable legal system. China appears to be using the rules to restrict foreign investments that are: intended to profit from currency speculation.  in sectors where the government is trying to tamp down aggregate capital inflows and inflation.3 billion. II]CLIMATE IN CHINA: The top sources of FDI in China in 2008 were: Hong Kong. South Korea. Western Samoa. Japan. industrial policies that protect and promote local firms. Some areas where investment is restricted are news agencies radio  . the British Virgin Islands. France. and the Netherlands. China also received the most votes in a 2007 UNCTAD poll of attractive investment destinations. inconsistently enforced laws and regulations. the Cayman Islands. codify standards and practices that China was already employing in its existing. According to the United Nations Conference on Trade and Development (UNCTAD). after the United States. At the moment. Problems foreign investors face in China include lack of transparency. Key terms and standards in the new regulations are undefined. they present several concerns to foreign investors. With the government planning more liberalisation measures across a broad range of sectors and continued investor interest. investors continued to face a range of potential problems that could expose them to risks in the future. In 2008.”  in sectors that have benefited historically from state-authorized monopolies or from a legacy of state investment. Although it remains to be seen how many of these rules will be applied. according to Ministry of Commerce statistics.  in sectors deemed key to social stability. Brazil. the new rules. Singapore. corruption. Finally. and Vietnam. China continued to lay out a legal and regulatory framework granting it the authority to restrict foreign investment that it deems not to be in China’s national interest.applications for steel maker ArcelorMittal and iron pipe maker Electrosteel Castings. weak IPR protection. the United States. the United Kingdom. mainland China was the world’s sixth largest FDI recipient. overall predictability for foreign investors has suffered because investors are less certain that China will approve proposed investment projects. and  nominally “foreign” investment that is actually Chinese capital that has been exported and re-imported to take advantage of preferential treatment accorded to foreigners.

China’s legal system rarely enforces foreign court judgments . publication and importation of press and audio-visual products. China’s leadership has also stated that China is actively seeking to target investment in higher value-added sectors. but progress has been slow Dispute Settlement Foreign firms report inconsistent results with all of China’s dispute settlement mechanisms. medical equipment. Western. Distribution of Foreign Investment The vast majority of foreign investment is concentrated in China's more prosperous coastal areas. and support for priority sectors that may present foreign investors with new opportunities. advanced manufacturing. including high technology research and development. and welcome foreign firms. none of which are independent of the government. The government often intervenes in disputes. machinery. compulsory basic education. Investment Guidelines While insisting it remains open to inward investment. China is committed to gradually phasing out barriers in many service industries. construction materials. Foreign investment in most service sectors lags manufacturing. Jiangsu.and TV transmission networks. management and funding support for start-ups across a variety of industries. environmental protection. Well-connected local business people are often in a better position to win court cases than are foreign investors and it is possible that they may use their connections to avoid prosecution for taking illegal actions against their former foreign partners. Finally. Corruption may also influence local court decisions and local officials may disregard the judgments of domestic courts. metallurgy. many focused on commercializing research developed in Chinese universities. in response to the weakening economy. chemicals. China announced a stimulus package that includes fiscal stimulus. and Shandong provinces. pharmaceuticals. energy conservation. and Shanghai. and modern agriculture and services. China would also seek to spread the benefits of foreign investment beyond China’s more wealthy coastal areas by encouraging multinationals to establish regional headquarters and operations in Central. Fujian. processing of green and “special” tea using Chinese traditional crafts and preparation of Chinese traditional medicine At the end of 2008. and Northeastern China. China offers preferences for investments in sectors it seeks to develop. and electronics. China boasts numerous national science parks. mainly due to government-imposed restrictions. mining and processing of certain minerals. communications. including Guangdong. The parks provide infrastructure. energy. including transportation. film production. rather than basic manufacturing. energy efficiency. business tax cuts.

The major factors in the country which have led. very low as compared to other locales On account o the above stated reasons. cost of consumables. A stable socio-political situation Vietnam’s professionalized investment promotion activities. These trends could . the various reasons that can be attributed to the same are doubts of Vietnam’s capability to digest such huge investment sums.3 billion in 2005 to $ 50 million in 2008. the expected inflows in the country in the form of FDI pledges are reported to plunge drastically on account of the skepticism. The Vietnamese government is also trying its best to mould the existing policies and laws. but the experts feel that Vietnam’s identity as an investor’s heaven is here to stay. Apart from the slowdown. multinationals park huge investments in the country can be tabulated as follows    Availability of a young. The various factors that play a role here are    inadequate infrastructure Management problems Shortage of adequately trained human resource This lack of absorption capability has become a huge spoilsport as it is believed that in 2006. literate and cheap workforce. on the part of the global investors. due to the ongoing slowdown. 60 % remained unutilized. thus becoming the third most popular investment destination after China and India. out of the total investment funds inflow. The investments were primarily in sectors like  Construction  High-tech areas  Production of electronics  Telecommunications thus turning Vietnam into a manufacturing hub in Asia.As the economy has slowed. Experts have forecasted a figure of $ 20-25 billion for this financial year in terms of the FDI pledges. Statistically speaking. In 2009. the FDI in Vietnam surged to a level of $64 billion in 2008. so as to keep the capital flow coming. clients. there have been anecdotal reports of local governments singling out foreign investors. the FDI pledges in Vietnam have galloped from a meager $ 11. which is a fall of above 60%. This year though the FDI flows have taken a drubbing because of the volatile economic prevalence and thus the reluctance of the foreign majors to part with the cash. and partners of Chinese businesses to repay debts incurred by local businesses III] CLIMATE IN VIETNAM Vietnam has seen a vertical surge in its FDI inflows in the recent years. policy formulation and implementation Cost of land.

4) Consistent with this belief. 5. In France.further intensify the dollar shortage faced by the country. . where we must ever observe this rule: to sell more to strangers yearly than we consume of theirs in value. Thus the need of the hour for the government is to plan and implement policies and infrastructure development. This change in relative prices between France and England would encourage the France to buy fewer English goods (because they were becoming more expensive) and the English to buy more Franch goods. increase its national wealth and prestige. according to Hume. its principle assertion was gold and silver were the mainstays of national wealth and essential to vigorous commerce. Rather. consequently. Referred to as mercantilism. and its prices would fall. imports were limited by tariffs and quotas. The mercantilists saw no virtue in a large volume of trade per se. 5) The classical economist David Hume pointed out an inherent inconsistency in the mercantilist doctrine in 1752. Ans: 1. they recommended policies to maximize exports and minimize imports. while exports were subsidized. The result would be deterioration in the English balance of trade and an improvement in France’s trade balance. until the English surplus was eliminated. to export more than it imported. however the outflow of gold and silver would have the opposite effect. which will restore investor confidence in Vietnam’s capability to absorb the incoming funds. 2) The main tenet of mercantilism was that it was in a country’s hand to maintain a trade surplus. By doing so. To achieve this. in the long run no country could sustain a surplus OD the balance of trade and so accumulate gold and silver as the mercantilists had envisaged. France’s money supply would contract. gold and silver were the currency of trade between countries. Discuss various international trade theories. The ordinary means therefore to increase our wealth and treasure is by foreign tread. 6) Hence. a country could earn gold and silver by exporting goods. According to Hume. if England had a balance-of-trade surplus with France (it exported more than it imported) the resulting inflow of gold and silver would swell the domestic money supply and generated inflation in England. the mercantilist doctrine advocated government intervention to achieve a surplus in the balance of trade. a country would accumulate gold and silver and. 3) As the English mercantilist writer Thomas Mun put it in 1630. At that time. Theory of Mercantilism 1) The first theory of international trade emerged in England in the mid-16th century. on account of hoarding by companies expecting the dong to depreciate.

therefore. Smith’s basic argument. good soils. Thus.1. 7) In Smith’s time. 2) Smith argued that countries differ in their ability to produce goods efficiently. and accumulated expertise. 11) Assume further that 200 units of resources are available in each country. this suggested that the English should specialize in the production of textiles while the French should specialize in the production of wine. 12) The different combinations that Ghana could produce are represented by the line GG’ in Figure 2. the English. Adam Smith attacked the mercantilist assumption that trade is a zerosum game. the French had the world’s most efficient wine industry. were the world’s most efficient textile manufacturers. Ghana could produce 20 tons of cocoa and no rice. and capital.) 2.7) The flaw with mercantilism was that it viewed trade as a zero game. 5) The English had an absolute advantage in the production of textiles. This is referred to as Ghana’s production possibility frontier (PPF). 3) In his time. countries should specialize in the production of goods for which they have an absolute advantage and then trade these for goods produced by other countries. The production of any good (output) requires resources (inputs) such as land. (A zero-sum game is one in which a gain by one country results in a loss by another. Assume that Ghana and South Korea both have the same amount of resources and that these resources can be used to produce either rice or cocoa. a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. Thus. both countries benefit by engaging in trade. 8) Similarly. Absolute Advantage Theory 1) In his 1776 landmark book The Wealth of Nations. . or some combination of rice and cocoa between these two extremes. England could get all the wine it needed by selling its textiles to France and buying wine in exchange. is that you should never produce goods at home that you can buy at a lower cost from other countries. 9) Smith demonstrates that by specializing in the production of goods in which each has an absolute advantage. 4) Due to the combination of favorable climate. labor. 6) According to Smith. 10) Consider the effects of trade between Ghana and South Korea. by virtue of their superior manufacturing processes. France could get all the textiles it needed by selling wine to England and buying textiles in exchange. Imagine that in Ghana it takes 10 resources to produce one ton of cocoa and 20 resources to produce one ton of rice. 10 tons of rice and no cocoa. while the French had an absolute advantage in the production of wine.

each country uses half of its resources to produce rice and . Assume that Ghana is more efficient in the production of both cocoa and rice. that is Ghana has an absolute advantage in the production of both products. or any combination on its PPF (the link KK’ in figure 2. it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries. or any combination in between on its PPF (the ling GG’ in figure 2. Ghana has an absolute advantage in the production of cocoa. even if this means buying goods from other countries that it could produce more efficiently itself. given its 200 units of resources. which is South Korea’s PPF. Ricardo showed that this was not the case. 5) While this may seem counterintuitive. 13) Thus. 2) Smith’s theory of absolute advantage suggests that such a country might derive no benefits from international trade. Thus South Korea can produce 5 tons of cocoa and no rice. 20 tons of rice and no cocoa. South Korea could produce 5 tons of cocoa and no rice. 13 1/3 resources to produce one ton of rice.) By the same token.Similarly. South Korea has an absolute advantage in the production of rice. or some combination between these two extremes. 14) Clearly.1. (More resources are needed to produce a ton of cocoa in South Korea than in Ghana. Ricardian Model (Comparative Advantage Theory) 1) David Ricardo took Adam Smith’s theory one step further by exploring what might happen when one country has an absolute advantage in the production of all goods. 6) Again assume that without trade. In South Korea it takes 40 resources to produce one ton of cocoa and 20 resources to produce one ton of rice. The different combinations available to South Korea are represented by the line KK’ in Figure 2. 4) According to Ricardo’s theory of comparative advantage. imagine that in South Korea it takes 40 resources to produce one ton of cocoa and 10 resources to produce one ton of rice. the logic can be explained with a simple example. 15 tons of rice and no cocoa. 10 tons of rice and no cocoa. 3) In his 1817 book Principles of Political Economy.2). Ghana can produce 20 tons of cocoa and no rice.2). In Ghana it takes 10 resources to produce one ton one ton of cocoa and. 3. Thus.

the combined output was 12. Now it is 15 tons of cocoa and 13.2. The source of the increase in production is summarized in Table 2. By engaging in trade. This uses up 150 units of resources. why should it trade with South Korea? Although Ghana has an absolute advantage in the production of both cocoa and rice. leaving the remaining50 units of resources to use in producing 3. c) Before specialization. 9) In light of Ghana’s absolute advantage in the production of both goods. if Ghana exchanges 4 tons of cocoa with South Korea for 4 tons of rice.5tons in Ghana and 5 tons in South Korea).75 tons of rice (point C in fig-ure 1. The combined output of both cocoa and rice has now increased. with both countries choosing to exchange 4 tons of their export for 4 tons of the import. but also both countries can now benefit from trade.75 tons of rice (3.7) half to produce cocoa. If Ghana and South Korea swap cocoa and rice on a one-to-one basis. South Korea specializes in the production of rice. without “trade. 10) The Gains from Trade a) Imagine that Ghana exploits its comparative advantage in the production of cocoa to increase its output from 10 tons to 15 tons. Ghana is comparatively more efficient at producing cocoa than it is at producing rice. and consumers in both nations can consume more of both goods. but only 1. and 7. Ghana will produce 10 tons of cocoa.5 in South Korea).5 tons of rice (point A in 8) Figure 2.5 tons of rice.75 tons in Ghana and 10 tons in South Korea). b) Meanwhile. The 4 tons .2). producing l0 tons. and the combined production of rice will also be 12. it is still left with 11 tons of rice.2). both countries are able to consume more cocoa and rice than they could before specialization and trade (see Table 2.5 tons of cocoa and 5 tons of rice (point B in Figure2. e) Thus.5 tons of cocoa and 12. Without trade the combined production of cocoa will be 12. Thus.2). which is 1 ton more than it had before trade. while South Korea will produce 2. the two countries can increase their combined production of rice and cocoa.5 tons (7.5 times as much rice.2). it has a comparative advantage only in the production of cocoa: Ghana can produce 4 times as much cocoa as South Korea. d) Not only is output higher.5 tons (10 tons in Ghana and 2. Without trade each country must consume what it produces.

reflecting in part its unusual abundance of arable land. the lower its cost. leaves it with a total of 7. when added to the 3. such as textiles and footwear. The more abundant a factor. however.5 tons more than it produced before trade. consumption of cocoa and rice can increase in both countries as a result of specialization and trade. this theory provides a strong rationale for encouraging free trade. labor. 14) As such. has been a primary importer of these goods. the 4 tons of cocoa it receives in exchange is 1. and capital Nations have varying factor endowments. South Korea still ends up with 6 tons office. The United States. and different factor endowments explain differences in factor costs. This occurs even in countries that lack an absolute advantage in the production of any good. which is 25 of a ton more than it had before specialization. the theory of comparative advantage suggests that trade is a positive-sum game in which all countries that participate realize economic gains. 11) The basic message of the theory of comparative advantage is that potential’ world production is greater with unrestricted free trade than it is with restricted trade. to an even greater degree than the theory of absolute advantage. This reflects China’s relative abundance of low-cost labor. while importing goods that make intensive use of factors that are locally scarce. China excels in the export of goods produced in labor-intensive manufacturing industries. 13) In other words. 12) Ricardo’s theory suggests that consumers in all nations can consume more if there are no restrictions on trade. the Heckscher-Ohlin theory attempts to explain the pattern of international trade that we observe in the world economy. Like Ricardo’s theory the Heckscher-Ohlin theory argues that free trade is beneficial. the Heckscher-Ohlin theory argues that the pattern of international trade is determined by differences in factor endowments. Thus. after swapping 4 tons of rice with Ghana. 4.of rice it gets from South Korea in exchange for its 4 tons of cocoa. ‘United States has long been a substantial exporter of agricultural goods.75 tons it now produces domestically. rather than differences in productivity. Note . Thus. f) In addition. By factor endowments they meant the extent to which a country is endowed with such resources as land. For example. Unlike Ricardo’s theory. which lacks abundant low-cost labor. Similarly. The Heckscher-Ohlin theory predicts that countries will export those goods that make intensive use of factors that are locally abundant. So powerful is Ricardo’s theory that it remains a major intellectual weapon for those who argue for free trade. Heckscher-Ohlin Theory Swedish economists Eli Heckscher (in 1919) and Bertil Ohlin (in 1933) argued that comparative advantage arises from differences in national factor endowments. In contrast. The Heckscher-Ohlin theory also has commonsense appeal.75 tons of rice. which is more than it had before specialization.

