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INTERNATIONAL BUSINESS

VARIOUS ORGANISATIONAL STRUCTURES IN IB

ORGANIZATION ARCHITECTURE AND PROFITABILITY • • • • • Totality of a firm’s organization, including structure, control systems, incentives, processes, culture and people. Superior organization profitability requires three conditions: An organization’s architecture must be internally consistent. Strategy and architecture must be consistent. Strategy, architecture and competitive environments must be consistent. ORGANIZATIONAL ARCHITECTURE

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INTERNATIONAL BUSINESS Organizational structure • • • Location of decision making responsibilities within the structure (vertical differentiation) Formal division of the organization into subunits e.g. product divisions (horizontal differentiation) Establishment of integrating mechanisms including cross-functional teams and or pan-regional committees Control systems • Metrics used to measure performance of subunits and judge managerial performance Incentives • • Devices used to reward appropriate employee behaviour Closely tied to performance metrics

Processes • Manner in which decisions are made and work is performed

Organizational culture • • Values and norms shared among employees of an organization Strategy used to manage human resources

People (Employees)

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and retain individuals with necessary skills.INTERNATIONAL BUSINESS • Strategy used to recruit. compensate. Two Approaches  Centralization  Decentralization CENTRALIZATION • • • • Facilitates coordination. Top-level managers have means to bring about organizational change. Ensure decisions consistent with organization’s objectives. DECENTRALIZATION 4 . values and orientation PURPOSE OF ORGANIZATIONAL STRUCTURE • • • • • • • • To exercise control To establish division of labour To facilitate communications To facilitate coordination & integration To establish accountability To delegate responsibility To establish lines of authority and chain of command To establish rules and regulations VERTICAL DIFFERENTIATION • • Concerned with where decisions are made. Avoids duplication of activities.

Can increase control.INTERNATIONAL BUSINESS • • • • • Overburdened top management. Can result in better decisions. Motivational research favours decentralization. TRANSNATIONAL FIRMS • • • Aim to realize location and experience curve economies Centralized control over global production centers Need to be locally responsive COMPANY’S INTERNATIONAL DIVISION STRUCTURE 5 . Permits greater flexibility. STRATEGY AND ORGANIZATION STRUCTURE Major strategic decisions are centralized at the firm’s headquarters while operating decisions are decentralized GLOBAL STRATEGY • • • • Aim to realize location and experience economies Centralization of some operating decisions Multi-domestic firms: aim for local responsiveness Decentralizing operating decisions to foreign subsidiaries INTERNATIONAL FIRMS Maintain centralized control over their core competency and decentralize other decision to foreign subsidiaries.

INTERNATIONAL 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 DISADVANTAGES OF INTERNATIONAL DIVISION • • • • • • Dependent on domestic product divisions for R&D. domestic Cannot handle too many products Not appropriate if foreign sales over 25% Heads of foreign subsidiaries relegated to second-tier position WORLDWIDE AREA STRUCTURE 6 . Conflict over pricing and transfer pricing Power struggles in firm: intl Vs.. etc. engg.

INTERNATIONAL BUSINESS • • • • • • • • • Favoured by firms with low degree of diversification Area is usually a country Facilitates local responsiveness Favoured by firms with low degree of diversification & domestic structure based on function World is divided into autonomous geographic areas Operational authority decentralized Facilitates local responsiveness Fragmentation of organization can occur Consistent with multi domestic strategy A WORLDWIDE AREA STRUCTURE PRODUCT DIVISION • • Adopted by firms that is reasonably diversified Original domestic firm structure based on product division 7 .

subservient to product division managers.INTERNATIONAL BUSINESS • • • • 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. leading to lack of local responsiveness A WORLDWIDE PRODUCT DIVISION STRUCTURE MATRIX STRUCTURE • • Helps to cope with conflicting demands of earlier strategies Two dimensions: product division and geographic area 8 .

INTERNATIONAL BUSINESS • 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 Attempts to meet needs of transnational strategy A GLOBAL MATRIX STRUCTURE THE INTERNATIONAL STRUCTURAL STAGES MODEL 9 .

INTERNATIONAL BUSINESS ADR & GDR HOW DO WE RAISE FUNDS FROM INTERNATIONAL MARKET? WHAT IS AN ADR / GDR? 10 .

companies in India issue shares which are traded on Indian stock exchanges like BSE (The Stock Exchange. Thus. • • • • • But many companies get listed on these stock exchanges indirectly. NSE (National Stock Exchange). The bank issues receipts against these shares.INTERNATIONAL BUSINESS • • There are some very good proxies that can be used by Non Resident Indians (NRIs) and non-Indians for making investments in India. ADR stands for American Depository Receipt. • But to list on a foreign stock exchange. • Every publicly traded company issues shares – and these shares are listed and traded on various stock exchanges. GDR stands for Global Depository Receipt. These receipts are then sold to the people of this foreign country (and anyone who are allowed to buy shares in that country). are called Depository Receipts. These receipts are listed on the stock exchanges. • These shares are sometimes also listed and traded on foreign stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotation). Mumbai). 11 . Similarly. and depending on the fundamentals of the underlying company. each receipt having a fixed number of shares as an underlying (Usually 2 or 4).using ADRs and GDRs. the company has to comply with the policies of those stock exchanges.their prices fluctuate depending on their demand and supply. etc. Many times. which are traded like ordinary stocks. They behave exactly like regular stocks. The company deposits a large number of its shares with a bank located in the country where it wants to list indirectly. the policies of these exchanges in US or Europe are much more stringent than the policies of the exchanges in India. This deters these companies from listing on foreign stock exchanges directly. • These receipts.

Reddys HDFC Bank Hindalco ICICI Bank Infosys Technologies ITC L&T MTNL Patni Computers Ranbaxy Laboratories FUTURE OF ADRs AND GDRs ADR No Yes Yes No Yes Yes No No Yes Yes No GDR Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes 12 . NRIs and foreigners can buy these using their regular equity trading accounts.INTERNATIONAL BUSINESS • • Each receipt amounts to a claim on the predefined number of shares of that company. The issuing bank acts as a depository for these shares. INDIAN COMPANIES HAVING ADRs & GDRs Company Bajaj Auto Dr. WHAT IS THE DIFFERNCE BETWEEN ADR AND GDR? • Both ADR and GDR are depository receipts.that is. If the depository receipt is traded in a country other than USA. The only difference is the location where they are traded. • • • If the depository receipt is traded in the United States of America (USA). it stores the shares on behalf of the receipt holders. and represents a claim on the underlying shares. Since ADRs and GDRs are traded like any other stock. it is called an American Depository Receipt (ADR). it is called a Global Depository Receipt (GDR).

INTERNATIONAL BUSINESS • If you look across the spectrum of companies in Central Europe (CE). on average. • ADR programmes can either be in Pink Sheets. • There is good empirical evidence to show that. Terminating an ADR programme sends the reverse signal. • The US brokerage system. as management. no longer want to be subjected to this additional layer of regulation and scrutiny.’ • There have been a lot of good names delisting over the past few months since the rule change that allowed companies to exit if their ADR trading fell below five per cent. Investors don’t want multiple brokerage accounts. • For a newly listed CE company. GDR programmes are becoming less popular because overall institutions are investing directly. a GDR programme still makes sense: the costs are marginal. besides the large institutional system. you don’t face custody costs. there is a 10 to 15 per cent increase in stock price when a foreign company lists an American depositary receipt. there are no extra efforts in terms of compliance and it’s a good way to get exposure. is still dollar based. • I’m not sure if having an ADR programme is really beneficial given the amount of paperwork and additional lawyers time needed to comply with the Sarbanes Oxley Act. • • The reason is that it has become a new company by agreeing voluntarily to play by a different set of rules. tax issues or get your dividends in another currency. which is why an ADR offers such value because it’s a US dollar security. 13 . which means the issuer has no relationship with us or they can apply for and go through the process of joining International OTCQX. It says to investors: ‘We. • With an ADR.

ADR & GDR NORMS FURTHER RELAXED • Indian bidders allowed raising funds through ADRs. except for an express ban on investment in real estate and stock markets. petroleum exploration and refining. • There is no such restriction because a company engaged in the manufacture of items covered under Automatic Route is likely to exceed the percentage limits under Automatic Route. • This condition can be relaxed for infrastructure projects such as power generation. airports and roads.INTERNATIONAL BUSINESS RBI RULES FOR ADRs & GDRs • Indian companies are allowed to raise equity capital in the international market through the issue of GDR & ADRs. whose direct foreign investment after a proposed GDRs/ADRs/FCCBs is likely to exceed 50 % / 51 % / 74 %. • There are no end-use restrictions on GDRs/ADRs issue proceeds. ports. GDRs and external commercial borrowings (ECBs) for acquiring shares of PSEs 14 . telecommunication. There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year. • An applicant company seeking Government's approval in this regard should have a consistent track record for good performance (financial or otherwise) for a minimum period of 3 years.

• FIIs can invest in a company under the portfolio investment route upto 24 per cent of the paid-up capital of the company.INTERNATIONAL BUSINESS in the first stage and buying shares from the market during the open offer in the second stage. This limit has now been increased to 49% from the present 40%. two-way conversion or fungibility) of shares of Indian companies into depository receipts listed in foreign bourses. Stock brokers in India can now purchase shares and deposit these with the 15 . removal of the existing limit of $20. while extending tax incentives to nonresident investors. • Companies have been allowed to invest 100 per cent of the proceeds of ADR/GDR issues (as against the earlier ceiling of 50%) for acquisitions of foreign companies and direct investments in joint ventures and wholly-owned subsidiaries overseas. The re-coversion of ADRs/GDRs would. however.k. whichever is higher. It can be increased to 40% with approval of general body of the shareholders by a special resolution. Earlier.a. this facility was available only to Indian companies in certain sectors. • Two way fungibility in ADR/GDR issues of Indian companies has been introduced subject to sectoral caps wherever applicable. • Conversion and reconversion (a.000 for remittance under the employees stock option scheme (ESOP) and permitting remittance up to $ 1 million from proceeds of sales of assets here. • Any Indian company which has issued ADRs/GDRs may acquire shares of foreign companies engaged in the same area of core activity upto $100 million or an amount equivalent to ten times of their exports in a year. allowed. • Permission to retain ADR/GDR proceeds abroad for future foreign exchange requirements. be governed by the Foreign Exchange Management Act notified by the Reserve Bank of India in March 2001.