Such products may be less capital intensive than products whose technology has had time to mature and become suitable for mass production. What is Leontief Paradox? Wassily Leontief (winner of the Nobel Prize in economics in 1973).S. To his surprise. One possible explanation is that the United States has a special advantage in producing new products or goods made with innovative technologies. Wassily Leontief postulated that since the United States was relatively abundant in capital compared to other nations. Such products may be less capital intensive than products whose technology has had time to mature and become suitable for mass production. This may not to be the . however. imports. the United States may be exporting goods that heavily use skilled labor and innovative entrepreneurship. United States exports commercial aircraft and imports automobiles not because its factor endowments are especially suited to aircraft manufacture and not suited to automobile manufacture. ‘he found that U. One possible explanation is that the United States has a special advantage in producing new products or goods made with innovative technologies. Thus. Since this result was at variance with the predictions of the theory. The Leontief Paradox Using the Heckscher Ohlin theory. A key assumption in the HeckscherOhlin theory is that technologies are . not absolute. it has become known as the Leontief paradox. Since this result was at variance with the predictions of the theory.S.S.Ohlin theory. such as computer software. many of these tests have raised questions about the validity of the Heckscher.that it is relative. such as computer software.the same across countries. while importing heavy manufacturing products that use large amounts of capital. it has become known as the Leontief paradox.Ohlin theory Leontief postulated that since the united States was relatively abundant in capital compared to other nations. the United States would be an exporter of capital-intensive goods and an importer of labor-intensive goods. Thus. but be relatively abundant in one of them. endowments that are important. but because the United States is more efficient at producing aircraft than automobiles. Example : As per the theory.S. ‘he found that U. while importing heavy manufacturing products that use large amounts of capital. No one is quite sure why we observe the Leontief paradox. the united States would be an exporter of capital-intensive goods and an importer of labor-intensive goods. United States may be exporting goods that heavily use skilled labor and innovative entrepreneurship. To his surprise. exports were less capital intensive than U. imports. however. No one is quite sure why we observe the Leontief paradox. exports were less capital intensive than U. a country may have larger absolute amounts of land and labor than another country. As per Heckscher.

firms and sold first in the U. cost considerations start to play a greater role in the competitive process. -Just because a new product is developed by a U. Vernon argued that the wealth and size of the U. the process might. Spain) might now be able to export to the United States. drives international trade patterns. To explain this. However. Apparently.S. Vernon argued that most new products were initially products were initially produced. In addition.S. Thailand) begin to acquire a production advantage over . the product becomes more standardized. The Product Life Cycle Theory Raymond Vernon initially proposed the product life-cycle theory in the mid-1960s.S. As this occurs. the pioneering firms believed it was better to keep production facilities close the market and to the firm’s center of decision making.S market gave U. it becomes worthwhile for foreign producers to begin producing for their home markets. Great Britain. firms can charge relatively high prices for new products. and Japan). given the uncertainty and risks inherent in introducing new products. The cycle by which the United States lost its advantage to other advanced countries might be repeated once more. Consequently. As it does.S. As the market in the United States and other advanced nations matures.S. the high cost of U.case.g. demand for the new product starts to grow in other advanced countries (e. which obviate the need to look for low cost production sites in other countries.mass-produced automobiles. it does not follow that the product must be produced in the United States. not stop there. demand in other advance countries is limited to highincome groups. market (e. which in turn. Italy. and differences in technology may lead to differences in productivity. U. France. and semiconductor chips). as developing countries (e. market. Also. Germany. demand is starting to grow rapidly in the United States.firms might set up production facilities in those advanced countries where demand is growing.S. Inaddition. Producers based in advanced countries where labor costs are lower than in the United States (e.. the demand for most new products tends to be based on nonprice factors. instant cameras.S. Consequently.. Vernon went on to argue that early in the life cycle of a typical new product. firm and first sold in the U. and price becomes the main competitive weapon. production within other advanced countries begins to limit the potential for exports from the United States. If cost pressures become intense. firms an incentiveto develop cost-saving process innovations. Vernon’s theory was based on the observation that for most of the 20th century a very large proportion of the world’s new products had been developed by U. Over time..in America. 5. labor gave U. personal computers. televisions. photocopiers. It could be produced abroad at some lowcost location and then exported back into the United States.g. but it does necessitate some exports from the United States to those countries.g. firms a strong incentive to develop new consumer products.g. The limited initial demand in other advanced countries does not make it worthwhile for firms in those countries to start producing the new product.S.

New trade theory also argues that if the output required to realize significant scale economies represents a substantial proportion of total world demand for that product the world market may be able to support only a limited number of firms based in a limited number of countries producing that product . Thus.advanced countries.5 shows the growth of production and consumption over time in the United States. from being an exporter of the Product to an importer of product as production becomes concentrated in lower-cost foreign locations. 6. It argues that increasing returns to specialization might exist in some industries. and developing countries. The consequence of these trends for the pattern of world trade is that is over time the United States switches. the locus of global production initially switches from the United States to other advanced nations and then from those nations to developing countries. other advanced countries. 2. New Trade Theory New Trade Theory (NTT) is the economic critique of international free trade from the perspective of increasing returns to scale and the network effect 1. Figure 2. New Trade theorists challenge the assumption of diminishing returns to specialization used in international trade theory.

The story of path-dependent industrial concentrations sometimes leads to monopolistic competition.Example: The commercial aerospace industry. Economies of scale in this industry come from the ability to spread fixed costs over a large output. and that the NTT argument is based on a selective sample of historical cases. and especially the use of the network effect to argue that the formation of important industries was path dependent in a way which industrial planning and judicious tariffs might control. Japan is cited as evidence of the benefits of "intelligent" protectionism. which is currently dominated by just two firms. and predicted the possibilities of national specialization-by-industry observed in the industrial world. In many ways. regressions on the outcomes of such "industrial policies" (including the failures) have been less conclusive   . highly technical. and again. Due to the time-scales required and the particular nature of production in each 'monopolizable' sector. there is too limited a dataset to produce a reliable test of the hypothesis which doesn't require arbitrary judgements from the researchers. Boeing and Airbus. Although many examples (like Japanese cars) can be cited where a 'protected' industry subsequently grew to world status. is a good example of this theory. statistical judgements have been hard to make. Econometric evidence: The econometric evidence for NTT was mixed. but critics of NTT have argued that the empirical support post-war Japan offers for beneficial protectionism is unusual.  The model they developed was highly technical. Implication: "NTD" was the rigor of the mathematical economics used to model the increasing returns to scale.

-Need to strengthen competitiveness among domestic SSI through modernisation and technology development. enquiry points -Process and production methods can be used to -Competition from foreign goods.4. India bas amended the Customs Act in conformity with the Agreement. -This affects efficacy of Reservation Policy. -SIS in conformity with International standards. but India has lost in the Disputes Settlement Case). Ans: Agreement Provisions Impact Policy issue General Agreement on Trade'" Tariff. (India is committed to a bind tariff lines at 40 per cent on finished goods and 2S per cent on intermediate goods. machinery and equipment. As import by standards other countries are -Checks on misuse of subject to mandatory mandatory product standards. India does not use services of PSI companies. products standards -Enquiry points help -Establishment of facilitation. Discuss the impact of WTO on India’s trade policy. (GATT) Prohibits: -Actions of Government I Organisations that distort normal -Discrimination between Member nations -Discrimination between domestic and lawfully imported foreign goods Agreement on valuation of Goods Agreement on Pre-shipment inspection (PSI) Binding of tariff lines. Barriers to Trade (TBT) -Bureau of Indian Standards (SIS) conforms to Agreement. -Quantitative restrictions of imports to be phased out by 1. with greater emphasis on competitiveness. Countries to follow -Greater transparency uniform procedures in -Beneficial to both respect of customs importers and formalities. Agreement on Technical. using PSI companies to benefit -Conformity with -Indian exporters to international benefit. exporters To check arbitrary Indian companies ways of PSI companies exporting to countries in valuation of goods. -Create freer trade regime.6.2000 (original deadline set was 2003. phased reduction by 2005). -BIS to serve as enquiry point. Need for Reservation Policy to move in tandem with OGL list. .

Will make Indian exports more expensive. -EXIM policy provides scheme for neutralisation of incidence of indirect taxes (e. advance licenses etc. as they are usually at the receiving end of restricted practices. Indian in with Rules Applicable on Exports Agreement on Subsidies and Countervailing Measures (SCM) -Allows export (to be relieved of indirect taxes (e. Would affect price competitiveness Delays. discretion and misuse of licensing procedures to be cut.g. -Allows levy of duties on exports -Prohibits export subsidies -Phasing out by 2003.g. . -Importing countries can countervail subsidies that are actionable. -Small businesses have to become more competitive. -Neutralisation of indirect taxes good. -Prohibits direct tax benefits (e. EXIM Policy made compatible. Measures can include Ministry of Commerce & Industry is putting required system in place. -Permits permissible subsidies.g. (SPM) Agreement on import licensing Same as above except that countries can deny import from certain region/country on the ground of pest I disease Transparency and time bound International standards to adopted Most of be standards conformity International standards.discriminate against Indian exports. Agreement on Sanitary and Phytosanitary Measure.) -Review of direct tax benefits. -Present schemes providing waiver of Income Tax on export earnings to be scrapped. Duty drawback. Beneficial to small businesses. to be WTO Agreement on Safeguard Measures -Subsidies given to small businesses are usually permissible and non-actionable. Excise Duty). Income Tax waiver on export earnings). Allows countries to Helpful provision take action against undue import surge injurious to domestic industry during transition period.

duty enhancement beyond bound rates etc. -India to really benefit from removal of QRs in these countries. MFN and National -India not partly to We need to carefully Treatment on the agreement. Directorate of AntiDumping established in Ministry of Commerce & Industry. review the policy. Trade Related Investment Measures (TRIMS) Market Access Negotiations Agreement on Government Procurement Prohibits countries -Affects FOREX Measures underway to from imposing position. computer hardware and software. Government -Under severe procurement pressure to fall in line. -Indian exporters of goods and services can export to countries who have signed this agreement barring USA. -Can affect exports of footwear. terms of reduction and -Does not help Indian binding of tariff lines. exporters. textiles.Agreement on Anti-Dumping Measures (ADP) Quantitative Restrictions (QRs). terminate notified conditions such as -Affects Government TRIMs such as localisation. export foreign Investment Dividend Balancing obligation on Policy investors. period extendable Allows countering Helpful provision unfair trade practices. as tariffs in developed countries already low. -Enhances competition to domestic industry Binding of tariff lines -Increased India followed the competition from WTO time-table in foreign goods. . stationary etc.

non-permissible. geographical indications and undisclosed information -National and MFN treatment. agrotechnology may chemicals and food. increase due to lesser Patent life increased fear of counterfeit. patent in -Transfer of pharmaceuticals. Most Favoured Nation Treatment (MFN): No discrimination between member nations. copy rights. Allows product difficult. Helpful to Indian India has made exporters of services. copyrights etc. -Developing countries to implement within 5 years. layout designs. India has acceded to Paris Convention.Actionable and non-actionable. Subsidies: Permissible . Micro -India's own R&D organisms made institutions could patentable.General Agreement on Trade in Services (GATS) -All services covered. trade marks. Trade Related Intellectual Property Rights (TRIPs) -Provides protection to IPRs as patents. -Reverse engineering Patent Act amended in becomes more 1991. being drafted for trademarks. New laws benefit. to 20 years. commitments in 33 service activities as compared to an average of 23 developing countries. Inflow of capital and technology with adequate employment prospects is the main consideration. National Treatment: No discrimination between domestic products and lawfully imported products. . industrial designs. -MFN principle -Liberalisation commitments.

As a company grows internationally we can expect to see a company’s organization grow as well. Discuss the various organisational structure in International Business. social and economic conditions we wish to expand to. a company must link and integrate functions and activities of different divisions of the company. The reason this would be optimal is because a company is new to selling internationally. and Global Functional Design Structure. In addition. this is going to allow the company to adapt additional marketing strategies. Ans: There are five types of organizational structures: International Division Structure. "an international firm must address its coordination needs" Meaning. INTERNATIONAL AREA STRUCTURE The one that would be optimal for a company that is just expanding is the International Area Structure. ." This would be a benefit to have the organizational in this manner because it would allow a company to focus on the region of the world we are selling to and tailor the needs of mobility products to that area. By using the International Area Structure.7. without disrupting the ones company managers have worked so hard for. the company is organized into countries or geographic regions. commercial. Global Product Structure. Using the International Area Structure will allow a company to hire managers who specialize in understanding the cultural. Global Matrix Structure. "In this organizational structure. International Area Structure.

then this is an international division structure. . This structure is designed do that the multinational will have a free access to explore the resources that are present internationally. It is usually based on the characteristics like a function. The abroad unit is required to control all the activities which are to be performed internationally.       Worldwide area structure Favoured by firms with low degree of diversification & domestic structure based of function World is divided into autonomous geographic areas Operational authority decentralized Facilitates local responsiveness Fragmentation of organization can occur Consistent with multi-domestic strategy INTERNATIONAL DIVISION STRUCTURE When a company has a branch that is located abroad and that abroad company is said to be attached with the original company. product or on geography.

Area is usually a country. The product division structure enhances coordination between different areas for any one product line but it reduces coordination of all product lines within each zone. Largely autonomous. unrelated business.          Adopted in early stages of international business operations Coordinate all IB activities Develop international expertise & skills Develop a global/international mindset Champion of foreign business Favored by firms with low degree of diversification. Facilitates local responsiveness GLOBAL PRODUCT STRUCTURE The product division structure is popular with large conglomerates with multiple. Under this structure different subsidiaries pertaining to different products within the same foreign country report to the head of different product groups at the head quarters. .

leading to lack of local responsiveness GLOBAL MATRIX STRUCTURE Over time. subservient to product division managers. "In this organizational structure." As we develop the sales in areas of the world. .       Adopted by firms that are reasonably diversified Original domestic firm structure based on product division Value creation activities of each product division coordinated by that division worldwide Help realize location and experience curve economies Facilitate transfer of core competencies Problem: area managers have limited control. we can expect to see the chain of command split between product managers and area managers. the chain of command is split between product managers and area managers. we can expect to see a company grow into a Global Matrix Structure.

finance and personnel. a variation of the functional structure known as the process structure. such as production. are responsible for the worldwide operations of their own functional areas. marketing. the head of functional areas.      Helps to cope with conflicting demands of earlier strategies Two dimensions: product division and geographic area Product division and geographic areas given equal responsibility for operating decisions Problems: Bureaucratic structure slows decision making Conflict between areas and product divisions Difficult to make one party accountable due to dual responsibility GLOBAL FUNCTIONAL DESIGN STRUCTURE Under the functional structure. In certain industries like energy and mining. . is common. which uses processes as the basis for the structure.

1994. Meanwhile. often part of a regional intergovernmental organization. No doubt. Mexican tariffs on U. These labels are printed in three languages. In 1991. English. House approved it by 234 to 200 on November 17 and the Senate by 60 to 38 on November 20. namely. which came into force on January 1. 1993 and entered force January 1. Bush. and its passage is considered one of his first successes.S. President George H. It is one of the world’s most powerful and successful treaties comprising the United States. Mexican President Salinas. Although it was started by President Bush. When Was NAFTA Started?: NAFTA was signed by U. 1994. which was signed in 1988. This is important because it gave the President "fast-track" authority to negotiate free trade agreements. who campaigned on a North American common market. the Security and Prosperity Partnership of North America (SPPNA) was also added to NAFTA. went into effect in 1989 and is now suspended due to NAFTA.S.S. Canadian Prime Minister Mulroney agrees with Reagan to begin negotiations for the Canada-U.S. Spanish and French. In 1984. How Was NAFTA Started?: The impetus for NAFTA actually began with President Ronald Regan. Mexican President Salinas and President Bush began negotiations for a liberalized trade between the two countries. Prior to NAFTA. the goods that are traded between the NAFTA members feature labels. farmers and ranchers. is not just another treaty that aims to facilitate trade between its member nations. NAFTA has been highly beneficial for consumers.S. Congress passed the Trade and Tariff Act. it was a priority of President Clinton's. The North American Agreement for Labor Cooperation (NAALC) and North American Agreement for Economic Cooperation (NAAEC) are major additions to this treaty. It was signed into law by President Bill Clinton on December 8.W. where regional barriers to trade (tariffs and non-tariff barriers) are reduced or eliminated among the participating states. Interestingly. Following the unfortunate September 11/2001 attack in the US. Canada and Mexico. and Canadian Prime Minister Brian Mulroney in 1992. imports were 250% higher than U. Free Trade Agreement. Discuss Regional Trade Blocs : NAFTA and ASEAN Trade bloc is a type of intergovernmental agreement. while while only allowing Congress the ability to approve or disapprove. tariffs on Mexican imports. Canada requests a trilateral . not change negotiating points.[1] What is NAFTA? The North American Free Trade Agreement or NAFTA.8. It was ratified by the legislatures of the three countries in 1993. The U.

the . from $151 billion in to $501 billion. In 1993. It is the second largest for corn. by decreasing costs of imports.agreement. Increase investment opportunities. from $142 billion to $364. apples and beans. Provide protection and enforcement of intellectual property rights. concerns about liberalization of labor and environmental regulations led to the adoption of two addendums to NAFTA. Increase in Trade: Trade between the NAFTA signatories tripled. soybean meal. from $297 billion in 1993 to $903 billion in 2007. spurring business growth. soybeans and oils.S. regional and multilateral cooperation to expand NAFTA's benefits. As a result of NAFTA. Agricultural Exports: NAFTA is especially helpful for agricultural exports because it reduces high Mexican tariffs. grew 231%.S. goods exports to Canada and Mexico grew 157%. What Are the Advantages of NAFTA?: NAFTA created the world’s largest free trade area.S.6 billion. GDP by as much as . Create procedures for the resolution of trade disputes. Estimates are that NAFTA increases U. Mexico is the top export destination for beef. linking 439 million people and producing $15.S.   U. NAFTA provides the ability for firms in member countries to bid on government contracts. That's because its elimination of tariffs and agreements on international rights for business investors increases trade and capital. Eliminate barriers to trade and facilitate the cross-border movement of goods and services. Elimination of tariffs also reduces inflation. Promote conditions of fair competition. Why Was NAFTA Formed?: Article 102 of the NAFTA agreement outlines its purpose:        Grant the signatories Most Favored Nation status. Exports from Canada and Mexico to the U. Establish a framework for further trilateral. Specifically. Increase in U. corn sweeteners.3 trillion in goods and services annually. It also protect intellectual properties. which then led to NAFTA.5% a year. rice.