Cipla said in a filing to the Bombay Stock Exchange. FOR EXAMPLE Cipla to raise funds from international market Cipla on Fridiay said it would raise Rs. American Depository Receipts and Global Depository Receipts. whereas supply chain management extends beyond that to include the management of supplier and customer relations. 1. foreign currency convertible bonds. or logistics. implementing and controlling the efficient. Materials management. and related information from point of origin to point of consumption for the purpose of conforming to customer requirements. in process inventory. cost effective flow and storage of raw materials.” • The difference between supply chain management and materials management is on degree. logistics management is the “process of planning. also sometimes called materials management.500 crore from the international market by issuing non-convertible debentures. According to the Council of Logistics Management. focuses much more on the transport and storage of materials and final goods. finished goods. INTERNATIONAL LOGISTICS AND ITS IMPORTANCE IN IB INTERNATIONAL LOGISTICS • • An important dimension of the supply chain is logistics. USA. 16 .INTERNATIONAL BUSINESS Indian custodian for issue of ADRs/GDRs by the overseas depository to the extent of the ADRs/GDRs that have been converted into underlying shares.

also known by such other names as marketing logistics.INTERNATIONAL BUSINESS • Logistics. 17 . industrial logistics/ business logistics/ distribution/ channels of distribution logistics/ distribution engineering materials logistics management supply chain management is a very important component of operations management.

• Factors like future potential of the markets. covering the entire range of operations concerned with the movement of materials and products to.INTERNATIONAL BUSINESS COMPONENTS OF LOGISTICS • Logistics encompasses the total movement concept. returned goods handling. political stability. • Some of the major components of logistics are the following: FIXED FACILITIES LOCATION • The major consideration is the location of fixed facilities like production and warehousing in such a way as to maximize the total efficiency of the logistics system. are also important considerations. packaging. INVENTORY MANAGEMENT • • The main objective of inventory management is to minimize the cost of the inventory while ensuring smooth supplies. • It includes a variety of activities such as inventory management. warehousing and storage. competitive factors. communications. customer service etc. order processing. Developments in inventory management by the customer’s order processing and in the total logistics system have made inventory management both challenging and efficient. future plans of the company. transportation. and out of the firm to the consumer. etc. through. ORDER PROCESSING 18 . salvage and scrap disposal. distribution. materials handling.

When a firm becomes heavily involved in international business. 19 . Exporters from developing countries like India face the challenge of coping up with such situations. international logistics is recognized as an integral part of the marketing mix that furthers the global marketing process. • Material Handling and Transportation: Material handling and transportation are also an important part of the logistics management. and efficient response to customer needs. The technologies in use in material handling and transportation affect the efficiency of logistics. obtain technological advantages from other countries. With the assistance of an efficiently managed international logistics function. logistics is seen as a critical part of the strategic planning process. An effective international logistics strategy not only offers significant cost savings but also can help firms penetrate new foreign markets. the role played by international logistics managers also increases in importance. better post sale service. IMPORTANCE OF INTERNATIONAL LOGISTICS IN IB 1. Indeed.INTERNATIONAL BUSINESS • The efficiency of order processing by the client as well as the company have important implications for inventory levels and other aspects of the logistics. 4. improved quality. reduced total cycle time. Rapid order processing shortens the order cycle and allows for lower safety stocks on the part of the client. 3. 6. 5. As logistics activities become a substantial part of a firm's international operations. 2. and expand their markets. firms can gain economies of scale from increased production. Firms have begun to explore how the logistics function can provide certain strategic advantages: more efficient distribution networks.

tend to offset a firm's efforts to establish an efficient logistics system. These often lead to higher total logistics costs and decreased flexibility. Distributors take ownership of the goods (and the accompanying risk) and usually on-sell through wholesalers and retailers to end-users. however. 8. Sales representatives promote their company’s products and do not take title to the merchandise. all of which adversely affects the competitive position of the firm.INTERNATIONAL BUSINESS 7. Advantages of Direct Exports o Give a higher return on your investment than selling through an agent or distributor o Allows the exporting company to set lower prices and be more competitive o Gives the company a close contact with its customers Disadvantages of Direct Exports 20 . a comprehensive and complex logistics system (including infrastructure and control systems) must be established. Export can be done in two ways: 1. In order to obtain a competitive advantage through such operations. VARIOUS ENTRY METHODS FOR INTERNATIONAL BUSINESS EXPORT Exporting is the most traditional way of entering into International Business. Various barriers in international markets. Direct Export – Products are sold directly to buyers in target markets either through local sales representatives or distributors.

o It allows making the move from domestic export sales to a locally based national sales office.Products are sold through intermediaries such as agents and trading companies. and such familiarity is often important when doing business internationally 2. This has happened due to changes in technologies. products. Agents may represent one or more indirect exporters in return for commission on sales. regulatory environment in terms of liberalization and easing of restrictions on foreign investments and acquisitions. 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. o Capability to increase total production capacity. and deregulation and privatization of many industries. capital process. cheaper production facilities. improved trade and investment policies of governments. FDI has come to play a major role in the internationalization of business. 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. Indirect Export . o FDI allows companies to avoid foreign government pressure for local production. o FDI can provide a strong impetus to economic development of the host country. access to new technologies. This is all the more true when large MNCs enter developing nations through FDI.INTERNATIONAL BUSINESS o The company may not have the services of a foreign intermediary. 21 . organizational technologies and management skills. Advantages: o It can provide a firm with new markets and marketing channels.

Often. Like a lease on a building. Any decision on investing is thus a combination of a number of key factors including: o Assessment of internal resources o Competitiveness o Market Analysis o Market expectations LICENSING Licensing is a legal agreement between the owner of intellectual property such as a copyright. The licensee uses that idea/product/process to sell products or services and earns money.INTERNATIONAL BUSINESS Depending on the industry sector and type of business. the license is for a specific period of time. New market access is also another major reason to invest in a foreign country. it becomes imperative to follow the expansion of key clients overseas if an active business relationship is to be maintained. At some stage. export of product or service reaches a critical mass of amount and cost where foreign production or location begins to be more cost effective. With rapid globalization of many industries and vertical integration rapidly taking place on a global level. it is important to be aware of whether a company’s competitors are expanding into a foreign market and how they are doing that. patent or trademark and someone who wants to use that IP. Advantages: 22 . a foreign direct investment may be an attractive and viable option. From a competitive standpoint. The licensee pays “rent” to the licensor for the use of an idea/product/process that is otherwise protected by IP law. at a minimum a firm needs to keep abreast of global trends in their industry.

o Helps avoid host country regulations that are more prevalent in equity ventures. licensing provides an opportunity to exploit research and development already conducted. This right can take the form of selling the franchiser’s products. It allows provides a network of interdependent business relationships that allows a number of people to share: o Brand identification 23 .INTERNATIONAL BUSINESS o Licensing appeals to prospective global players because it does not require large capital investment not detailed involvement with foreign customers. using its name. After initial costs. o Provides a way of testing foreign markets without significant resources. Limitations: o Limited form of market entry which does not guarantee a basis for expansion. o It reduces the risk of expropriation because the licensee is a local company that can provide leverage against government action. o Licensor may create more competition in exchange of royalty. the licensor can reap benefits until the end of license contract period. FRANCHISING Franchising involves granting of rights by a parent company to another (franchisee) to do business in a prescribed manner. production and marketing techniques or using its general business approach. o Can be used as a pre-emption major in new market before the entry of competition. By generating royalty income.

McDonald’s. 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. o The risk is divided between joint-venture partners.g. It can be beneficial to both groups.INTERNATIONAL BUSINESS o Successful method of doing business o Proven marketing and distribution system Franchise agreement typically requires the payment of a fee upfront and then a percentage on sales. In return. Franchising is adaptable to international arena and requires minor modification for the local market.g. Typically. 24 . Major Forms of Franchising: manufacturer-retailer system (e. this stake can be a majority one so as to ensure tighter control. 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. It has been one of the most popular way of entering a new market.g. Franchiser has a new stream of income and the franchisee gets time proven concept/product which can be quickly bought to the market. car dealership) manufacturer-wholesaler system (e. Advantages: o Domestic company brings in the knowledge of the domestic market. soft-drink companies) service firm – retailer system (fast-food. hotel) e. 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. At times.

g.INTERNATIONAL BUSINESS o Normally. Hero Honda. environmental. Danone-Brittania. WOS allows a foreign firm complete control and freedom to execute its business strategy in the foreign country. o Profits have to be shared. Acquisition of established firm. Set up of new operation 2. Limitations: o Limited control over business approach for foreign entity. A. INFLUENCE OF PEST FACTORS ON INTERNATIONAL BUSINESS OR RISK ANALYSIS IN INTERNATIONAL BUSINESS Any business is affected by its external environment. POLITICAL ENVIRONMENT 25 . social and technological. Maruti Suzuki WHOLLY OWNED SUBSIDIARIES In a wholly owned subsidiary. foreign partner has an option to sell its stake in the venture to another entity. the company owns 100% of the equity. Acquisition of an established company can reduce this risk to an extent. The major macroeconomic factors in the external environment that affect the business are political. This freedom is accompanied by a greater risk due to lack of knowledge of the market. e. Establishing a wholly owned subsidiary in a foreign market can be done in 2 ways: 1.

INTERNATIONAL BUSINESS The political environment of a country greatly influences the business operating in those countries or business trading with those countries. The success and growth of international business depends on the stable, collaborative, conducive and secure political system in the country. The following factors affect the political environment in a country. 1. Tax Policy: The tax policy of a country affects the profitability of the business there. The Corporate Taxation laws affect the profitability directly. The direct taxation laws also affect the business because it influences consumer spending. The structure of indirect taxation in a country like its excise duty structure, customs and sales tax greatly affects the input costs of a business. For e.g. Countries like UAE have very low direct taxation levels inducing great spending and hence trading and marketing based business are successful. But due to very high indirect taxation levels the manufacturing business is not very successful. 2. Government support: One of the most important political factors is the Government support to international businesses. Business can be successful only if the local government provides support in terms of infrastructure, license clearing if required, transparent policy and quick dispute resolution mechanism. Also the nature of the political system i.e. democracy, communism etc. in the country influences the Government support. For e.g. the RBI has provided single window clearance for FDI and hence has greatly increased the FDI levels in our country. 3. Labour Laws: The labour laws in a country affect the viability of a business in that country. The pension laws also play a critical role especially in cross border acquisitions. Many businesses had to be withdrawn or closed because of the labour unrest in the country.
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INTERNATIONAL BUSINESS For e.g.: Withdrawal of Premier Automobiles due to union strikes in our country. The problems faced by doctors and nurses in UK due to the restrictive laws in that country. 4. Environmental policy: The countries environmental policy (under the Kyoto Protocol or otherwise) affects many business like chemicals, refineries and heavy engineering. 5. Tariffs and duty structure: The level of duties and tariffs that are imposed by the country influence its imports and exports greatly. Some countries follow a protectionist policy to the domestic industry by raising import barriers for e.g. India in the pre liberalization era, Russia. 6. Political stability and political milieu: Political stability greatly affects the longevity of the businesses in a country. Political risk assessment should be done to determine the country risk on the basis of following parameters: a. Confiscation: The nationalization of businesses without compensation. For e.g. India during the nationalist wave during Indira Gandhi’s tenure. b. Nationalization: Resource nationalization is a major risk for businesses involving local resources like oil, minerals etc. For e.g. the resource nationalization in Columbia. c. Instability risk: The possibility of military takeovers or huge government changes. For e.g. 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. d. Domestication: The global company relinquishing control in favour of domestic investors. Africa B. ECONOMIC FACTORS
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For e.g. Barclays bank in South