000 jobs.S.7 million jobs. These aren't as easily transported as are goods. Services exports from Canada and Mexico grew to $37 billion. foreign direct investment (FDI) in Canada and Mexico tripled to $331 billion (as of 2006.S. states.-subsidized farm products. NAFTA requires authorities to use open administrative procedures and publish all regulations. and electrical appliances. so being able to expand services to nearby countries is important. These industries included motor vehicles. Increase in Foreign Direct Investment: Since NAFTA was enacted. Canadian and Mexican FDI in the U. Thanks to NAFTA. textiles. gaining only 794. Michigan and Texas. Service industries are often highly regulated. the U. was $165 billion.S.S. U. Loss of U. NAFTA reduces risk for investors by guaranteeing they will have the same legal rights as local investors. Many of Mexico's farmers were put out of business by U.percent of U. services exports to Canada and Mexico grew 125%. NAFTA provides a legal mechanism for investors to make claims against a government.S. including financial services and health care. Increase in Trade of Services: More than 40% of U. It also guarantees they will receive fair market value for their investments in case the government decides to nationalize the industry or take the property by eminent domain. agricultural exports to Canada and Mexico has grown from 22% in 1993 to 30% in 2007. States hit hard included California. Most of these jobs(78%) were in manufacturing. Those manufacturers that remained had to decrease wages to compete.S. These states had high concentrations of the industries that moved plants to Mexico.S. NAFTA eliminates trade barriers in nearly all service sectors. many manufacturing industries moved part of their production from high-cost U. for a net loss of 879. computers. New York. NAFTA allowed U. NAFTA provisions for Mexican labor and environmental protection were not strong enough.S. Between 1994 and 2002. Jobs: Since the cost of labor is cheaper in Mexico.00. latest data available). GDP is services. lost 1.S. . from $25 billion to $62 billion in 2006. and the regulations aren't always apparent.S. manufacturers to move jobs to lower-cost Mexico. U. allowing for exploitation. if needed Disadvantages of NAFTA: NAFTA has many disadvantages.

corn and other food is exported to Mexico below cost. Laos. cultural development among its members." according to Continental Social Alliance.S. which was formed on 8 August 1967 by Indonesia.6% per annum. Maquiladora Workers Are Exploited: NAFTA caused an increase of the maquiladora program.2% to 13.000 hectares per year.728 billion growing at an average rate of around 5. Mexico's Farmers Are Being Put Out of Business: Thanks to the 2002 Farm Bill.5 billion/$2. Burma (Myanmar).46 million km2 with a combined GDP (Nominal/PPP) of about USD$896. social progress. Wages: Employers in industries that could move to Mexico used that as a threat during union organizing drives. agribusiness is heavily subsidized . in which U. the protection of the peace and stability of the region. In contrast. the Philippines. by 1999. ASEAN: The Association of Southeast Asian Nations. Degradation of Mexico's Environment Has Increased: In response to NAFTA competitive pressure. costing $36 billion per year in pollution.Since then. workdays stretch out 12 hours or more. Most of those subsidies go to Mexico's large farms. In 2008. and to provide opportunities for member countries to discuss differences peacefully In 2005. This benefits consumers.5 trillion with a population of approximately 580 million people (8.as much as 40% of net farm income. and Vietnam.S. Its aims include the acceleration of economic growth. thus suppressing wage growth. who pay less for food.S. resulting in deforestation at a rate of 630. the bloc spanned over an area of 4. Singapore and Thailand. 50% of all companies used the threat. Mexico decreased its subsidies to farmers from 33. Cambodia.7% of the world population OBJECTIVES The ASEAN Declaration states that the aims and purposes of the Association are: . and if you are a woman.Lower U. Malaysia. but makes it impossible for rural Mexican farmers to compete. that rate had grown to 65%. U. between 1990-2001. This now comprises 30% of Mexico's labor force. Mexico agribusiness has increased its use of fertilizers and other chemicals. you could be forced to take a pregnancy test when applying for a job. is a geo-political and economic organisation of 10 countries located in Southeast Asia.2% of total farm income. owned companies employ Mexican workers near the border to cheaply assemble products for "export" to the U. Rural farmers have expanded into more marginal land. As tariffs are removed. membership has expanded to include Brunei.S. its combined GDP had grown to more than USD $1. Between 1993 and 1995. These workers have "no labor rights or health protections.

often part of a regional intergovernmental organization. TRADE BLOC: A trade bloc is a type of intergovernmental agreement. aiming to create an ASEAN Economic Community (AEC) by 2015 . Also. The members have also established a series of co-operative efforts to encourage joint participation in industrial. India and ASEAN India is interested in maintaining close economic relations with the members of ASEAN. ASEAN has emphasised regional cooperation in the “three pillars” of security. WORKING OF ASEAN The member countries of ASEAN have Preferential Trading Arrangements (PTA). ASEAN nations have introduced some programmes for greater diversification in their economies. In 1992. agricultural and technical development projects and to increase foreign investments in their economies. ASEAN developed a Common Effective Preferential Tariffs (CEPT) plan to reduce tariffs systematically for manufactured and processed products. (iii) To maintain close cooperation with the existing international and regional organizations with similar aims. India’s trade with ASEAN countries is satisfactory in recent years. The ASEAN countries are offering co-operation to India in the field of trade. the ASEAN Industrial Joint Ventures Programme (AJIV) etc. social progress and cultural development in the region through joint endeavors. These efforts include an ASEAN finance corporation. (ii) To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter. science and technology and training of personnel. which reduces tariffs on products traded among member countries. as these countries are closer to India.(i) To accelerate the economic growth. investment. sociocultural and economic integration. where regional barriers to trade (tariffs and non-tariff barriers) are reduced or eliminated among the participating states. The regional grouping has made the most progress in economic integration.

Vietnam joined in 1995. while from 1 January 2009. and also freeing up tourism. and Vietnam) countries. ASEAN has concluded seven packages of commitments under AFAS. Trade in Services An ASEAN Framework Agreement on Trade in Services was adopted at the ASEAN Summit in Bangkok in December 1995. Brunei. The latecomers have not fully met the AFTA's obligations. proposed by the ASEAN Air Transport Working Group. restrictions on the third and fourth freedoms of the air between capital cities of member states for air passengers services will be removed. Free Trade Agreements With Other Countries . investment and services flows between member states. a common external preferential tariff scheme to promote the free flow of goods within ASEAN The ASEAN Free Trade Area (AFTA) is an agreement by the member nations of ASEAN concerning local manufacturing in all ASEAN countries. Myanmar. Beginning 1 December 2008. Singapore and Thailand. These schedules are often referred to as packages of services commitments. supported by the ASEAN Senior Transport Officials Meeting. The negotiations result in commitments that are set forth in schedules of specific commitments annexed to the Framework Agreement. Indonesia. Under AFAS. Single Aviation Market The ASEAN Single Aviation Market (SAM).Free Trade Area The foundation of the AEC is the ASEAN Free Trade Area (AFTA). fisheries. while By 1 January 2011. and were given longer time frames in which to meet AFTA's tariff reduction obligations Comprehensive Investment Area The ASEAN Comprehensive Investment Area (ACIA) will encourage the free flow of investment within ASEAN. will introduce an open-sky arrangement to the region by 2015. The ASEAN SAM will be expected to fully liberalise air travel between its member states. there will be liberalisation of fifth freedom traffic rights between all capital cities. trade. Malaysia. Lao PDR. there will be full liberalisation of air freight services in the region. Laos and Myanmar in 1997. and endorsed by the ASEAN Transport Ministers. the Philippines. with exclusions to be phased out according to schedules National treatment is granted immediately to ASEAN investors with few exclusions Elimination of investment impediments Streamlining of investment process and procedures Enhancing transparency Undertaking investment facilitation measures Full realisation of the ACIA with the removal of temporary exclusion lists in manufacturing agriculture. The main principles of the ACIA are as follows       All industries are to be opened up for investment. The AFTA agreement was signed on 28 January 1992 in Singapore When the AFTA agreement was originally signed. At present. ASEAN had six members. but they are officially considered part of the AFTA as they were required to sign the agreement upon entry into ASEAN. and Cambodia in 1999. allowing ASEAN to directly benefit from the growth in air travel around the world. ASEAN Member States enter into successive rounds of negotiations to liberalise trade in services with the aim of submitting increasingly higher levels of commitments. forestry and mining is scheduled by 2010 for most ASEAN members and by 2015 for the CLMV (Cambodia. namely.

ASEAN has concluded free trade agreements with China. middle income & rich income countries? Do you think that the Explain different kinds of on International influences . New Zealand and most recently India. Taiwan has also expressed interest in an agreement with ASEAN but needs to overcome diplomatic objections from QUESTION BANK = INTERNATIONAL BUSINESS 1) Explain the nature of International Business? Its Components (Pg 2) Globalization– 2) Explain the stages of Internationalization? Pros & Cons 3) Explain 4) Explain the the Comparative Opportunity Cost Cost Theory Theory of of International International Business. it is currently negotiating free trade agreement with the European Union. What are its assumptions and outcomes? (Pg 165) Business? 5) What are the assumptions. In addition. Japan. Australia. merits and derivatives of Hecklscher-Ohlin Theory? (Pg 168) 6) What is Business Environment? Explain the different factors of International Business Environment? (Pg 25) 7) What is Social & Cultural Environment? Analyze the impact of Social & Cultural factors on global business? (Pg 30) 8) Explain Cross-Cultural Communication process and negotiation with a suitable example?(Pg 183) 9) What is Economic Environment? economic systems & their Business? (Pg 27) 10) How do you classify the countries as low income. Korea.

15) 14) What is International Franchising? Explain the basic issues involved in Franchising & Franchising Agreements? (Pg 15.economic business? status of the country influence the global 11) What are the advantages & disadvantages of different modes of entry? (Pg 12) 12) What is Exporting? How do the firms enter international markets through exporting strategy? (Pg 13. But many argue that WTO is the Wrong Trade Organization. an international company & a transnational company? (Pg 81) .14) 13) What is International Licensing? What are the advantages & disadvantages of International Licensing? (Pg 13.‖ Critically comment? 20) What is Multinational Corporation? How is it different from a global company.16) 15) What is Foreign Direct Investment? What are the advantages & disadvantages of FDI? Also explain different strategies of FDI? (Pg 39) 16) What is Joint Venture? Why do the firms Joint Venture to go globally? (Pg 18) 17) What are the conflicting situations in the Alliances? How do you manage them? 18) What is Dumping? What are the impacts of Dumping by China & East Asian countries on Indian industry? 19) ―Some argue that WTO is the third pillar of Global Business.

objective & functions of International Monetary Fund (IMF)? (Dhondse) 25) What is SDR? Explain its role in maintaining International Liquidity? (Dhondse) 26) Explain the origin. objectives & functions of International Bank for Reconstruction & Development (IBRD)? (Dhondse) 27) GATT.21) Why do developing countries allow MNC‘s to operate in their countries? Why do some countries impose control over MNC‘s? (Pg 98. Tech. Cul. SAFTA. Legal)? (Pg 25) . GATS. TRIPS. Eco. etc? 28) Economic Integration levels – EU. NAFTA. BRIC. Soc. etc? 29) International Business Strategy & Organization Structure/ HR? (Pg 190) 30) PEST Analysis‘s/ Business Environment (Pol.99) 22) What are the peculiarities of Global Strategic Management? What is International SWOT analysis? How do you use it in formulating global strategies? 23) What is Foreign Exchange? How do you determine the Exchange Rates? 24) Discuss the origin.

Products are sold through intermediaries such as agents and trading companies. so it may need more time to become familiar with the market o The customers or clients may take longer to get to know the company and its products. Sales representatives promote their company‘s products and do not take title to the merchandise. Foreign direct Investment . Export can be done in two ways: 1. Agents may represent one or more indirect exporters in return for commission on sales.Q1. Indirect Export . Distributors take ownership of the goods (and the accompanying risk) and usually on-sell through wholesalers and retailers to end-users. and such familiarity is often important when doing business internationally 2. What are the various entry methods for International Business? Export Exporting is the most traditional way of entering into International Business. Advantages of Direct Exports: o Give a higher return on your investment than selling through an agent or distributor o o Allows the exporting company to set lower prices and be more competitive Gives the company a close contact with its customers Disadvantages of Direct Exports: o The company may not have the services of a foreign intermediary. Direct Export – Products are sold directly to buyers in target markets either through local sales representatives or distributors.

With rapid globalization of many industries and vertical integration rapidly taking place on a global level. improved trade and investment policies of governments. From a competitive standpoint. it becomes imperative to follow the expansion of key clients overseas if an active business relationship is to be maintained. FDI has come to play a major role in the internationalization of business. a foreign direct investment may be an attractive and viable option. organizational technologies and management skills. regulatory environment in terms of liberalization and easing of restrictions on foreign investments and acquisitions. This has happened due to changes in technologies. Depending on the industry sector and type of business. Advantages: o It can provide a firm with new markets and marketing channels. products. o Capability to increase total production capacity. New market access is also another major reason to invest in a foreign country. and deregulation and privatization of many industries. it is important to be aware of whether a company‘s competitors are expanding into a foreign market and how they are doing that. capital process. at a minimum a firm needs to keep abreast of global trends in their industry. o FDI can provide a strong impetus to economic development of the host country.FDI are investments made to acquire a lasting interest by a resident entity in one economy in an enterprise resident in another economy. export of product or service reaches a critical mass of amount and cost where foreign production or location begins to be more cost effective. Often. access to new technologies. At some stage. This is all the more true when large MNCs enter developing nations through FDI. o o FDI allows companies to avoid foreign government pressure for local production. It allows making the move from domestic export sales to a locally based national sales office. cheaper production facilities. Any decision on investing is thus a combination of a number of key factors including: o o o o Assessment of internal resources Competitiveness Market Analysis Market expectations .

production and marketing techniques or using its general business approach. This right can take the form of selling the franchiser‘s products. licensing provides an opportunity to exploit research and development already conducted. Provides a way of testing foreign markets without significant resources. Licensor may create more competition in exchange of royalty. The licensee uses that idea/product/process to sell products or services and earns money.Licensing Licensing is a legal agreement between the owner of intellectual property such as a copyright. Advantages: o Licensing appeals to prospective global players because it does not require large capital investment not detailed involvement with foreign customers. By generating royalty income. the licensor can reap benefits until the end of license contract period. Limitations: o o Limited form of market entry which does not guarantee a basis for expansion. . patent or trademark and someone who wants to use that IP. using its name. Like a lease on a building. o o o Helps avoid host country regulations that are more prevalent in equity ventures. o It reduces the risk of expropriation because the licensee is a local company that can provide leverage against government action. Can be used as a preemption major in new market before the entry of competition. The licensee pays ―rent‖ to the licensor for the use of an idea/product/process that is otherwise protected by IP law. After initial costs. Franchising Franchising involves granting of rights by a parent company to another (franchisee) to do business in a prescribed manner. the license is for a specific period of time.

McDonald‘s. Franchiser has a new stream of income and the franchisee gets time proven concept/product which can be quickly bought to the market. the franchiser provides assistance and at times may require the purchase of goods or supplies to ensure the same quality of goods or services worldwide. car dealership) manufacturer-wholesaler system (e.g.g. Typically. Burger King Joint Ventures A joint venture is an agreement involving two or more organizations that arrange to produce a product or service through a collectively owned enterprise. In return. Franchising is adaptable to international arena and requires minor modification for the local market. this stake can be a majority one so as to ensure tighter control. soft-drink companies) service firm – retailer system (fast-food. it is a 50-50 joint venture in which each of the party holds 50% ownership stake and contributes a team of managers to share operating control. Major Forms of Franchising: manufacturer-retailer system (e.It allows provides a network of interdependent business relationships that allows a number of people to share: o o o Brand identification Successful method of doing business Proven marketing and distribution system Franchise agreement typically requires the payment of a fee upfront and then a percentage on sales. At times. It has been one of the most popular way of entering a new market. Advantages: . hotel) e. It can be beneficial to both groups.g.

Profits have to be shared. e. collaborative. Hero Honda. The success and growth of international business depends on the stable. This freedom is accompanied by a greater risk due to lack of knowledge of the market. environmental.o o o Domestic company brings in the knowledge of the domestic market. A. Influence of PEST Factors on International Business Any business is affected by its external environment. Set up of new operation 2. the company owns 100% of the equity. WOS allows a foreign firm complete control and freedom to execute its business strategy in the foreign country. Maruti Suzuki Wholly Owned Subsidiaries In a wholly owned subsidiary. Acquisition of an established company can reduce this risk to an extent. foreign partner has an option to sell its stake in the venture to another entity. social and technological. Acquisition of established firm. Normally. Limitations: o o Limited control over business approach for foreign entity. political system in the country. The major macroeconomic factors in the external environment that affect the business are political. Danone-Brittania. Q2.g. The risk is divided between joint-venture partners. The following factors affect the political environment in a country. Political Environment The political environment of a country greatly influences the business operating in those countries or business trading with those countries. Establishing a wholly owned subsidiary in a foreign market can be done in 2 ways: 1. conducive and secure .

g. Tariffs and duty structure: The level of duties and tariffs that are imposed by the country influence its imports and exports greatly. India during the nationalist wave during Indira Gandhi‘s tenure. Business can be successful only if the local government provides support in terms of infrastructure. 4. Many businesses had to be withdrawn or closed because of the labor unrest in the country. The problems faced by doctors and nurses in UK due to the restrictive laws in that country. For e. Russia. For e.g. For e. 3. The structure of indirect taxation in a country like its excise duty structure.1. But due to very high indirect taxation levels the manufacturing business is not very successful. license clearing if required. democracy. Labor Laws: the labor laws in a country affect the viability of a business in that country. The direct taxation laws also affect the business because it influences consumer spending. 5.: Withdrawal of Premier Automobiles due to union strikes in our country.g. Tax Policy: The tax policy of a country affects the profitability of the business there. communism etc. Also the nature of the political system i.g.g. 6. Confiscation: the nationalization of businesses without compensation. 2. customs and sales tax greatly affects the input costs of a business. Some countries follow a protectionist policy to the domestic industry by raising import barriers For e. transparent policy and quick dispute resolution mechanism. The Corporate Taxation laws affect the profitability directly. For e. Government support: One of the most important political factor is the Government support to international businesses. India in the pre liberalization era. refineries and heavy engineering. Countries like UAE have very low direct taxation levels inducing great spending and hence trading and marketing based business are successful. Political risk assessment should be done to determine the country risk on the basis of following parameters : a. . Political stability and political milieu: Political stability greatly affects the longevity of the businesses in a country. Environmental policy: The countries environmental policy (under the Kyoto Protocol or otherwise) affects many business like chemicals. the RBI has provided single window clearance for FDI and hence has greatly increased the FDI levels in our country.e. in the country influences the Government support. The pension laws also play a critical role especially in cross border acquisitions.

For e. the resource nationalization in Columbia. The following are the important social factors. Economic factors The economic factors in a country greatly influence the business in that country.g.g. A young population also determines a workforce. the coups in Thailand or in Fiji has affected the profits of businesses there by as much as 60% due to work stoppage and property destruction. In a country like India. Age distribution also determines the mindset of the market and helps segmentation of the market accordingly. Barclays bank in South Africa B.b. Instability risk: The possibility of military takeovers or huge government changes. 1. It also has a bearing on the employee quality.g. Social factors Businesses are driven by people both as human capital and as consumers. Due to globalization there is a gradual shift toward market forces to allocate resources even in the communist countries like China.g. For e.g. The following factors are important in the macroeconomic environment. 4. Family system: the family system has a bearing on the decision makers in consumption. For e. in Islamic countries women have a less say in making . For e. c. 3. 2.e. The nature of the system decides the allocation of resources. with rising aspirer population there is a market opportunity for products like IPod (considered luxury items till now) C. 1. 2. capitalism/ communism/ mixed economy (India) is important for deciding the nature of the businesses. minerals etc. Domestication: The global company relinquishing control in favor of domestic investors. For e. Age distribution: the age distribution of the population is important to consider the consumption patterns in the markets. It is necessary for an international businessman to understand the social and cultural aspects of the country they operate in. Interest rates: The interest rates in the country affect the cost of capital (if raised locally) and the operational costs. Income levels and spending pattern: Though it is more of a demographic parameter has is very important bearing on the sell side of all international businesses. Economic system: the economic system in a country i. Exchange rates: The exchange rates affect international trade and capital inflows in the country. Nationalization: Resource nationalization is a major risk for businesses involving local resources like oil. d. Interest rates also determine the confidence of the Government in the economy and consumer spending.

In Russia being a communist oriented mindset the business is conducted in a closed manner. 3. For e. Technological Factors Technology has a very important role to play in determining the success of international businesses because technology has made international business possible. The following are the technological factors that influence the business. In emerging economies like India children are gaining important role in consumption. R&D: the support that the Government gives to R&D encourages setting up R&D business levels. in the early 40s countries like Czechoslovakia (the Czech Republic) was a very technologically advanced country but had very low business interest due to the less chances of technology transfers. Cultural aspects: The cultural aspects influence the way the business is conducted in countries.g. GE withdrew operations from a JV as there as they could not access local expertise) Q3. Career attitudes: the career attitude of the workforce is important social aspect.consumption decisions. 4.g. In Japan there is a different way in which contracts are signed and executed. Technology transfer: The ease of technology transfer influences the business climate. For e.g. 1. For e. Italians have a seemingly lazy way of doing business and hence it is very difficult to conduct business in the pacy US way. Also the ease of a qualified local workforce influence business. Trade Theories . D. This helps in positioning of products. The environment where the technology transfer is not viable gradually loses out on business from emerging countries that seek technology transfers. the semiconductor industry in Taiwan 2.

Zero-Sum Game  In 1752. Minimize imports through tariffs and quotas. Classical Country-Based Theories 1. David Hume pointed out that: Increased exports lead to inflation and higher prices Increased imports lead to lower prices Result: Country A sells less because of high prices and Country B sells more because of lower prices In the long run.Trade Theories Classical Trade Theories Modern Trade Theories Other Theories Mercantilism Free Trade Theories Theory of Absolute Advantage Theory of Relative Advantage Free Trade Theories Refined Factor Endowment Theory Product Life Cycle Theory Productivity Theory The vent for surplus theory Theory of Reciprocal Demand 1.2. Mercantilism. Neo-mercantilism views persist today.Mercantilism (pre-16th century)     This theory takes an ―us-versus-them‖ view of trade. Maximize exports through subsidies. Theory says you should have a trade surplus.1.  Flaw: ―Zero-sum game‖. A nation‘s wealth depends on accumulated treasure. Free Trade supporting theories . other country‘s gain is our country‘s loss. no one can keep a trade surplus 1.

beneficial. and Japan makes more shirts than shoes. a country should specialize in and export products for which it has absolute advantage. Assume that there are just two countries in the world. TABLE B Shoes India 200 Shirts 0 . not government controls. spending half of their working hours on each.2. The resources of both countries can be used to produce either shoes or shirts. Absolute Advantage (Adam Smith. The Wealth of Nations. Pretend also that they produce only two goods. as shown in Table B. the India and Japan. Under free (unregulated) trade each nation should specialize in producing those goods it could produce most efficiently.   A country has absolute advantage .This theory shows that specialization of production and free flow of goods grow all trading partners‘ economies 1.1. This theory states that a country is capable of producing more of a good with the same input than another country. it robs individuals of the ability to trade freely. Trade between countries is. volume and composition of international trade. Both countries make both products. Adam Smith claimed market forces. But India makes more shoes than shirts.either natural or acquired when it is more productive than another country in producing a particular product. Hence. should determine the direction. TABLE A Shoes India Japan Total 100 80 180 Shirts 75 100 175 What will happen when each country specializes and spends all its working hours making one product? It will make twice as much of that product and none of the other. 1776)     Mercantilism weakens a country in the long run and enriches only a few segments. therefore. import others. shoes and shirts.

compared with producing other goods. India could make more shoes than Japan with the same resources.2.   A country has a comparative advantage in the production of a good or service that it produces at a lower opportunity cost than its trading partners.Japan Total 0 200 200 200 The world now has both more shoes and more shirts. had an absolute advantage at shirt making. in his theory of comparative costs. suggested that countries will specialize and trade in goods and services in which they have a comparative advantage. Japan. put simply. It has an absolute advantage at shoemaking. it is better for a country that is inefficient at producing a good to specialize in the production of that good it is least inefficient at. Comparative Advantage (David Ricardo.2. 1817) – Also known as Opportunity Cost Theory  David Ricardo. India can trade 100 units of shoes for 100 units of shirts. on the other hand. labor. and both countries will benefit. Now suppose one country has an absolute advantage in both products. The theory of comparative costs argues that. Assumptions:     Perfect competition and no transportation costs in a world of two countries and two products One unit of input (combination of land. In this example. Principals of Political Economy. and capital) Each nation has two input units it can use to produce either rice or automobiles Each country uses one unit of input to produce each product 1. TABLE C Shoes India 100 Shirts 80 . Table C shows what production might be like if India had an absolute advantage at making both shoes and shirts.

For example. If China produces only shoes. TABLE D Shoes India China Total 200 0 200 Shirts 0 150 150 By specializing in this way. If the India produces only shoes. from 180 to 200. Hence. But the world has lost five units of shirts. TABLE E . Table E shows the results of such a tradeoff. it could produce 8 units of shirts. it gives up 75 units of shirts to gain 80 units of shoes. The India could produce either 200 units of shoes or 160 units of shirts. India has a comparative advantage in shoemaking and China has a comparative advantage in shirt making. going from 155 to 150. if the India gave up 10 units of shoes. the India can produce more of each good with the same set of resources than China can. vice-versa for China.China Total 80 180 75 155 In this case. For India. Production in the India could be adjusted to make up the difference. it gives up 80 units of shirts to gain 100 units of shoes. Table D shows what happens when each country specializes in the product in which it has a comparative advantage. China could produce either 160 units of shoes or 150 units of shirts. the India and China have increased the production of shoes by twenty units over what they produced before. the opportunity cost of producing shirts is higher and the opportunity cost of producing shoes is lower.

the total production of both goods could be increased.  Relative endowments of the factors of production (land. two-product mode. Trade involves many different countries and products. now often referred to as the Heckscher-Ohlin theory. even if it has absolute advantage in all goods it produces.1.3. The real world is much more complex than this two-country. the opportunity cost of choosing to produce 80 units of shirts was the 100 units of shoes that could have been produced with the same resources. For India.Free Trade refined 1. and capital) determine a country's comparative advantage. 1. labour. 1919)  Eli Heckscher and Bertil Ohlin developed the theory of relative factor endowments. Factor-proportions (Heckscher-Ohlin. Efficiency of resource utilization leads to more productivity. In the like manner. China will not accept fewer than 80 units of shoes for 75 units of shirts and the India will not pay more than 100 units of shoes for 80 units of shirts. China's opportunity cost of producing 80 units of shoes was 75 units of shirts. Both countries must benefit for trade to occur. The theory states that the pattern of international trade depends on differences in factor endowments not on differences in productivity. And it is not always clear where a country's comparative advantage lies.3. This extends free trade argument. . trade will take place.Shoes India China Total 190 0 190 Shirts 8 150 158 In this way. In this example. In the terms of trade each reduce each country's opportunity cost of acquiring the good traded for. Summary    Country should specialize in the production of those goods in which it is relatively more productive.

their prices will be low. but little labour . 1. the country is better off importing those goods. This is because the prices of goods are ultimately determined by the prices of their inputs.and thus attractive for both local consumption and export. Therefore. for example.or capital-intensive The theory ignored transportation costs.2. both location of sales and optimal production changes . Summary    Factor endowments vary among countries Products differ according to the types of factors that they need as inputs A country has a comparative advantage in producing products that intensively use factors of production (resources) it has in abundance Assumptions      A given technology was universally available. 1966)  As products mature. a country where capital and land are abundant but labour is scarce will have comparative advantage in goods that require lots of capital and land. Product Life Cycle (Ray Vernon. Countries have comparative advantage in those goods for which the required factors of production are relatively abundant. Since capital and land are abundant. Those low prices will ensure that the price of the grain that they are used to produce will also be low . For example. Labor intensive goods on the other hand will be very expensive to produce since labor is scarce and its price is high.  Goods that require inputs that are locally abundant will be cheaper to produce than those goods that require inputs that are locally scarce.grains.3. Relative factor endowments are different in each country Tastes and preferences are identical in both countries A given product was either labor.

two products) No transportation costs No price differences in resources Resources immobile across countries Constant returns to scale Each country has a fixed stock of resources & no efficiency gains in resource use from trade Full employment 2. These are cost savings that come from ―learning by doing‖ New Trade Theory-Applications  Typically.  Affects the direction and flow of imports and exports Globalization and integration of the economy makes this theory less valid Classic Theory Limitations: All the classical theories are based on the following assumptions that no longer hold true –        Simple world (two countries. requires industries with high. and the ability to enhance economies of scale increases Learning effects are high. fixed costs o o   World demand will support few competitors Competitors may emerge because of ― First-mover advantage‖ Role of the government becomes significant Economies of scale may preclude new entrants o Some argue that it generates government intervention and strategic trade policy Theory of National Competitive Advantage   The theory attempts to analyze the reasons for a nation‘s success in a particular industry Porter studied 100 industries in 10 nations . Modern Trade Theory In industries with high fixed costs:    Specialization increases output.

it must invest in advanced factors Communications Skilled labor Research . and government are more likely to lead to competitive advantage If a country has no basic factors. structure and rivalry Factor endowments: A nation‘s position in factors of production such as skilled labor or infrastructure necessary to compete in a given industry   Basic factor endowments Advanced factor endowments Basic Factor Endowments  Basic factors: Factors present in a country  Natural resources Climate Geographic location Demographics While basic factors can provide an initial advantage they must be supported by advanced factors to maintain success Advanced Factor Endowments   Advanced factors: The result of investment by people. companies.- Postulated determinants of competitive advantage of a nation were based on four major attributes     Factor endowments Demand conditions Related and supporting industries Firm strategy.

Limitations:    Labor productivity did not increase after certain level Increase in working hours Increase in proportion of gainfully employed labour in proportion to disguised unemployed labour 3. Other Theories: 3. Appropriateness of this Theory for Developing Countries: .1. If the countries produce more than the domestic requirements. they have to export the surplus to other countries.2. Otherwise.The productivity theory by H. H. increase productivity by enhancing the efficiency of human resources. Myint proposed productivity theory and the vent for surplus theory. Countries should be exporting products from those industries where all four components of the diamond are favorable. they would be surplus productive capacity in the country.  In the absence of foreign trade.The vent for surplus theory   International trade absorbs the output of unemployed factors. adapting latest technology etc. while importing in those areas where the components are not favorable 3. Myind  It is criticized that the comparative cost theories are not applicable to developing countries.  The productivity theory points toward indirect and direct benefits. Hence. This surplus productive capacity is taken by another country and in turn gives the benefit under international trade.  Countries increase productivity in order to utilize the gains of exports.- Technology Education Porter’s Theory-Predictions   Porter‘s theory should predict the pattern of international trade that we observe in the real world. a part of the productive labour of the country must cease and the value of its annual Produce diminishes. This theory encourages the developing countries to go for cash crops. This theory emphasizes that the process of specialization involves adapting and reshaping the production structure of a trading country to meet the export demands.

Foreign Direct Investments (FDI) as defined in the BOP Manual. It determines the terms of trade and relative share of each country.  According to this theory. J. are investments made to acquire a lasting interest by a resident entity in one economy in an enterprise resident in another economy. The purpose of the investor is to have a significant influence.3. Mill introduced the concept of ‗reciprocal demand‘ to explain the determinations of the equilibrium terms of trade. The definition of the Organization for Economic Cooperation and Development (OECD) which considers as direct investment enterprise an incorporated or unincorporated enterprise in which a direct investor who is resident in another economy owns ten percent or more of the ordinary shares or voting power (for incorporated enterprise) or the equivalent (for an unincorporated enterprise). 3. an effective voice in the management of the enterprise. .Mills’ theory of reciprocal demand  Comparative cost advantage theories do not explain the ratios at which commodities are exchanged for one another. The unemployed labour of the developing countries is profitably employed when the vent for surplus is exported. Existence of perfect competition Existence of full employment Q4. the factors of production of developing countries are fully utilized. it is prepared to give up in exchange.S. Ten reasons why FDI happens 1. Equilibrium: Quality of a product exported by country A = Quality of another product exported by country B Assumptions:      Existence of two countries Trade in only two goods – both the goods are produced under the law of constant returns Absence of transportation Costs.  Reciprocal demand indicates a country‘s demand for one commodity in terms of the other commodity.

And it is more profitable for the production utilizing these assets to take place in different countries than to produce in and export from the home country exclusively. Partly this is because of the expected continued decline in the role of development assistance (on which these countries have traditionally relied heavily). they could help their host countries in their industrialization. It provides a firm with new markets and marketing channels. FDI enables the firm owns assets to be profitably exploited on a comparatively large scale. In the past 15 years. management skills. For small and medium sized companies. equipment and buildings. For example. as well as the purchase or licensing of foreign technology. and as such can provide a strong impetus to economic . processes. 7. hidden and otherwise Making the move from domestic export sales to a locally-based national sales office Capability to increase total production capacity. 3. products. and marketing networks. etc 6. it can provide a source of new technologies. access to new technology. development. joint ventures with local partners. While imports of high-technology products. 8. joint marketing arrangements. licensing. organizational and managerial skills. technology. FDI may result in a greater diffusion of know-how than other ways of serving the market.2. and the resulting search for alternative sources of foreign capital. products. 4. FDI is viewed as a basis for going ―global‖. organizational technologies and management skills. machinery. FDI represents an opportunity to become more actively involved in international business activities. A recent and specific example is the perceived role of FDI in efforts to stimulate economic growth in many of the world's poorest countries. Opportunities for co-production. including intellectual property (such as technology and brand names). Foreign direct investment is viewed as a way of increasing the efficiency with which the world's scarce resources are used. the technology capital. skills and financing. the classic definition of FDI as noted above has changed considerably. are important channels for the international diffusion of technology. Hence. cheaper production facilities. FDI allows companies to accomplish following tasks:      Avoiding foreign government pressure for local production Circumventing trade barriers. and of resources that are scarce in developing countries. FDI provides more scope for spillovers. FDI inflows are considered as channels of entrepreneurship. 5. over 2/3 of direct foreign investment is still made in the form of fixtures. For a host country or the foreign firm which receives the investment.

allow more people to be employed at the same level of wages.and productivity of local firms may improve as foreign firms enter the market and demonstrate new technologies. Even with skill levels and technology constant. WTO Rounds wrt India The WTO came into being on January 1. The truth might lie somewhere in between but they surely become reasons for companies to invest in foreign markets. FDI increases employment in host country. Proponents of foreign investment point out that the exchange of investment flows benefits both the home country (the country from which the investment originates) and the host country (the destination of the investment). and is the successor to the General Agreement on Tariffs and Trade (GATT). or result in some combination of the two. provide technical assistance to their local suppliers and customers. India was one of the 76 countries that signed the accession to the WTO and is one of the founder members of the WTO. and train workers and managers who may later be employed by local firms. Trade implications of signing the WTO for India: . 1995. Opponents of FDI note that multinational conglomerates are able to wield great power over smaller and weaker economies and can drive out much local competition. this will either raise labor productivity and wages. Q5. 9. and new modes of organization and distribution. 10. Inflows of FDI also increase the amount of capital in the host country. which was created in 1948.