INTERNATIONAL BUSINESS The economic factors in a country greatly influence the business in that country. The following factors are important in the macroeconomic environment. 1. Economic system: The economic system in a country i.e. capitalism/ communism/ mixed economy (India) is important for deciding the nature of the businesses. The nature of the system decides the allocation of resources. Due to globalization there is a gradual shift toward market forces to allocate resources even in the communist countries like China. 2. Interest rates: The interest rates in the country affect the cost of capital (if raised locally) and the operational costs. Interest rates also determine the confidence of the Government in the economy and consumer spending. 3. Exchange rates: The exchange rates affect international trade and capital inflows in the country. 4. 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. For e.g. In a country like India, with rising a sparer population there is a market opportunity for products like IPod (considered luxury items till now) C. SOCIAL FACTORS Businesses are driven by people both as human capital and as consumers. It is necessary for an international businessman to understand the social and cultural aspects of the country they operate in. The following are the important social factors. 1. Age distribution:
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2. Cultural aspects: The cultural aspects influence the way the business is conducted in countries. Family system: The family system has a bearing on the decision makers in consumption. Age distribution also determines the mindset of the market and helps segmentation of the market accordingly. R&D: 29 . In emerging economies like India children are gaining important role in consumption. For e.INTERNATIONAL BUSINESS The age distribution of the population is important to consider the consumption patterns in the markets. A young population also determines a workforce. The following are the technological factors that influence the business. Career attitudes: The career attitude of the workforce is important social aspect. In Japan there is a different way in which contracts are signed and executed. TECHNOLOGICAL FACTORS Technology has a very important role to play in determining the success of international businesses because technology has made international business possible. D. 4. This helps in positioning of products.g. 3. Italians have a seemingly lazy way of doing business and hence it is very difficult to conduct business in the pacy US way. In Russia being a communist oriented mindset the business is conducted in a closed manner. 1. in Islamic countries women have a less say in making consumption decisions. It also has a bearing on the employee quality.

INTERNATIONAL BUSINESS The support that the Government gives to R&D encourages setting up R&D business levels. For e. Technology transfer: The ease of technology transfer influences the business climate. The semiconductor industry in Taiwan 2. The environment where the technology transfer is not viable gradually loses out on business from emerging countries that seek technology transfers. GE withdrew operations from a JV as there as they could not access local expertise) INTERNATIONAL TRADE THEORIES 30 . For e. Also the ease of a qualified local workforce influence business.g.g. For e. 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.g.

Zero-Sum Game • In 1752. Neo-mercantilism views persist today. A nation’s wealth depends on accumulated treasure. • • • • Mercantilism (pre-16th century) This theory takes an “us-versus-them” view of trade. Theory says you should have a trade surplus. other country’s gain is our country’s loss.INTERNATIONAL BUSINESS 1. • Flaw: “Zero-sum game”. David Hume pointed out that: 31 .1.  Maximize exports through subsidies. Classical Country-Based Theories 1.  Minimize imports through tariffs and quotas. Mercantilism.

no one can keep a trade surplus 1. This theory states that a country is capable of producing more of a good with the same input than another country . Free Trade supporting theories This theory shows that specialization of production and free flow of goods grow all trading partners’ economies Absolute Advantage (Adam Smith. and Japan makes more shirts than shoes. Under free (unregulated) trade each nation should specialize in producing those goods it could produce most efficiently. spending half of their working hours on each. Adam Smith claimed market forces. the India and Japan. beneficial. The Wealth of Nations. it robs individuals of the ability to trade freely. composition of international trade.either natural or acquired when it is more productive than another country in producing a particular product. a country should specialize in and export products for which it has absolute advantage. • A country has absolute advantage .2. import others. shoes and shirts. 1776) • • Mercantilism weakens a country in the long run and enriches only a few segments. not government volume and controls. • • should determine the direction. Hence. Both countries make both products. Pretend also that they produce only two goods. • Trade between countries is.INTERNATIONAL BUSINESS  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. The resources of both countries can be used to produce either shoes or shirts. 32 . Assume that there are just two countries in the world. But India makes more shoes than shirts. therefore.

and capital) Each nation has two input units it can use to produce either rice or automobiles 33 . had an absolute advantage at shirt making. Assumptions: • • • Perfect competition and no transportation costs in a world of two countries and two products One unit of input (combination of land. on the other hand. India could make more shoes than Japan with the same resources. as shown in Table B. and both countries will benefit.INTERNATIONAL BUSINESS 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. TABLE B Shoes India Japan Total 200 0 200 Shirts 0 200 200 The world now has both more shoes and more shirts. In this example. India can trade 100 units of shoes for 100 units of shirts. Japan. labor. It has an absolute advantage at shoemaking.

in his theory of comparative costs. If the India produces only shoes. 1817) – Also known as Opportunity Cost Theory • David Ricardo. suggested that countries will specialize and trade in goods and services in which they have a comparative advantage. Now suppose one country has an absolute advantage in both products. Principals of Political Economy. The India could produce either 200 units of shoes or 160 units of shirts. China could produce either 160 units of shoes or 150 units of shirts. it gives up 75 units of shirts to gain 80 units of shoes. For India.INTERNATIONAL BUSINESS • Each country uses one unit of input to produce each product Comparative Advantage (David Ricardo. Table C shows what production might be like if India had an absolute advantage at making both shoes and shirts. it gives up 80 units of shirts to gain 100 units of shoes. compared with producing other goods. TABLE C Shoes India China Total 100 80 180 Shirts 80 75 155 In this case. 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. • 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. • The theory of comparative costs argues that. the India can produce more of each good with the same set of resources than China can. If China produces only shoes. put simply. the opportunity cost of producing shirts is higher and the opportunity cost of producing 34 .