2. India also benefits from the clauses related to trade without discrimination and benefit from capital good exports. Drug prices: the granting of the product patents in India will hurt the Indian generic drugs industry and benefit the foreign pharma companies that own the formulation . India can utilize its competitive advantage in processing.g. This will hurt our agriculture foods. gems and jeweler compared to the traditional centers in Europe like Amsterdam or Manchester etc increasing its trade with both the Euro region and the US. The Indian Patent Act allows only process patents in areas of foods. chemicals and medicines. agricultural products exports and in market access to foreign markets in automobiles and electronics. Market access: as a signatory to the WTO India automatically gets the MFN ( most favored nation ) status. patents in agriculture. This gives India access to markets in Europe and US in sectors like automobiles and engineering. AoA export subsidies etc. beverages. Benefits: 1. Under the TRIPS the IPA will have to modify to allow product patents also. The anti dumping provisions and countervailing duties lend security to India‘s domestic industries. the Alphanso mango and the Basmati strand controversy. drug prices. The Agreement on Agriculture: the AoA stipulates that the developed countries will reduce tariffs on agriculture imports (up to 35%) thus helping India‘s agriculture exports. 3. E. TIS ( trade in services ) and TRIMS especially in biomedical areas. India has benefited in the areas of garment exports. India has a disadvantage mainly in areas of TRIPs. Disadvantages: 1. 5.The implications of signing the WTO agreement for Indian trade have been mixed. 2. Also products developed outside India can claim international patents applicable to India. 4. pipes affecting Indian domestic industry greatly. The readymade garment exports from India has reached Rs 800 crores in 2007 and expected to reach Rs 1000 crores in 2008. It also promises reduction of domestic subsidies in the developed countries helping exports from India. This is thrice the exports in 2004-05. TRIPS: the Indian Patent Act is not compatible with the TRIPS agreement under the WTO. Competitive advantage: India has competitive advantage in the areas of merchandise trade. Anti Dumping measures: India suffered from persistent dumping by Romanian and Russian steel majors in the areas of steel casings. Garment exports: The Multi Fiber Arrangement (MFA) that required Indian garment exporters to have quotas for exporting to developed countries was phased out in 2005. Also India suffered from dumping by Chinese steel industry.

These issues were dropped in the Chachun ministerial conferences. Agricultural subsidies: the EU. Issues: market access to foreign markets. This was opposed by countries like India and Brazil. India’s stand in the Doha round and the following ministerial conferences: 1. Indian companies would have to lose in the differential charges that are applied. Brazil.g. 5. (This resulted in regulatory intervention in the recent budget in life saving drugs) e. This will increase seed prices for Indian farmers and also lend our genetic resources to the MNCs 4. Qatar in There is no mechanism to November 2001 and is still continuing. Similarly Indian textiles faced anti dumping regulations in US. This will lead to increase in drug prices in India. led and represented mainly by India. 6. the United States and Japan and the major developing countries (represented by the G20 developing nations). China and South Africa. resolve anti dumping duties issues. Genetics: Indian seed and genetic research organizations are Government funded and will not be able to compete with the MNCs like Montessanto etc that have economies of scale. Cancun conference 2003 : The objective of this conference was to forge the agreement discussed in Doha. India benefited greatly in the capital goods export. together called as Singapore issues. permitting free trade between countries of varying prosperity. Its objective is to lower trade barriers around the world. US and Japan support domestic agriculture by subsides. formalities etc. This agreement on market access for the developing countries in capital and industrial goods increased strength of G20 countries. Issues: Singapore issues: the issues related to the trade facilitation and differential charges in investment vehicles affected Indian investment and venture companies. the Pfizer controversy 3.patents. Doha round: The Doha Development Round commenced at Doha. . talks have stalled over a divide between the developed nations led by the European Union. Services: the opening up of the banking sector in 2009 will affect Indian banks due to the foreign banks with huge balance sheets. TRIMS: the Trade Related Investment Measures resulted in problems in trade in investment issues like transit charges. 2. Anti dumping: the anti dumping rules were imposed on Indian linen in EU. As of 2008. This affected the Indian services.

Paris 2005: France reduced subsidies on farm products. casting to export largely and benefit from the construction boom in US. Geneva 2004: In Geneva conference the developed nations reduced subsidiaries on manufactured goods. However US and Japan did not relent. This resulted in Indian small manufacturers like steel forging. This also benefited the Indian financial sector internationally. Hong Kong 2006 and Potsdam 2007 talks failed in resolving the farm subsidies.The Singapore issues were resolved that resulted in removing the undue advantage for countries like US and Japan in investment arena. 3. . So the recent rounds are in a stalemate situation from India‘s point of view. 4.

and  The commitment by the member states to make the necessary adjustments to their laws in pertinent areas to allow for the strengthening of the integration process. taxes. During the transition period. the rights and obligations of each party will initially be equivalent but not necessarily equal. . where in addition to customs unification the free movement of manpower and capital across the member nations' international frontiers is possible. monetary system. Chile. making Mercosur the fifth largest economy in the World. customs. and depends on equal rights and duties being granted to all signatory countries. exchange and capital. in order to ensure free competition between member states.78 trillion a year (Purchasing power parity. MERCOSUR initially targeted free-trade zones. and the coordination of positions in regional and international commercial and economic meetings. Its purpose is to promote free trade and the fluid movement of goods.Q6. PPP) according to International Monetary Fund (IMF) numbers. Bolivia. and the combined Gross Domestic Product of the full-member nations is in excess of US$2. as a result of the chronological differences in actual implementation of trade liberalization by the member states. which was later amended and updated by the 1994 Treaty of Ouro Preto. Ecuador and Peru currently have associate member status. services and factors between the member states with inter alia. transport and communications. services. a common market. but before becoming a full member its entry has to be ratified by the Paraguayan and the Brazilian parliaments. then customs unification and.Paraguay & Uruguay founded in 1991 by the Treaty of Asunción. and any others they may agree on. Discuss NAFTA/ EU/ ASEAN/ SAARC/ MERCUSOR Mercosur Mercosur is a regional trade agreement among Argentina. In addition to the reciprocity doctrine.  Coordination of macroeconomic and sectorial policies of member states relating to foreign trade. Colombia. people. the elimination of customs rights and lifting of nontariff restrictions on the transit of goods or any other measures with similar effects. and currency. industry. agriculture. finally.  Fixing of a common external tariff (TEC) and adopting of a common trade policy with regard to nonmember states or groups of states. Objectives of MERCOSUR  Free transit of production goods. The Asuncion Treaty is based on the doctrine of the reciprocal rights and obligations of the member states. Brazil . The bloc comprises a population of more than 263 million people. Venezuela signed a membership agreement on 17 June 2006.

Afghanistan became its eighth member. Bhutan and Sri Lanka. technical and scientific fields. according to which the member nations undertake to automatically extend--after actual formation of the common market--to the other Treaty signatories any advantage. to promote active collaboration and mutual assistance in the economic. 1985 by India. Pakistan. SAARC . entitlement. Nepal. In April 2007. at the Association's 14th summit. Nepal. understanding and appreciation of one another's problems. and to cooperate with international and regional organizations with similar aims and purposes. Free Trade Agreement Over the years. Bangladesh.the Asuncion Treaty also contains provisions regarding the most-favored nation concept.       to promote and strengthen collective self-reliance among the countries of South Asia. to strengthen cooperation among themselves in international forums on matters of common interest. Though India has several trade pacts with Maldives. India has been constructing a barrier across its borders with Bangladesh and Pakistan. cultural. SAARC The South Asian Association for Regional Cooperation (SAARC) is an economic and political organization of eight countries in Southern Asia. In 1993. to contribute to mutual trust. Objectives of SAARC:   to promote the welfare of the peoples of South Asia and to improve their quality of life. the SAARC members have expressed their unwillingness on signing a free trade agreement. immunity or privilege granted to a product originating from or intended for countries that are not party to ALADI. social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realize their full potential. Sri Lanka. to strengthen cooperation with other developing countries. favor.Sheelkant Sharma is the current secretary & Mahinda Rajapaksa is the current chairman of SAARC which is headquartered at Kathmandu. similar trade agreements with Pakistan and Bangladesh have been stalled due to political and economic concerns on both sides. It was established on December 8. social. Maldives and Bhutan. to accelerate economic growth.

the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). as of 2007 the trade bloc is the largest in the world and second largest by nominal GDP comparison. 2006.S. with others being phased out over periods of 5 to 15 years.-Canada Free Trade Agreement. . the establishment of a SAARC standard organization. This agreement went into force on January 1. in Dhaka. with full implementation beginning January 1. It also is one of the most powerful.countries signed an agreement to gradually lower tariffs within the region. with a few exceptions for items covered by tariff-rate quotas. Under these provisions.the SAARC development fund. Canada. Under the NAFTA. wide-reaching treaties in the world.4 billion people. The North American Free Trade Agreement (NAFTA) has two supplements. In addition. Under this agreement. SAARC members will bring their duties down to 20 per cent by 2007. Implementation of the North American Free Trade Agreement (NAFTA) began on January 1. 2008. Canada. and Mexico. and Mexico. and the protocol on Afghanistan's admission to the South Asia Free Trade Agreement (SAFTA) were adopted with emphasis on region-wide food security. were incorporated into the NAFTA. all non-tariff barriers to agricultural trade between the United States and Mexico were eliminated. in effect since 1989. 1998. NAFTA The North American Free Trade Agreement (NAFTA) is a trilateral trade bloc in North America created by the governments of the United States. many tariffs were eliminated immediately. This agreement will remove most barriers to trade and investment among the United States. at the 12th SAARC Summit at Islamabad. SAARC countries devised the South Asia Free Trade Agreement which created a framework for the establishment of a free trade area covering 1. Eleven years later. In terms of combined purchasing power parity GDP of its members. all tariffs affecting agricultural trade between the United States and Canada. The agricultural provisions of the U. 1994. The last summit (15th) was held in Colombo where four major agreements . the SAARC convention on mutual legal assistance in criminal matters. This allowed for an orderly adjustment to free trade with Mexico. were removed by January 1.

Fifteen member states have adopted a common currency. workers in manufacturing and assembly industries who lost jobs. or 15 years. Others argue that NAFTA has been beneficial to business owners and elites in all three countries. which introduced a single currency. which may also have affected employment levels in these industries. The Mexican-Canadian agreement eliminated most tariffs either immediately or over 5. which allows for free movement of goods. foreign policies. trade. have been quantified by several economists. The automotive. The EU. in . even after accounting for the 1994–1995 economic crisis. trade with Mexico and Canada has grown more rapidly than total U. services and factors of production. agribusiness. EU The European Union (EU) is a political and economic union of 27 member states. The single market refers to the creation of a fully integrated market within the EU. Objectives of the EU: Its principal goal is to promote and expand cooperation among members‘ states in economics. textiles and apparel. trade since 1994. The EU has developed a single market through a standardised system of laws which apply in all member states. which has seen its poverty rates fall and real income rise (in the form of lower prices. and negative impacts on U. social issues. and judicial matters.S. Another major goal of the EU is to implement the Economic and Monetary Union. and Mexico. goods. but has had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from U.S. security. both positive and negative. U. The five major U. computer equipment. guaranteeing the freedom of movement of people. The effects of NAFTA. Some argue that NAFTA has been positive for Mexico.Mexico and Canada reached a separate bilateral NAFTA agreement on market access for agricultural products.8 trillion in 2007). It maintains a common trade policy. and apparel industries have experienced the most significant changes in trade flows. and microelectronics.S. Critics also argue that NAFTA has contributed to the rising levels of inequality in both the U.S.S. services and capital. located primarily in Europe. defense. textile. especially food). The EU generates an estimated 30% share of the world's nominal gross domestic product (US$16. chemicals and allied products. 10. the Euro for the EU members.S. the euro. Thus EU presents an enormous export and investor market that is both mature and sophisticated. industries that have high volumes of trade with Mexico and Canada are automotive industry.

Services: Any member nation has a right to provide services in other Member States. Top items of trade between India and EU India‘s exports to EU Textile and clothing Leather and leather products Gemstones and jewelery Agriculture products Chemical products % 35 25 12 10 9 India‘s Imports from EU Gemstones and jewellery Power generating equipment Chemical products Office machinery Transport equipment % 31 28 15 10 6   India is EU‘s 17th largest supplier and 20th largest destination for exports.conjunction with Member States. and abuse of monopoly. . Free movement of goods: A custom union covering all trade in goods was established and a common customs tariff was adopted with respect to countries outside the union. Free movement of persons: Any citizen of EU member state can live work in any other EU member state Capital: There are no restrictions on the movement of capital and on payments with the EU and between member states and third countries. collusion (secret agreement). EU – India trade has grown from 4. but compared to International standards they are still high. The EU is India‘s largest trading partner and biggest source of FDI. Some of the policies are given below: Competition Policy: The main competition lied in energy and transport sector. It is a major contributor of developmental aid and an important source of technology. Trade between the European Union and India India was one of the first Asian nations to accord recognition to the European Community in 1962. Tariff and non-tariffs have been reduced. Over the years. The union designed this strategy to prevent price fixing. has a number of policies designed to assist the functioning of the market.4 bn to 28.4 bn US$.

agricultural and technical development projects and to increase foreign investments in their economies. 1999.2008 at the EU-India summit in Marseille.7 billion) in 2000 to 55.  Trade between India and the 27-nation EU has more than doubled from 25. Brunei Darussalam joined on 8 January 1984. Philippines. ASEAN The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in Bangkok by the five original Member Countries. and Thailand. To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter. Indonesia.  Under the Bilateral trade between India and EU. with further expansion to be seen. the ASEAN Industrial Joint Ventures Programme (AJIV) etc. ASEAN nations have introduced some programmes for greater diversification in their economies. to expand their cooperation in the fields of nuclear energy and environmental protection and deepen their strategic partnership. Singapore. Laos and Myanmar on 23 July 1997. The members have also established a series of co-operative efforts to encourage joint participation in industrial. ASEAN developed a Common Effective Preferential Tariffs (CEPT) plan to reduce tariffs systematically for manufactured and processed products. (vi) To maintain close cooperation with the existing international and regional organizations with similar aims.6 billion euros ($36. Malaysia. WORKING OF ASEAN The member countries of ASEAN have Preferential Trading Arrangements (PTA). social progress and cultural development in the region through joint endeavors. France's largest commercial port.6 billion euros last year. OBJECTIVES The ASEAN Declaration states that the aims and purposes of the Association are: (iv) (v) To accelerate the economic growth. These efforts include an ASEAN finance corporation. and Cambodia on 30 April . it accounts for 26% of India‘s exports and 25% of its imports. The European Union (EU) and India agreed on September 29. Vietnam on 28 July 1995. namely. In 1992. which reduces tariffs on products traded among member countries.

Slower global growth: Global growth stood at 5 percent in 2007. Even administrative costs may be difficult to come by. GDP growth was slower in Q2 of 2008 compared to Q1.1% for 2009. science and technology and training of personnel. France and Germany) experienced negative GDP growth in Q2. Rising income insecurity and disproportionate impact on low-income groups: As stock markets around the world have eroded trillions of dollars in wealth and rolled back some of the investment gains of the past 5 years. 7. the investment and retirement . India‘s trade with ASEAN countries is satisfactory in recent years. Q7. 8. Although employment has contracted in several countries in recent months. The governments would be hard pressed for funds for guarantees and development work.5 percent in 2009. Effect of Current Economic Meltdown on International Business 1.g. In the case of Iceland the banking sector has assets of around 300% of GDP. The IMF forecasts around 0 percent growth for advanced economies in 2009. preceded by financial stress tend to be more severe. Large employment losses in sectors: Some sectors like construction. Depth of slowdown: It is observed that economic slowdowns. it has not been as severe as that during 1990-91. and forecasts are for a continued decline in Q3. may trigger a falloff in investments. real estate services will experience disproportionate employment declines. Financing challenges for governments: State and local governments may be faced with financial crisis. A drop in exports. investment. Economic contraction in some countries: In G7 countries except for the United States and Canada. The ASEAN countries are offering co-operation to India in the field of trade.India and ASEAN India is interested in maintaining close economic relations with the members of ASEAN. unemployment in the advanced economies will rise from 5. Also. 6.0.7 percent in 2008 to 6. as these countries are closer to India. 2. In addition there will be significant job losses in the financial sector. Three major European economies (Italy. at least not on a short-term basis.9% as against the earlier estimate of 4. Rising unemployment: According to IMF. something no government could ever guarantee.9 percentage points lower than forecasted in July 2008. Reduced world trade volume: According to the IMF. 3. as well as capital inflow. 4. the world trade will grow only at the rate of 1. 5. but the IMF expects world growth to slow to 3 percent in 2009 . For e.

‖ says World Bank President Robert Zoellick. many branded products may face surplus capacities. This might start a local business environment. For e. 11. AIG and Citibank 12. Steel & Aircrafts manufacturers are already staring at excess capacity. Increase in Trade Deficit: Already in the last quarter. Airlines. as ―the most poor are the most defenseless. 9. Car. Falling Currency: as the demand for dollars increases the Indian rupee is likely to weaken. 10. The rupee has already depreciated to Rs. India‘s trade deficit has grown where exports are not meeting the set targets while imports continue to grow. c. For e. d.g. Return to Tariff and Non-Tariff Barriers: Developed economies in order to ward off unemployment and financial crisis may erect barriers to free trade. BPO Operations: India is likely to face a severe crunch on the IT and ITes services. There is a risk that lowincome countries and lower-income groups within countries will bear the brunt of challenges. President-elect Barrack Obama has already announced his intention to reduce outsourcing from US by 30%.g. will face salary and employment cutbacks. b. For e. Pressure on Services Sector: As the demand for services is destroyed. would buy out or control the operations of large companies.savings of many individuals have lost significant value. and Telecommunication etc. 50 a dollar.g. . rendered by Indian BPO Companies. these sunshine industries such as BPOs. Increase in Government Controls: In order to bail out sinking Corporates the governments. Surplus Production Capacities: In line with demand destruction. Impact on India: a.

the marketing personnel of the domestic company monitor the export operations with the help of an export department. The company exports the same product designed for domestic markets to foreign countries under this approach. The domestic company continues the exports to the foreign countries and views the foreign markets as an extension to the domestic markets just like a new region.Q8. But. Echnocentric Approach The domestic companies normally formulate their strategies. customers and competitors. maintenance of domestic approach towards international business is called ethnocentric approach. their product design and their operations towards the national markets. either due to competition or due to changes in customer preferences push the company to export the excessive production to foreign countries. the excessive production more than the demand for the product. . Organizational Structures in International Business Douglas Wind and Pelmutter advocated four approaches of international business. They are: 1. Thus. The executives at the head office of the company make the decisions relating to exports and.

Managing Director Manager Human Resources

Manager - R&D

Manager Production

Manager Finances

Manager Marketing

Asst. Manager North India

Asst. Manager South India

Asst. Manager Exports
Fig: Organization Structure of an Echnocentric Company

2. Polycentric Approach The domestic companies, which are exporting to foreign countries using the ethnocentric approach, find at the latter stage that the foreign markets need an altogether different approach. Then, the company establishes a foreign subsidiary company and decentralists all the operations and delegate decision making and policy-making authority to its executives. In fact, the company appoints executives and personnel including a chief executive who reports directly to the Managing Director of the company. Company appoints the key personnel from the home country and the people of the host country fill all other vacancies.

Fig: Organization Structure of a Polycentric Company

3. Regiocentric Approach The company after operating successfully in a foreign country thinks of exporting to the neighboring countries of the host country. At this stage, the foreign subsidiary considers the regions environment (for example, Asian environment like laws, culture, policies etc.) for formulating policies and strategies. However, it markets more or less the same product designed under polycentric approach in other countries of the region, but with different market strategies.

Fig: Organization Structure of a Regiocentric Company

4. Geocentric approach Under this approach, the entire world is just like a single country for the company. They select the employees from the entire globe and operate with a number of subsidiaries. The headquarters coordinate the activities of the subsidiaries. Each

subsidiary functions like an independent and autonomous company in formulating policies, strategies, product design, human resource policies, operations etc.

Fig: Organization Structure of a Geocentric Company

Q9. Discuss Swaps, Options, Futures
Swaps a) A swap is a derivative in which two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap. b) The cash flows are calculated over a notional principal amount, which is usually not exchanged between counterparties. Consequently, swaps can be used to create unfunded exposures to an underlying asset, since counterparties can earn the profit or loss from movements in price without having to post the notional amount in cash or collateral.

c) Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the underlying prices. d) Most swaps are traded over-the-counter (OTC), "tailor-made" for the counterparties. Some types of swaps are also exchanged on futures markets such as the Chicago Mercantile Exchange Holdings Inc., the largest U.S. futures market, the Chicago Board Options Exchange and Frankfurt-based Eurex AG. e) The five generic types of swaps, in order of their quantitative importance, are: interest rate swaps, currency swaps, credit swaps, commodity swaps and equity swaps. Futures a) A futures contract is a standardized contract, traded on a futures exchange, to buy or sell a standardized quantity of a specified commodity of standardized quality at a certain date in the future, at a price determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract. b) The future date is called the delivery date or final settlement date. The official price of the futures contract at the end of a day's trading session on the exchange is called the settlement price for that day of business on the exchange. c) A futures contract gives the holder the obligation to make or take delivery under the terms of the contract, d) Both parties of a "futures contract" must fulfill the contract on the settlement date. The seller delivers the underlying asset to the buyer, or, if it is a cash-settled futures contract, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset his/her position by either selling a long position or buying back (covering) a short position, effectively closing out the futures position and its contract obligations. e) Futures contracts, or simply futures, are exchange traded derivatives. The exchange's clearinghouse acts as counterparty on all contracts, sets margin requirements, and crucially also provides a mechanism for settlement. Options a) An option is a contract written by a seller that conveys to the buyer the right — but not the obligation — to buy (in the case of a call option) or to sell (in the case of a put option) a particular asset, such as a piece of property, or shares of stock or some other underlying security, such as, among others, a futures contract. In return for granting the option, the seller collects a payment (the premium) from the buyer.

and prepayment options are usually included in mortgage loans. the party who sold. attempt to predict how the value of the option will change in response to changing conditions. d) Exchange-traded options form an important class of options which have standardized contract features and trade on public exchanges. which are developed by quantitative analysts. which are awarded by a company to their employees as a form of incentive compensation f) Other types of options exist in many financial contracts. the option must fulfill the terms of the contract.b) For example. facilitating trading among independent parties. . or trading options may be quantified and managed with a greater degree of precision. owning. These models.S. than with some other investments.. for example real estate options are often used to assemble large parcels of land. perhaps. particularly in the U. are employee stock options. Hence. Upon the option holder's choice to exercise the option. the risks associated with granting. or wrote. c) The theoretical value of an option can be evaluated according to several models. e) Another important class of options. buying a call option provides the right to buy a specified quantity of a security at a set strike price at some time on or before expiration. while buying a put option provides the right to sell. Over-the-counter options are traded between private parties. often well-capitalized institutions that have negotiated separate trading and clearing arrangements with each other.

PEST Analysis Risk? How to manage political. SAFTA . Program in DOHA Round. Current Opportunities of Indian MNC. PLC. New Trade Theory. IMF . Porter.ADB ( SN/ Full Question) Trade Barriers (SN) WTO – Functions/Objectives/Activities carried out by WTO.Question Bank 1) 2) 3) 4) 5) 6) 7) 8) 9) What is International Business? Domestic Business V/S IB ? Globalisation? Features and Types Globalisation – Bane or Boon What are the modes of entry? / Collaborative arrangement alternatives modes of entry. MNE’s – Benefits Bane or Boon Globalisation strategies Difference between international/Global/Multinational and Transnational Logistics and Supply Chain Country Selection and Evaluation(case study) Offshore Banking (CHANDRAN) Organisation Structure of MNE. SAARC and its benefits to India. EU. Trade Theories – Factor endowment. World Bank . APEC. PPP theory. 10) 11) 12) 13) 14) 15) 16) 17) 18) 19) 20) 21) . IPR Is WTO any use to India? FDI – Theories and Benefits BOP(SN) ERPG Frame Work(SN) Trade Blocks – NAFTA. economic and foreign exchange risk.

so it may need more time to become familiar with the market o The customers or clients may take longer to get to know the company and its products. . Export can be done in two ways: 3. Agents may represent one or more indirect exporters in return for commission on sales.Q1. Sales representatives promote their company‘s products and do not take title to the merchandise. and such familiarity is often important when doing business internationally 4. Distributors take ownership of the goods (and the accompanying risk) and usually on-sell through wholesalers and retailers to end-users. What are the various entry methods for International Business? Export Exporting is the most traditional way of entering into International Business. Direct Export – Products are sold directly to buyers in target markets either through local sales representatives or distributors. Advantages of Direct Exports: o Give a higher return on your investment than selling through an agent or distributor o o Allows the exporting company to set lower prices and be more competitive Gives the company a close contact with its customers Disadvantages of Direct Exports: o The company may not have the services of a foreign intermediary.Products are sold through intermediaries such as agents and trading companies. Indirect Export .

o Capability to increase total production capacity. capital process. improved trade and investment policies of governments. With rapid globalization of many industries and vertical integration rapidly taking place on a global level. New market access is also another major reason to invest in a foreign country. FDI has come to play a major role in the internationalization of business. access to new technologies. it becomes imperative to follow the expansion of key clients overseas if an active business relationship is to be maintained. At some stage. it is important to be aware of whether a company‘s competitors are expanding into a foreign market and how they are doing that. This has happened due to changes in technologies. export of product or service reaches a critical mass of amount and cost where foreign production or location begins to be more cost effective. regulatory environment in terms of liberalization and easing of restrictions on foreign investments and acquisitions. products. Advantages: o It can provide a firm with new markets and marketing channels. Often. organizational technologies and management skills. It allows making the move from domestic export sales to a locally based national sales office.Foreign direct Investment FDI are investments made to acquire a lasting interest by a resident entity in one economy in an enterprise resident in another economy. Any decision on investing is thus a combination of a number of key factors including: o o o Assessment of internal resources Competitiveness Market Analysis . o FDI can provide a strong impetus to economic development of the host country. From a competitive standpoint. o o FDI allows companies to avoid foreign government pressure for local production. at a minimum a firm needs to keep abreast of global trends in their industry. This is all the more true when large MNCs enter developing nations through FDI. Depending on the industry sector and type of business. cheaper production facilities. and deregulation and privatization of many industries. a foreign direct investment may be an attractive and viable option.

patent or trademark and someone who wants to use that IP. o o o Helps avoid host country regulations that are more prevalent in equity ventures. the licensor can reap benefits until the end of license contract period. Limitations: o o Limited form of market entry which does not guarantee a basis for expansion. This right can take the form of selling the franchiser‘s products. After initial costs. Can be used as a preemption major in new market before the entry of competition.o Market expectations Licensing Licensing is a legal agreement between the owner of intellectual property such as a copyright. Like a lease on a building. licensing provides an opportunity to exploit research and development already conducted. Provides a way of testing foreign markets without significant resources. Franchising Franchising involves granting of rights by a parent company to another (franchisee) to do business in a prescribed manner. The licensee pays ―rent‖ to the licensor for the use of an idea/product/process that is otherwise protected by IP law. Licensor may create more competition in exchange of royalty. By generating royalty income. The licensee uses that idea/product/process to sell products or services and earns money. the license is for a specific period of time. o It reduces the risk of expropriation because the licensee is a local company that can provide leverage against government action. production and marketing techniques or using its general business approach. Advantages: o Licensing appeals to prospective global players because it does not require large capital investment not detailed involvement with foreign customers. using its name. .

the franchiser provides assistance and at times may require the purchase of goods or supplies to ensure the same quality of goods or services worldwide.It allows provides a network of interdependent business relationships that allows a number of people to share: o o o Brand identification Successful method of doing business Proven marketing and distribution system Franchise agreement typically requires the payment of a fee upfront and then a percentage on sales. It has been one of the most popular way of entering a new market. In return. it is a 50-50 joint venture in which each of the party holds 50% ownership stake and contributes a team of managers to share operating control. Burger King Joint Ventures A joint venture is an agreement involving two or more organizations that arrange to produce a product or service through a collectively owned enterprise. It can be beneficial to both groups.g. Typically.g. Franchiser has a new stream of income and the franchisee gets time proven concept/product which can be quickly bought to the market. hotel) e. this stake can be a majority one so as to ensure tighter control. soft-drink companies) service firm – retailer system (fast-food. Franchising is adaptable to international arena and requires minor modification for the local market. Major Forms of Franchising: manufacturer-retailer system (e. McDonald‘s. car dealership) manufacturer-wholesaler system (e. At times. Advantages: .g.

Establishing a wholly owned subsidiary in a foreign market can be done in 2 ways: 3. Maruti Suzuki Wholly Owned Subsidiaries In a wholly owned subsidiary. Limitations: o o Limited control over business approach for foreign entity. Set up of new operation 4. The following factors affect the political environment in a country. Q2. The success and growth of international business depends on the stable. Acquisition of an established company can reduce this risk to an extent. This freedom is accompanied by a greater risk due to lack of knowledge of the market.o o o Domestic company brings in the knowledge of the domestic market. foreign partner has an option to sell its stake in the venture to another entity. social and technological. environmental. the company owns 100% of the equity. The major macroeconomic factors in the external environment that affect the business are political. The risk is divided between joint-venture partners. Political Environment The political environment of a country greatly influences the business operating in those countries or business trading with those countries.g. political system in the country. Acquisition of established firm. Hero Honda. Danone-Brittania. e. conducive and secure . E. Normally. Profits have to be shared. Influence of PEST Factors on International Business Any business is affected by its external environment. collaborative. WOS allows a foreign firm complete control and freedom to execute its business strategy in the foreign country.

Countries like UAE have very low direct taxation levels inducing great spending and hence trading and marketing based business are successful.g. The Corporate Taxation laws affect the profitability directly. The problems faced by doctors and nurses in UK due to the restrictive laws in that country. Labor Laws: the labor laws in a country affect the viability of a business in that country. Also the nature of the political system i.g. Some countries follow a protectionist policy to the domestic industry by raising import barriers For e. Business can be successful only if the local government provides support in terms of infrastructure. For e. 11. .g. in the country influences the Government support. For e. 10. 12. The structure of indirect taxation in a country like its excise duty structure. India in the pre liberalization era. For e. Government support: One of the most important political factor is the Government support to international businesses. Confiscation: the nationalization of businesses without compensation. transparent policy and quick dispute resolution mechanism. Many businesses had to be withdrawn or closed because of the labor unrest in the country. Tariffs and duty structure: The level of duties and tariffs that are imposed by the country influence its imports and exports greatly. refineries and heavy engineering. Political stability and political milieu: Political stability greatly affects the longevity of the businesses in a country.: Withdrawal of Premier Automobiles due to union strikes in our country. The direct taxation laws also affect the business because it influences consumer spending.g. The pension laws also play a critical role especially in cross border acquisitions. communism etc. But due to very high indirect taxation levels the manufacturing business is not very successful. Tax Policy: The tax policy of a country affects the profitability of the business there.g. customs and sales tax greatly affects the input costs of a business. Russia. Political risk assessment should be done to determine the country risk on the basis of following parameters : a. Environmental policy: The countries environmental policy (under the Kyoto Protocol or otherwise) affects many business like chemicals. 8.7. democracy. 9. For e. the RBI has provided single window clearance for FDI and hence has greatly increased the FDI levels in our country. India during the nationalist wave during Indira Gandhi‘s tenure.e. license clearing if required.

5.e. Economic system: the economic system in a country i. with rising aspirer population there is a market opportunity for products like IPod (considered luxury items till now) G.b. Age distribution: the age distribution of the population is important to consider the consumption patterns in the markets. In a country like India. Economic factors The economic factors in a country greatly influence the business in that country. 6. Domestication: The global company relinquishing control in favor of domestic investors. 6. 7. c. The nature of the system decides the allocation of resources. d.g. minerals etc. Exchange rates: The exchange rates affect international trade and capital inflows in the country. A young population also determines a workforce. Due to globalization there is a gradual shift toward market forces to allocate resources even in the communist countries like China. Income levels and spending pattern: Though it is more of a demographic parameter has is very important bearing on the sell side of all international businesses. The following are the important social factors. Interest rates: The interest rates in the country affect the cost of capital (if raised locally) and the operational costs. For e. Instability risk: The possibility of military takeovers or huge government changes. For e. Social factors Businesses are driven by people both as human capital and as consumers. Age distribution also determines the mindset of the market and helps segmentation of the market accordingly. It also has a bearing on the employee quality.g. 8. For e. Family system: the family system has a bearing on the decision makers in consumption.g. the resource nationalization in Columbia.g. in Islamic countries women have a less say in making . The following factors are important in the macroeconomic environment. Interest rates also determine the confidence of the Government in the economy and consumer spending. the coups in Thailand or in Fiji has affected the profits of businesses there by as much as 60% due to work stoppage and property destruction. 5. capitalism/ communism/ mixed economy (India) is important for deciding the nature of the businesses. Nationalization: Resource nationalization is a major risk for businesses involving local resources like oil. It is necessary for an international businessman to understand the social and cultural aspects of the country they operate in. Barclays bank in South Africa F.g. For e. For e.

For e. In Japan there is a different way in which contracts are signed and executed. 3. The environment where the technology transfer is not viable gradually loses out on business from emerging countries that seek technology transfers. Italians have a seemingly lazy way of doing business and hence it is very difficult to conduct business in the pacy US way. Trade Theories . 7.g. GE withdrew operations from a JV as there as they could not access local expertise) Q3. Cultural aspects: The cultural aspects influence the way the business is conducted in countries.g. the semiconductor industry in Taiwan 4. Technology transfer: The ease of technology transfer influences the business climate. In Russia being a communist oriented mindset the business is conducted in a closed manner. Career attitudes: the career attitude of the workforce is important social aspect. In emerging economies like India children are gaining important role in consumption.g. R&D: the support that the Government gives to R&D encourages setting up R&D business levels. For e. 8. Also the ease of a qualified local workforce influence business. The following are the technological factors that influence the business. H. This helps in positioning of products. For e.consumption decisions. Technological Factors Technology has a very important role to play in determining the success of international businesses because technology has made international business possible. in the early 40s countries like Czechoslovakia (the Czech Republic) was a very technologically advanced country but had very low business interest due to the less chances of technology transfers.

David Hume pointed out that: Increased exports lead to inflation and higher prices Increased imports lead to lower prices Result: Country A sells less because of high prices and Country B sells more because of lower prices In the long run.Mercantilism (pre-16th century)     This theory takes an ―us-versus-them‖ view of trade. Minimize imports through tariffs and quotas. other country‘s gain is our country‘s loss. Neo-mercantilism views persist today. Free Trade supporting theories . A nation‘s wealth depends on accumulated treasure. Maximize exports through subsidies.1. Theory says you should have a trade surplus. Classical Country-Based Theories 4. Mercantilism. no one can keep a trade surplus 4.  Flaw: ―Zero-sum game‖.2.Zero-Sum Game  In 1752.Trade Theories Classical Trade Theories Modern Trade Theories Other Theories Mercantilism Free Trade Theories Theory of Absolute Advantage Theory of Relative Advantage Free Trade Theories Refined Factor Endowment Theory Product Life Cycle Theory Productivity Theory The vent for surplus theory Theory of Reciprocal Demand 4.

TABLE B Shoes India 200 Shirts 0 . import others. should determine the direction. Trade between countries is.   A country has absolute advantage . the India and Japan. But India makes more shoes than shirts. it robs individuals of the ability to trade freely. Assume that there are just two countries in the world. 1776)     Mercantilism weakens a country in the long run and enriches only a few segments. spending half of their working hours on each. volume and composition of international trade. The Wealth of Nations.2. Hence. Both countries make both products. and Japan makes more shirts than shoes. a country should specialize in and export products for which it has absolute advantage. Absolute Advantage (Adam Smith. TABLE A Shoes India Japan Total 100 80 180 Shirts 75 100 175 What will happen when each country specializes and spends all its working hours making one product? It will make twice as much of that product and none of the other. The resources of both countries can be used to produce either shoes or shirts. Under free (unregulated) trade each nation should specialize in producing those goods it could produce most efficiently.1. Adam Smith claimed market forces. shoes and shirts. Pretend also that they produce only two goods. therefore. beneficial. as shown in Table B. This theory states that a country is capable of producing more of a good with the same input than another country.either natural or acquired when it is more productive than another country in producing a particular product.This theory shows that specialization of production and free flow of goods grow all trading partners‘ economies 4. not government controls.