India has a comparative advantage in shoemaking and China has a comparative advantage in shirt making. Hence. But the world has lost five units of shirts. from 180 to 200. For example. it could produce 8 units of shirts.INTERNATIONAL BUSINESS shoes is lower. the India and China have increased the production of shoes by twenty units over what they produced before. TABLE E Shoes India China Total 190 0 190 Shirts 8 150 158 35 . vice-versa for China. TABLE D Shoes India China Total 200 0 200 Shirts 0 150 150 By specializing in this way. Table D shows what happens when each country specializes in the product in which it has a comparative advantage. going from 155 to 150. if the India gave up 10 units of shoes. Table E shows the results of such a tradeoff. Production in the India could be adjusted to make up the difference.

two-product mode. For India. The real world is much more complex than this two-country. trade will take place.3. Trade involves many different countries and products. 36 . In the like manner. now often referred to as the Heckscher-Ohlin theory. In the terms of trade each reduce each country's opportunity cost of acquiring the good traded for. the total production of both goods could be increased. Summary • Country should specialize in the production of those goods in which it is relatively more productive. And it is not always clear where a country's comparative advantage lies. 1. 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. The theory states that the pattern of international trade depends on differences in factor endowments not on differences in productivity. China's opportunity cost of producing 80 units of shoes was 75 units of shirts.1. • Free Trade refined Factor-proportions (Heckscher-Ohlin. In this example. Eli Heckscher and Bertil Ohlin developed the theory of relative factor endowments. 1919) 1.3. even if it has absolute advantage in all goods it produces. Efficiency of resource utilization leads to more productivity.INTERNATIONAL BUSINESS In this way. • • This extends free trade argument. 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. Both countries must benefit for trade to occur.

but little labour . their prices will be low. Labour intensive goods on the other hand will be very expensive to produce since labor is scarce and its price is high. Those low prices will ensure that the price of the grain that they are used to produce will also be low . and capital) determine a country's comparative advantage. • Goods that require inputs that are locally abundant will be cheaper to produce than those goods that require inputs that are locally scarce. the country is better off importing those goods. 37 .INTERNATIONAL BUSINESS • • Relative endowments of the factors of production (land. 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. This is because the prices of goods are ultimately determined by the prices of their inputs.grains. labour. Therefore. For example. Countries have comparative advantage in those goods for which the required factors of production are relatively abundant. for example. Since capital and land are abundant. 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.and thus attractive for both local consumption and export.

2.or capital-intensive The theory ignored transportation costs. Modern Trade Theory In industries with high fixed costs: • Specialization increases output. both location of sales and optimal production 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.INTERNATIONAL BUSINESS • • • • Relative factor endowments are different in each country Tastes and preferences are identical in both countries A given product was either labor. • • • changes Product Life Cycle (Ray Vernon.3. 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. 1966) As products mature. 1. and the ability to enhance economies of scale increases 38 .

fixed costs o World demand will support few competitors o Competitors may emerge because of “ First-mover advantage” • • Economies of scale may preclude new entrants o Role of the government becomes significant 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 . structure and rivalry • 39 .INTERNATIONAL BUSINESS • • Learning effects are high. requires industries with high. These are cost savings that come from “learning by doing” New Trade Theory-Applications • Typically.Postulated determinants of competitive advantage of a nation were based on four major attributes     Factor endowments Demand conditions Related and supporting industries Firm strategy.

are more likely to lead to government 40 .Geographic location .Research .Communications . • and competitive advantage If a country has no basic factors. The result of investment by people.Education Porter’s Theory-Predictions • Porter’s theory should predict the pattern of international trade that we observe in the real world.Demographics • While basic factors can provide an initial advantage they must be supported by advanced factors to maintain success Advanced Factor Endowments • Advanced factors: companies.INTERNATIONAL BUSINESS 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 .Climate .Technology .Skilled labor . it must invest in advanced factors .Natural resources .

This theory emphasizes that the process of specialization involves adapting and reshaping the production structure of a trading country to meet the export demands.1.INTERNATIONAL BUSINESS • Countries should be exporting products from those industries where all four components of the diamond are favourable. a part of the productive labour of the country must cease and the value of its annual Produce diminishes. If the countries produce more than the domestic requirements. • Countries increase productivity in order to utilize the gains of exports. Other Theories: 3. Hence. • The productivity theory points toward indirect and direct benefits. • In the absence of foreign trade. Otherwise. Limitations: • • • Labour 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. they would be surplus productive capacity in the country. Myint proposed productivity theory and the vent for surplus theory. • The productivity theory by H. increase productivity by enhancing the efficiency of human resources. adapting latest technology etc. This surplus productive capacity is taken by 41 . while importing in those areas where the components are not favourable 3. they have to export the surplus to other countries.2. • • The vent for surplus theory International trade absorbs the output of unemployed factors. This theory encourages the developing countries to go for cash crops. H. Myind It is criticized that the comparative cost theories are not applicable to developing countries.