In this example. on the other hand. labor. Comparative Advantage (David Ricardo. had an absolute advantage at shirt making.   A country has a comparative advantage in the production of a good or service that it produces at a lower opportunity cost than its trading partners. Japan.2. Principals of Political Economy.Japan Total 0 200 200 200 The world now has both more shoes and more shirts. The theory of comparative costs argues that. put simply. compared with producing other goods. suggested that countries will specialize and trade in goods and services in which they have a comparative advantage.2. Table C shows what production might be like if India had an absolute advantage at making both shoes and shirts. Assumptions:     Perfect competition and no transportation costs in a world of two countries and two products One unit of input (combination of land. It has an absolute advantage at shoemaking. India could make more shoes than Japan with the same resources. TABLE C Shoes India 100 Shirts 80 . in his theory of comparative costs. and both countries will benefit. Now suppose one country has an absolute advantage in both products. 1817) – Also known as Opportunity Cost Theory  David Ricardo. it is better for a country that is inefficient at producing a good to specialize in the production of that good it is least inefficient at. and capital) Each nation has two input units it can use to produce either rice or automobiles Each country uses one unit of input to produce each product 4. India can trade 100 units of shoes for 100 units of shirts.

But the world has lost five units of shirts. TABLE E . if the India gave up 10 units of shoes. If China produces only shoes. going from 155 to 150. If the India produces only shoes. it could produce 8 units of shirts. from 180 to 200. the India can produce more of each good with the same set of resources than China can.China Total 80 180 75 155 In this case. The India could produce either 200 units of shoes or 160 units of shirts. India has a comparative advantage in shoemaking and China has a comparative advantage in shirt making. For example. the India and China have increased the production of shoes by twenty units over what they produced before. China could produce either 160 units of shoes or 150 units of shirts. vice-versa for China. TABLE D Shoes India China Total 200 0 200 Shirts 0 150 150 By specializing in this way. Table E shows the results of such a tradeoff. Table D shows what happens when each country specializes in the product in which it has a comparative advantage. the opportunity cost of producing shirts is higher and the opportunity cost of producing shoes is lower. it gives up 80 units of shirts to gain 100 units of shoes. For India. Hence. Production in the India could be adjusted to make up the difference. it gives up 75 units of shirts to gain 80 units of shoes.

The theory states that the pattern of international trade depends on differences in factor endowments not on differences in productivity. trade will take place. Efficiency of resource utilization leads to more productivity. . Trade involves many different countries and products. The real world is much more complex than this two-country. And it is not always clear where a country's comparative advantage lies.  Relative endowments of the factors of production (land. In the terms of trade each reduce each country's opportunity cost of acquiring the good traded for. Both countries must benefit for trade to occur.Free Trade refined 4. China will not accept fewer than 80 units of shoes for 75 units of shirts and the India will not pay more than 100 units of shoes for 80 units of shirts.3. and capital) determine a country's comparative advantage. the opportunity cost of choosing to produce 80 units of shirts was the 100 units of shoes that could have been produced with the same resources. labour. 4. now often referred to as the Heckscher-Ohlin theory. In the like manner. even if it has absolute advantage in all goods it produces. For India. Summary    Country should specialize in the production of those goods in which it is relatively more productive. China's opportunity cost of producing 80 units of shoes was 75 units of shirts.1. 1919)  Eli Heckscher and Bertil Ohlin developed the theory of relative factor endowments. This extends free trade argument. In this example.Shoes India China Total 190 0 190 Shirts 8 150 158 In this way. two-product mode. the total production of both goods could be increased. Factor-proportions (Heckscher-Ohlin.3.

Countries have comparative advantage in those goods for which the required factors of production are relatively abundant. This is because the prices of goods are ultimately determined by the prices of their inputs.

Goods that require inputs that are locally abundant will be cheaper to produce than those goods that require inputs that are locally scarce.

For example, a country where capital and land are abundant but labour is scarce will have comparative advantage in goods that require lots of capital and land, but little labour - grains, for example.

Since capital and land are abundant, their prices will be low. Those low prices will ensure that the price of the grain that they are used to produce will also be low - and thus attractive for both local consumption and export.

Labor intensive goods on the other hand will be very expensive to produce since labor is scarce and its price is high. Therefore, the country is better off importing those goods. Summary

  

Factor endowments vary among countries Products differ according to the types of factors that they need as inputs A country has a comparative advantage in producing products that intensively use factors of production (resources) it has in abundance

Assumptions

    

A given technology was universally available. Relative factor endowments are different in each country Tastes and preferences are identical in both countries A given product was either labor- or capital-intensive The theory ignored transportation costs.

4.3.2. Product Life Cycle (Ray Vernon, 1966)

As products mature, both location of sales and optimal production changes

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Affects the direction and flow of imports and exports Globalization and integration of the economy makes this theory less valid

Classic Theory Limitations: All the classical theories are based on the following assumptions that no longer hold true –

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Simple world (two countries, two products) No transportation costs No price differences in resources Resources immobile across countries Constant returns to scale Each country has a fixed stock of resources & no efficiency gains in resource use from trade Full employment

5. Modern Trade Theory
In industries with high fixed costs:

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Specialization increases output, and the ability to enhance economies of scale increases Learning effects are high. These are cost savings that come from ―learning by doing‖

New Trade Theory-Applications  Typically, requires industries with high, fixed costs o o   World demand will support few competitors Competitors may emerge because of ― First-mover advantage‖ Role of the government becomes significant

Economies of scale may preclude new entrants o Some argue that it generates government intervention and strategic trade policy

Theory of National Competitive Advantage

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The theory attempts to analyze the reasons for a nation‘s success in a particular industry Porter studied 100 industries in 10 nations

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Postulated determinants of competitive advantage of a nation were based on four major attributes     Factor endowments Demand conditions Related and supporting industries Firm strategy, structure and rivalry

Factor endowments: A nation‘s position in factors of production such as skilled labor or infrastructure necessary to compete in a given industry   Basic factor endowments Advanced factor endowments Basic Factor Endowments  Basic factors: Factors present in a country  Natural resources Climate Geographic location Demographics

While basic factors can provide an initial advantage they must be supported by advanced factors to maintain success

Advanced Factor Endowments   Advanced factors: The result of investment by people, companies, and

government are more likely to lead to competitive advantage If a country has no basic factors, it must invest in advanced factors Communications Skilled labor Research

 The productivity theory points toward indirect and direct benefits. they would be surplus productive capacity in the country.- Technology Education Porter’s Theory-Predictions   Porter‘s theory should predict the pattern of international trade that we observe in the real world.The vent for surplus theory   International trade absorbs the output of unemployed factors. Otherwise. they have to export the surplus to other countries. Limitations:    Labor productivity did not increase after certain level Increase in working hours Increase in proportion of gainfully employed labour in proportion to disguised unemployed labour 6. This theory emphasizes that the process of specialization involves adapting and reshaping the production structure of a trading country to meet the export demands. This theory encourages the developing countries to go for cash crops.  In the absence of foreign trade. while importing in those areas where the components are not favorable 6. Appropriateness of this Theory for Developing Countries: . Other Theories: 6. increase productivity by enhancing the efficiency of human resources. This surplus productive capacity is taken by another country and in turn gives the benefit under international trade.  Countries increase productivity in order to utilize the gains of exports. H. Countries should be exporting products from those industries where all four components of the diamond are favorable.2. Myint proposed productivity theory and the vent for surplus theory.1. a part of the productive labour of the country must cease and the value of its annual Produce diminishes.The productivity theory by H. If the countries produce more than the domestic requirements. Myind  It is criticized that the comparative cost theories are not applicable to developing countries. Hence. adapting latest technology etc.

The unemployed labour of the developing countries is profitably employed when the vent for surplus is exported. the factors of production of developing countries are fully utilized. Existence of perfect competition Existence of full employment Q4.  Reciprocal demand indicates a country‘s demand for one commodity in terms of the other commodity. Equilibrium: Quality of a product exported by country A = Quality of another product exported by country B Assumptions:      Existence of two countries Trade in only two goods – both the goods are produced under the law of constant returns Absence of transportation Costs. The definition of the Organization for Economic Cooperation and Development (OECD) which considers as direct investment enterprise an incorporated or unincorporated enterprise in which a direct investor who is resident in another economy owns ten percent or more of the ordinary shares or voting power (for incorporated enterprise) or the equivalent (for an unincorporated enterprise).3. Ten reasons why FDI happens 11. The purpose of the investor is to have a significant influence. Mill introduced the concept of ‗reciprocal demand‘ to explain the determinations of the equilibrium terms of trade.Mills’ theory of reciprocal demand  Comparative cost advantage theories do not explain the ratios at which commodities are exchanged for one another. are investments made to acquire a lasting interest by a resident entity in one economy in an enterprise resident in another economy.  According to this theory. J. Foreign Direct Investments (FDI) as defined in the BOP Manual. . It determines the terms of trade and relative share of each country.S. it is prepared to give up in exchange. 6. an effective voice in the management of the enterprise.

FDI enables the firm owns assets to be profitably exploited on a comparatively large scale. Opportunities for co-production. 14. For a host country or the foreign firm which receives the investment. development. the classic definition of FDI as noted above has changed considerably. including intellectual property (such as technology and brand names). Hence. Partly this is because of the expected continued decline in the role of development assistance (on which these countries have traditionally relied heavily). FDI inflows are considered as channels of entrepreneurship. 13. equipment and buildings. joint ventures with local partners. and of resources that are scarce in developing countries. the technology capital. and the resulting search for alternative sources of foreign capital. processes. as well as the purchase or licensing of foreign technology. joint marketing arrangements. products. organizational and managerial skills. FDI allows companies to accomplish following tasks:      Avoiding foreign government pressure for local production Circumventing trade barriers. hidden and otherwise Making the move from domestic export sales to a locally-based national sales office Capability to increase total production capacity. and as such can provide a strong impetus to economic . organizational technologies and management skills. skills and financing. And it is more profitable for the production utilizing these assets to take place in different countries than to produce in and export from the home country exclusively. 15. While imports of high-technology products. FDI is viewed as a basis for going ―global‖. technology. In the past 15 years. over 2/3 of direct foreign investment is still made in the form of fixtures. A recent and specific example is the perceived role of FDI in efforts to stimulate economic growth in many of the world's poorest countries. FDI represents an opportunity to become more actively involved in international business activities. FDI may result in a greater diffusion of know-how than other ways of serving the market. products. 18. cheaper production facilities. It provides a firm with new markets and marketing channels. management skills. access to new technology. For small and medium sized companies. are important channels for the international diffusion of technology. it can provide a source of new technologies. licensing. they could help their host countries in their industrialization. Foreign direct investment is viewed as a way of increasing the efficiency with which the world's scarce resources are used. FDI provides more scope for spillovers.12. and marketing networks. For example. 17. machinery. etc 16.

Proponents of foreign investment point out that the exchange of investment flows benefits both the home country (the country from which the investment originates) and the host country (the destination of the investment). India was one of the 76 countries that signed the accession to the WTO and is one of the founder members of the WTO. FDI increases employment in host country. Q5. 1995. The truth might lie somewhere in between but they surely become reasons for companies to invest in foreign markets.and productivity of local firms may improve as foreign firms enter the market and demonstrate new technologies. Trade implications of signing the WTO for India: . Inflows of FDI also increase the amount of capital in the host country. 19. this will either raise labor productivity and wages. allow more people to be employed at the same level of wages. 20. or result in some combination of the two. WTO Rounds wrt India The WTO came into being on January 1. and is the successor to the General Agreement on Tariffs and Trade (GATT). which was created in 1948. and train workers and managers who may later be employed by local firms. and new modes of organization and distribution. Opponents of FDI note that multinational conglomerates are able to wield great power over smaller and weaker economies and can drive out much local competition. provide technical assistance to their local suppliers and customers. Even with skill levels and technology constant.

India can utilize its competitive advantage in processing. chemicals and medicines. 10. This gives India access to markets in Europe and US in sectors like automobiles and engineering. 9. India also benefits from the clauses related to trade without discrimination and benefit from capital good exports. India has a disadvantage mainly in areas of TRIPs. beverages. Anti Dumping measures: India suffered from persistent dumping by Romanian and Russian steel majors in the areas of steel casings. Competitive advantage: India has competitive advantage in the areas of merchandise trade. drug prices. Under the TRIPS the IPA will have to modify to allow product patents also. patents in agriculture. The anti dumping provisions and countervailing duties lend security to India‘s domestic industries. Market access: as a signatory to the WTO India automatically gets the MFN ( most favored nation ) status. India has benefited in the areas of garment exports. pipes affecting Indian domestic industry greatly. Garment exports: The Multi Fiber Arrangement (MFA) that required Indian garment exporters to have quotas for exporting to developed countries was phased out in 2005. E. Also India suffered from dumping by Chinese steel industry. TIS ( trade in services ) and TRIMS especially in biomedical areas. The readymade garment exports from India has reached Rs 800 crores in 2007 and expected to reach Rs 1000 crores in 2008.g. It also promises reduction of domestic subsidies in the developed countries helping exports from India. 8. the Alphanso mango and the Basmati strand controversy. 7. This is thrice the exports in 2004-05. This will hurt our agriculture foods. Drug prices: the granting of the product patents in India will hurt the Indian generic drugs industry and benefit the foreign pharma companies that own the formulation . 8. Benefits: 6. Disadvantages: 7. gems and jeweler compared to the traditional centers in Europe like Amsterdam or Manchester etc increasing its trade with both the Euro region and the US. agricultural products exports and in market access to foreign markets in automobiles and electronics.The implications of signing the WTO agreement for Indian trade have been mixed. The Agreement on Agriculture: the AoA stipulates that the developed countries will reduce tariffs on agriculture imports (up to 35%) thus helping India‘s agriculture exports. The Indian Patent Act allows only process patents in areas of foods. Also products developed outside India can claim international patents applicable to India. AoA export subsidies etc. TRIPS: the Indian Patent Act is not compatible with the TRIPS agreement under the WTO.

This affected the Indian services. Genetics: Indian seed and genetic research organizations are Government funded and will not be able to compete with the MNCs like Montessanto etc that have economies of scale. This will increase seed prices for Indian farmers and also lend our genetic resources to the MNCs 10. formalities etc. India benefited greatly in the capital goods export. Services: the opening up of the banking sector in 2009 will affect Indian banks due to the foreign banks with huge balance sheets. talks have stalled over a divide between the developed nations led by the European Union. Anti dumping: the anti dumping rules were imposed on Indian linen in EU. This was opposed by countries like India and Brazil. India’s stand in the Doha round and the following ministerial conferences: 5. Doha round: The Doha Development Round commenced at Doha. TRIMS: the Trade Related Investment Measures resulted in problems in trade in investment issues like transit charges. the United States and Japan and the major developing countries (represented by the G20 developing nations). Its objective is to lower trade barriers around the world. (This resulted in regulatory intervention in the recent budget in life saving drugs) e. the Pfizer controversy 9. 11. China and South Africa. Indian companies would have to lose in the differential charges that are applied. together called as Singapore issues. Issues: market access to foreign markets. These issues were dropped in the Chachun ministerial conferences. Qatar in There is no mechanism to November 2001 and is still continuing. led and represented mainly by India. . Cancun conference 2003 : The objective of this conference was to forge the agreement discussed in Doha.g. This will lead to increase in drug prices in India. Similarly Indian textiles faced anti dumping regulations in US. US and Japan support domestic agriculture by subsides. This agreement on market access for the developing countries in capital and industrial goods increased strength of G20 countries. permitting free trade between countries of varying prosperity. 12. Brazil. resolve anti dumping duties issues. Agricultural subsidies: the EU. 6. Issues: Singapore issues: the issues related to the trade facilitation and differential charges in investment vehicles affected Indian investment and venture companies.patents. As of 2008.

casting to export largely and benefit from the construction boom in US. Hong Kong 2006 and Potsdam 2007 talks failed in resolving the farm subsidies. 7.The Singapore issues were resolved that resulted in removing the undue advantage for countries like US and Japan in investment arena. So the recent rounds are in a stalemate situation from India‘s point of view. However US and Japan did not relent. 8. Paris 2005: France reduced subsidies on farm products. This resulted in Indian small manufacturers like steel forging. Geneva 2004: In Geneva conference the developed nations reduced subsidiaries on manufactured goods. This also benefited the Indian financial sector internationally. .

services and factors between the member states with inter alia.Paraguay & Uruguay founded in 1991 by the Treaty of Asunción.  Fixing of a common external tariff (TEC) and adopting of a common trade policy with regard to nonmember states or groups of states. and depends on equal rights and duties being granted to all signatory countries. The bloc comprises a population of more than 263 million people.Q6. in order to ensure free competition between member states. customs. The Asuncion Treaty is based on the doctrine of the reciprocal rights and obligations of the member states. the rights and obligations of each party will initially be equivalent but not necessarily equal. MERCOSUR initially targeted free-trade zones. In addition to the reciprocity doctrine. agriculture. people. exchange and capital. as a result of the chronological differences in actual implementation of trade liberalization by the member states. but before becoming a full member its entry has to be ratified by the Paraguayan and the Brazilian parliaments.  Coordination of macroeconomic and sectorial policies of member states relating to foreign trade. and the combined Gross Domestic Product of the full-member nations is in excess of US$2.78 trillion a year (Purchasing power parity. which was later amended and updated by the 1994 Treaty of Ouro Preto. Venezuela signed a membership agreement on 17 June 2006. finally. monetary system. . and  The commitment by the member states to make the necessary adjustments to their laws in pertinent areas to allow for the strengthening of the integration process. Colombia. Discuss NAFTA/ EU/ ASEAN/ SAARC/ MERCUSOR Mercosur Mercosur is a regional trade agreement among Argentina. and the coordination of positions in regional and international commercial and economic meetings. Its purpose is to promote free trade and the fluid movement of goods. Chile. services. where in addition to customs unification the free movement of manpower and capital across the member nations' international frontiers is possible. making Mercosur the fifth largest economy in the World. a common market. Bolivia. PPP) according to International Monetary Fund (IMF) numbers. Brazil . the elimination of customs rights and lifting of nontariff restrictions on the transit of goods or any other measures with similar effects. During the transition period. and any others they may agree on. Ecuador and Peru currently have associate member status. transport and communications. then customs unification and. taxes. and currency. industry. Objectives of MERCOSUR  Free transit of production goods.

Nepal. Free Trade Agreement Over the years. social. Afghanistan became its eighth member.Sheelkant Sharma is the current secretary & Mahinda Rajapaksa is the current chairman of SAARC which is headquartered at Kathmandu. Objectives of SAARC:   to promote the welfare of the peoples of South Asia and to improve their quality of life.       to promote and strengthen collective self-reliance among the countries of South Asia. entitlement. Pakistan. SAARC . In 1993. Maldives and Bhutan. to contribute to mutual trust. immunity or privilege granted to a product originating from or intended for countries that are not party to ALADI. Though India has several trade pacts with Maldives. understanding and appreciation of one another's problems. SAARC The South Asian Association for Regional Cooperation (SAARC) is an economic and political organization of eight countries in Southern Asia.the Asuncion Treaty also contains provisions regarding the most-favored nation concept. favor. 1985 by India. cultural. at the Association's 14th summit. to strengthen cooperation among themselves in international forums on matters of common interest. Nepal. It was established on December 8. to promote active collaboration and mutual assistance in the economic. technical and scientific fields. social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realize their full potential. India has been constructing a barrier across its borders with Bangladesh and Pakistan. according to which the member nations undertake to automatically extend--after actual formation of the common market--to the other Treaty signatories any advantage. Bhutan and Sri Lanka. to strengthen cooperation with other developing countries. the SAARC members have expressed their unwillingness on signing a free trade agreement. Bangladesh. to accelerate economic growth. Sri Lanka. and to cooperate with international and regional organizations with similar aims and purposes. In April 2007. similar trade agreements with Pakistan and Bangladesh have been stalled due to political and economic concerns on both sides.

and Mexico. with a few exceptions for items covered by tariff-rate quotas. all non-tariff barriers to agricultural trade between the United States and Mexico were eliminated. in effect since 1989.the SAARC development fund. 2006. and Mexico. and the protocol on Afghanistan's admission to the South Asia Free Trade Agreement (SAFTA) were adopted with emphasis on region-wide food security. with others being phased out over periods of 5 to 15 years.4 billion people. in Dhaka. Under these provisions.-Canada Free Trade Agreement. were incorporated into the NAFTA. all tariffs affecting agricultural trade between the United States and Canada. 2008. SAARC members will bring their duties down to 20 per cent by 2007. Under the NAFTA. Canada. This agreement will remove most barriers to trade and investment among the United States. 1994. the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). many tariffs were eliminated immediately.S. In addition. It also is one of the most powerful. In terms of combined purchasing power parity GDP of its members. the SAARC convention on mutual legal assistance in criminal matters. Under this agreement. as of 2007 the trade bloc is the largest in the world and second largest by nominal GDP comparison. Canada. wide-reaching treaties in the world. . the establishment of a SAARC standard organization. This allowed for an orderly adjustment to free trade with Mexico. The North American Free Trade Agreement (NAFTA) has two supplements. The agricultural provisions of the U.countries signed an agreement to gradually lower tariffs within the region. with full implementation beginning January 1. Eleven years later. 1998. were removed by January 1. NAFTA The North American Free Trade Agreement (NAFTA) is a trilateral trade bloc in North America created by the governments of the United States. The last summit (15th) was held in Colombo where four major agreements . Implementation of the North American Free Trade Agreement (NAFTA) began on January 1. This agreement went into force on January 1. SAARC countries devised the South Asia Free Trade Agreement which created a framework for the establishment of a free trade area covering 1. at the 12th SAARC Summit at Islamabad.

U. It maintains a common trade policy. trade since 1994. Some argue that NAFTA has been positive for Mexico. Thus EU presents an enormous export and investor market that is both mature and sophisticated. and apparel industries have experienced the most significant changes in trade flows. agribusiness. The Mexican-Canadian agreement eliminated most tariffs either immediately or over 5. services and capital. both positive and negative. computer equipment. which may also have affected employment levels in these industries. trade with Mexico and Canada has grown more rapidly than total U. The effects of NAFTA. The five major U. and microelectronics. especially food).S. goods. defense. The automotive. guaranteeing the freedom of movement of people. services and factors of production.S. and negative impacts on U. social issues. The single market refers to the creation of a fully integrated market within the EU. Objectives of the EU: Its principal goal is to promote and expand cooperation among members‘ states in economics.S. the Euro for the EU members. but has had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from U.8 trillion in 2007). the euro. textile. located primarily in Europe. industries that have high volumes of trade with Mexico and Canada are automotive industry. even after accounting for the 1994–1995 economic crisis. Others argue that NAFTA has been beneficial to business owners and elites in all three countries. in . Fifteen member states have adopted a common currency. 10. workers in manufacturing and assembly industries who lost jobs.S. and Mexico. Critics also argue that NAFTA has contributed to the rising levels of inequality in both the U. or 15 years. trade. which allows for free movement of goods. The EU generates an estimated 30% share of the world's nominal gross domestic product (US$16. The EU has developed a single market through a standardised system of laws which apply in all member states. which introduced a single currency. The EU. chemicals and allied products. textiles and apparel. and judicial matters. Another major goal of the EU is to implement the Economic and Monetary Union. EU The European Union (EU) is a political and economic union of 27 member states.Mexico and Canada reached a separate bilateral NAFTA agreement on market access for agricultural products.S.S. have been quantified by several economists. security. which has seen its poverty rates fall and real income rise (in the form of lower prices. foreign policies.

Services: Any member nation has a right to provide services in other Member States.4 bn US$. Trade between the European Union and India India was one of the first Asian nations to accord recognition to the European Community in 1962. The union designed this strategy to prevent price fixing. Over the years. Free movement of persons: Any citizen of EU member state can live work in any other EU member state Capital: There are no restrictions on the movement of capital and on payments with the EU and between member states and third countries. Tariff and non-tariffs have been reduced. . but compared to International standards they are still high. Free movement of goods: A custom union covering all trade in goods was established and a common customs tariff was adopted with respect to countries outside the union. and abuse of monopoly.4 bn to 28. has a number of policies designed to assist the functioning of the market.conjunction with Member States. EU – India trade has grown from 4. Some of the policies are given below: Competition Policy: The main competition lied in energy and transport sector. Top items of trade between India and EU India‘s exports to EU Textile and clothing Leather and leather products Gemstones and jewelery Agriculture products Chemical products % 35 25 12 10 9 India‘s Imports from EU Gemstones and jewellery Power generating equipment Chemical products Office machinery Transport equipment % 31 28 15 10 6   India is EU‘s 17th largest supplier and 20th largest destination for exports. The EU is India‘s largest trading partner and biggest source of FDI. collusion (secret agreement). It is a major contributor of developmental aid and an important source of technology.

ASEAN nations have introduced some programmes for greater diversification in their economies.  Under the Bilateral trade between India and EU. Malaysia. The European Union (EU) and India agreed on September 29.6 billion euros ($36. ASEAN The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in Bangkok by the five original Member Countries. it accounts for 26% of India‘s exports and 25% of its imports. and Thailand. which reduces tariffs on products traded among member countries.  Trade between India and the 27-nation EU has more than doubled from 25. ASEAN developed a Common Effective Preferential Tariffs (CEPT) plan to reduce tariffs systematically for manufactured and processed products. namely. (ix) To maintain close cooperation with the existing international and regional organizations with similar aims. agricultural and technical development projects and to increase foreign investments in their economies. with further expansion to be seen. Singapore. France's largest commercial port. Vietnam on 28 July 1995.7 billion) in 2000 to 55. social progress and cultural development in the region through joint endeavors. Indonesia. OBJECTIVES The ASEAN Declaration states that the aims and purposes of the Association are: (vii) (viii) To accelerate the economic growth. To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter. The members have also established a series of co-operative efforts to encourage joint participation in industrial. These efforts include an ASEAN finance corporation. 1999. the ASEAN Industrial Joint Ventures Programme (AJIV) etc. to expand their cooperation in the fields of nuclear energy and environmental protection and deepen their strategic partnership. In 1992. and Cambodia on 30 April .6 billion euros last year. Philippines. Laos and Myanmar on 23 July 1997. WORKING OF ASEAN The member countries of ASEAN have Preferential Trading Arrangements (PTA). Brunei Darussalam joined on 8 January 1984.2008 at the EU-India summit in Marseille.

France and Germany) experienced negative GDP growth in Q2. at least not on a short-term basis. investment. The ASEAN countries are offering co-operation to India in the field of trade. 17. as these countries are closer to India. In the case of Iceland the banking sector has assets of around 300% of GDP. Slower global growth: Global growth stood at 5 percent in 2007. GDP growth was slower in Q2 of 2008 compared to Q1. preceded by financial stress tend to be more severe. science and technology and training of personnel. but the IMF expects world growth to slow to 3 percent in 2009 .India and ASEAN India is interested in maintaining close economic relations with the members of ASEAN.7 percent in 2008 to 6. real estate services will experience disproportionate employment declines. something no government could ever guarantee.1% for 2009. 19. For e. the investment and retirement . Also. The governments would be hard pressed for funds for guarantees and development work. 20. Rising income insecurity and disproportionate impact on low-income groups: As stock markets around the world have eroded trillions of dollars in wealth and rolled back some of the investment gains of the past 5 years. 14.g. Rising unemployment: According to IMF. 18. India‘s trade with ASEAN countries is satisfactory in recent years. unemployment in the advanced economies will rise from 5. Although employment has contracted in several countries in recent months. Financing challenges for governments: State and local governments may be faced with financial crisis. 15. Depth of slowdown: It is observed that economic slowdowns. Effect of Current Economic Meltdown on International Business 13. it has not been as severe as that during 1990-91. as well as capital inflow. Reduced world trade volume: According to the IMF. Economic contraction in some countries: In G7 countries except for the United States and Canada. the world trade will grow only at the rate of 1. Q7.5 percent in 2009. may trigger a falloff in investments. In addition there will be significant job losses in the financial sector.0. 16.9% as against the earlier estimate of 4. Even administrative costs may be difficult to come by. Large employment losses in sectors: Some sectors like construction. The IMF forecasts around 0 percent growth for advanced economies in 2009. and forecasts are for a continued decline in Q3. Three major European economies (Italy.9 percentage points lower than forecasted in July 2008. A drop in exports.

many branded products may face surplus capacities. There is a risk that lowincome countries and lower-income groups within countries will bear the brunt of challenges. as ―the most poor are the most defenseless. AIG and Citibank 24. b. Increase in Trade Deficit: Already in the last quarter. President-elect Barrack Obama has already announced his intention to reduce outsourcing from US by 30%. For e. Increase in Government Controls: In order to bail out sinking Corporates the governments. Pressure on Services Sector: As the demand for services is destroyed.‖ says World Bank President Robert Zoellick. India‘s trade deficit has grown where exports are not meeting the set targets while imports continue to grow. c. Steel & Aircrafts manufacturers are already staring at excess capacity. 50 a dollar. d. 23. This might start a local business environment. BPO Operations: India is likely to face a severe crunch on the IT and ITes services. Return to Tariff and Non-Tariff Barriers: Developed economies in order to ward off unemployment and financial crisis may erect barriers to free trade. rendered by Indian BPO Companies.g. 22. Car. . would buy out or control the operations of large companies. will face salary and employment cutbacks. For e. For e.g. The rupee has already depreciated to Rs.savings of many individuals have lost significant value. Surplus Production Capacities: In line with demand destruction. and Telecommunication etc. Airlines. Impact on India: a. Falling Currency: as the demand for dollars increases the Indian rupee is likely to weaken. 21.g. these sunshine industries such as BPOs.

either due to competition or due to changes in customer preferences push the company to export the excessive production to foreign countries. Organizational Structures in International Business Douglas Wind and Pelmutter advocated four approaches of international business. They are: 5.Q8. maintenance of domestic approach towards international business is called ethnocentric approach. The domestic company continues the exports to the foreign countries and views the foreign markets as an extension to the domestic markets just like a new region. their product design and their operations towards the national markets. the excessive production more than the demand for the product. . The company exports the same product designed for domestic markets to foreign countries under this approach. Thus. The executives at the head office of the company make the decisions relating to exports and. customers and competitors. the marketing personnel of the domestic company monitor the export operations with the help of an export department. But. Echnocentric Approach The domestic companies normally formulate their strategies.

Then. which are exporting to foreign countries using the ethnocentric approach. the company establishes a foreign subsidiary company and decentralists all the operations and delegate decision making and policy-making authority to its executives. Company appoints the key personnel from the home country and the people of the host country fill all other vacancies. Manager Exports Fig: Organization Structure of an Echnocentric Company 6. Manager South India Asst. find at the latter stage that the foreign markets need an altogether different approach. the company appoints executives and personnel including a chief executive who reports directly to the Managing Director of the company.R&D Manager Production Manager Finances Manager Marketing Asst. Manager North India Asst.Managing Director Manager Human Resources Manager . Polycentric Approach The domestic companies. . In fact.

the foreign subsidiary considers the regions environment (for example. policies etc. Regiocentric Approach The company after operating successfully in a foreign country thinks of exporting to the neighboring countries of the host country.) for formulating policies and strategies. Asian environment like laws.Fig: Organization Structure of a Polycentric Company 7. it markets more or less the same product designed under polycentric approach in other countries of the region. At this stage. The headquarters coordinate the activities of the subsidiaries. However. culture. the entire world is just like a single country for the company. Geocentric approach Under this approach. but with different market strategies. They select the employees from the entire globe and operate with a number of subsidiaries. Fig: Organization Structure of a Regiocentric Company 8. Each .

These streams are called the legs of the swap. product design. strategies. Futures Swaps f) A swap is a derivative in which two counterparties agree to exchange one stream of cash flows against another stream. Discuss Swaps. human resource policies. operations etc. Consequently. since counterparties can earn the profit or loss from movements in price without having to post the notional amount in cash or collateral.subsidiary functions like an independent and autonomous company in formulating policies. Options. Fig: Organization Structure of a Geocentric Company Q9. g) The cash flows are calculated over a notional principal amount. swaps can be used to create unfunded exposures to an underlying asset. . which is usually not exchanged between counterparties.

h) Swaps can be used to hedge certain risks such as interest rate risk. currency swaps. sets margin requirements. in order of their quantitative importance. The exchange's clearinghouse acts as counterparty on all contracts. credit swaps. the Chicago Board Options Exchange and Frankfurt-based Eurex AG. the largest U. h) A futures contract gives the holder the obligation to make or take delivery under the terms of the contract. a futures contract. i) Both parties of a "futures contract" must fulfill the contract on the settlement date. or. such as a piece of property. or to speculate on changes in the underlying prices. The seller delivers the underlying asset to the buyer. g) The future date is called the delivery date or final settlement date. such as. or shares of stock or some other underlying security. to buy or sell a standardized quantity of a specified commodity of standardized quality at a certain date in the future. at a price determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract. j) The five generic types of swaps.. In return for granting the option. are: interest rate swaps. the seller collects a payment (the premium) from the buyer. if it is a cash-settled futures contract. effectively closing out the futures position and its contract obligations. j) Futures contracts. and crucially also provides a mechanism for settlement. . Some types of swaps are also exchanged on futures markets such as the Chicago Mercantile Exchange Holdings Inc. the holder of a futures position has to offset his/her position by either selling a long position or buying back (covering) a short position. futures market. i) Most swaps are traded over-the-counter (OTC). To exit the commitment prior to the settlement date. are exchange traded derivatives.S. traded on a futures exchange. The official price of the futures contract at the end of a day's trading session on the exchange is called the settlement price for that day of business on the exchange. then cash is transferred from the futures trader who sustained a loss to the one who made a profit. Options g) An option is a contract written by a seller that conveys to the buyer the right — but not the obligation — to buy (in the case of a call option) or to sell (in the case of a put option) a particular asset. or simply futures. "tailor-made" for the counterparties. among others. Futures f) A futures contract is a standardized contract. commodity swaps and equity swaps.

which are awarded by a company to their employees as a form of incentive compensation l) Other types of options exist in many financial contracts. buying a call option provides the right to buy a specified quantity of a security at a set strike price at some time on or before expiration. Hence.h) For example. often well-capitalized institutions that have negotiated separate trading and clearing arrangements with each other. or wrote. and prepayment options are usually included in mortgage loans. attempt to predict how the value of the option will change in response to changing conditions. the risks associated with granting. which are developed by quantitative analysts. particularly in the U. facilitating trading among independent parties.. . than with some other investments.S. j) Exchange-traded options form an important class of options which have standardized contract features and trade on public exchanges. Upon the option holder's choice to exercise the option. or trading options may be quantified and managed with a greater degree of precision. k) Another important class of options. the option must fulfill the terms of the contract. owning. i) The theoretical value of an option can be evaluated according to several models. for example real estate options are often used to assemble large parcels of land. while buying a put option provides the right to sell. Over-the-counter options are traded between private parties. These models. are employee stock options. the party who sold. perhaps.

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