Mill introduced the concept of ‘reciprocal demand’ to explain the determinations of the equilibrium terms of trade. 3. • Mills’ theory of reciprocal demand Comparative cost advantage theories do not explain the ratios at which commodities are exchanged for one another. the factors of production of developing countries are fully utilized. J.3. Existence of perfect competition 42 . 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.INTERNATIONAL BUSINESS another country and in turn gives the benefit under international trade. It determines the terms of trade and relative share of each country. The unemployed labour of the developing countries is profitably employed when the vent for surplus is exported.S. • Reciprocal demand indicates a country’s demand for one commodity in terms of the other commodity. Appropriateness of this Theory for Developing Countries: • • According to this theory. it is prepared to give up in exchange.

skills and financing. products. FDI represents an opportunity to become more actively involved in international business activities. capital. It provides a firm with new markets and marketing channels. they could help their host countries in their industrialization. an effective voice in the management of the enterprise. and of resources that are scarce in developing countries. FDI inflows are considered as channels of entrepreneurship. Hence. it can provide a source of new technologies. The purpose of the investor is to have a significant influence. 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). access to new technology. 3. and as such can provide a strong impetus to economic development. technology. For small and medium sized companies. management skills. 43 . 2. organizational technologies and management skills.INTERNATIONAL BUSINESS • Existence of full employment TEN REASONS WHY FDI HAPPENS 1. processes. are investments made to acquire a lasting interest by a resident entity in one economy in an enterprise resident in another economy. Foreign Direct Investments (FDI) as defined in the BOP Manual. cheaper production facilities. products. For a host country or the foreign firm which receives the investment. 4.

and the resulting search for alternative sources of foreign capital. 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.INTERNATIONAL BUSINESS In the past 15 years. Partly this is because of the expected continued decline in the role of development assistance (on which these countries have traditionally relied heavily). 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. licensing. hidden and otherwise Making the move from domestic export sales to a locally-based national sales office Capability to increase total production capacity. While imports of high-technology products. FDI may result in a greater diffusion of know-how than other ways of serving the market. the classic definition of FDI as noted above has changed considerably. joint marketing arrangements. FDI is viewed as a basis for going “global”. equipment and buildings. and marketing networks. etc 6. over 2/3 of direct foreign investment is still made in the form of fixtures. and new modes of 44 . the technology and productivity of local firms may improve as foreign firms enter the market and demonstrate new technologies. For example. Foreign direct investment is viewed as a way of increasing the efficiency with which the world's scarce resources are used. Opportunities for co-production. including intellectual property (such as technology and brand names). FDI allows companies to accomplish following tasks: • • • • • Avoiding foreign government pressure for local production Circumventing trade barriers. FDI provides more scope for spillovers. are important channels for the international diffusion of technology. as well as the purchase or licensing of foreign technology. FDI enables the firm owns assets to be profitably exploited on a comparatively large scale. organizational and managerial skills. 5. 8. 7. machinery. joint ventures with local partners.

India has benefited in the areas of garment exports. 10. FDI increases employment in host country. WTO ROUNDS WRT INDIA The WTO came into being on January 1. Inflows of FDI also increase the amount of capital in the host country. 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. 1995. provide technical assistance to their local suppliers and customers. allow more people to be employed at the same level of wages. 45 . The truth might lie somewhere in between but they surely become reasons for companies to invest in foreign markets. agricultural products exports and in market access to foreign markets in automobiles and electronics. or result in some combination of the two. drug prices. this will either raise labour productivity and wages. TIS ( trade in services ) and TRIMS especially in biomedical areas. AoA export subsidies etc. 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). Even with skill levels and technology constant. and train workers and managers who may later be employed by local firms. which was created in 1948. India was one of the 76 countries that signed the accession to the WTO and is one of the founder members of the WTO. patents in agriculture. and is the successor to the General Agreement on Tariffs and Trade (GATT). TRADE IMPLICATIONS OF SIGNING THE WTO FOR INDIA The implications of signing the WTO agreement for Indian trade have been mixed. 9.INTERNATIONAL BUSINESS organization and distribution. India has a disadvantage mainly in areas of TRIPs.

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. 2. India can utilize its competitive advantage in processing. The readymade garment exports from India has reached Rs 800 crores in 2007 and expected to reach Rs 1000 crores in 2008. 3.INTERNATIONAL BUSINESS BENEFITS 1. It also promises reduction of domestic subsidies in the developed countries helping exports from India. 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. 5. pipes affecting Indian domestic industry greatly. This gives India access to markets in Europe and US in sectors like automobiles and engineering. 46 . Market access: As a signatory to the WTO India automatically gets the MFN ( most favored nation ) status. India also benefits from the clauses related to trade without discrimination and benefit from capital good exports. gems and jeweller compared to the traditional centers in Europe like Amsterdam or Manchester etc increasing its trade with both the Euro region and the US. The anti dumping provisions and countervailing duties lend security to India’s domestic industries. beverages. 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. Also India suffered from dumping by Chinese steel industry. 4. This is thrice the exports in 2004-05.

E. Indian companies would have to lose in the differential charges that are applied. The Pfizer controversy 3.g. 5. 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. 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 patents. This will hurt our agriculture foods. together called as Singapore issues. chemicals and medicines. formalities etc. Services: The opening up of the banking sector in 2009 will affect Indian banks due to the foreign banks with huge balance sheets. TRIPS: The Indian Patent Act is not compatible with the TRIPS agreement under the WTO. Under the TRIPS the IPA will have to modify to allow product patents also. TRIMS: The Trade Related Investment Measures resulted in problems in trade in investment issues like transit charges. This will increase seed prices for Indian farmers and also lend our genetic resources to the MNCs 4. the Alphanso mango and the Basmati strand controversy.g.INTERNATIONAL BUSINESS DISADVANTAGES 1. Also products developed outside India can claim international patents applicable to India. The Indian Patent Act allows only process patents in areas of foods. 2. (This resulted in regulatory intervention in the recent budget in life saving drugs) e. These issues were dropped in the Chachun ministerial conferences. 47 . This will lead to increase in drug prices in India.

Similarly Indian textiles faced anti dumping regulations in US. Doha round: The Doha Development Round commenced at Doha. mechanism to resolve anti dumping duties issues. permitting free trade between countries of varying prosperity. Its objective is to lower trade barriers around the world. the United States and Japan and the major developing countries (represented by the G20 developing nations). As of 2008. China and South Africa. Anti dumping: The anti dumping rules were imposed on Indian linen in EU. 48 . talks have stalled over a divide between the developed nations led by the European Union. There is no INDIA’S STAND IN THE DOHA ROUND AND THE FOLLOWING MINISTERIAL CONFERENCES 1. Brazil. Qatar in November 2001 and is still continuing.INTERNATIONAL BUSINESS 6. led and represented mainly by India.

The EU. This resulted in Indian small manufacturers like steel forging. This also benefited the Indian financial sector internationally. 4. India benefited greatly in the capital goods export. Geneva 2004: In Geneva conference the developed nations reduced subsidiaries on manufactured goods. US and Japan support domestic agriculture by subsides. Cancun conference 2003 : The objective of this conference was to forge the agreement discussed in Doha. Agricultural subsidies: Brazil.INTERNATIONAL BUSINESS Singapore issues: The issues related to the trade facilitation and differential charges in investment vehicles affected Indian investment and venture companies. Hong Kong 2006 and Potsdam 2007 talks failed in resolving the farm subsidies. This agreement on market access for the developing countries in capital and industrial goods increased strength of G20 countries. 2. Paris 2005: France reduced subsidies on farm products. So the recent rounds are in a stalemate situation from India’s point of view. 3. The Singapore issues were resolved that resulted in removing the undue advantage for countries like US and Japan in investment arena. Issues: Market access to foreign markets. However US and Japan did not relent. casting to export largely and benefit from the construction boom in US. This was opposed by countries like India and 49 . This affected the Indian services.

Colombia. and the combined Gross Domestic Product of the full-member nations is in excess of US$2. OBJECTIVES OF MERCOSUR • Free transit of production goods. people. The bloc comprises a population of more than 263 million people. the elimination of customs rights and lifting of nontariff restrictions on the transit of goods or any other measures with similar effects. Brazil .INTERNATIONAL BUSINESS DISCUSS NAFTA/ EU/ ASEAN/ SAARC/ MERCUSOR MERCOSUR Mercosur is a regional trade agreement among Argentina. and currency. services and factors between the member states with inter alia. Ecuador and Peru currently have associate member status. PPP) according to International Monetary Fund (IMF) numbers.78 trillion a year (Purchasing power parity. but before becoming a full member its entry has to be ratified by the Paraguayan and the Brazilian parliaments. Its purpose is to promote free trade and the fluid movement of goods. 50 . Venezuela signed a membership agreement on 17 June 2006. which was later amended and updated by the 1994 Treaty of Ouro Preto. Chile. Bolivia. making Mercosur the fifth largest economy in the World.Paraguay & Uruguay founded in 1991 by the Treaty of Asunción.

immunity or privilege granted to a product originating from or intended for countries that are not party to ALADI. It 51 . exchange and capital. monetary system. MERCOSUR initially targeted free-trade zones. in order to ensure free competition between member states. and any others they may agree on.INTERNATIONAL BUSINESS • Fixing of a common external tariff (TEC) and adopting of a common trade policy with regard to non member states or groups of states. transport and communications. according to which the member nations undertake to automatically extend--after actual formation of the common market--to the other Treaty signatories any advantage. as a result of the chronological differences in actual implementation of trade liberalization by the member states. industry. the Asuncion Treaty also contains provisions regarding the most-favored nation concept. customs. 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. where in addition to customs unification the free movement of manpower and capital across the member nations' international frontiers is possible. During the transition period. a common market. finally. services. then customs unification and. In addition to the reciprocity doctrine. entitlement. SAARC The South Asian Association for Regional Cooperation (SAARC) is an economic and political organization of eight countries in Southern Asia. and depends on equal rights and duties being granted to all signatory countries. • Coordination of macroeconomic and sectorial policies of member states relating to foreign trade. The Asuncion Treaty is based on the doctrine of the reciprocal rights and obligations of the member states. favor. and the coordination of positions in regional and international commercial and economic meetings. agriculture. taxes. the rights and obligations of each party will initially be equivalent but not necessarily equal.

1985 by India. In April 2007. OBJECTIVES OF SAARC • To promote the welfare of the peoples of South Asia and to improve their quality of life. Though India has several trade pacts with Maldives. Afghanistan became its eighth member. • • To promote and strengthen collective self-reliance among the countries of South Asia. at the Association's 14th summit. and To cooperate with international and regional organizations with similar aims and purposes. cultural. Nepal. the SAARC members have expressed their unwillingness on signing a free trade agreement. understanding and appreciation of one another's problems. similar trade agreements with Pakistan and Bangladesh have been stalled due to political and economic concerns on both sides. • • • • • FREE TRADE AGREEMENT Over the years. Nepal. Eleven 52 .Sheelkant Sharma is the current secretary & Mahinda Rajapaksa is the current chairman of SAARC which is headquartered at Kathmandu. In 1993. Sri Lanka. To strengthen cooperation with other developing countries.INTERNATIONAL BUSINESS was established on December 8. SAARC countries signed an agreement to gradually lower tariffs within the region. Bangladesh. 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. To accelerate economic growth. To promote active collaboration and mutual assistance in the economic. social. Pakistan. Maldives and Bhutan. To contribute to mutual trust. To strengthen cooperation among themselves in international forums on matters of common interest. technical and scientific fields. Bhutan and Sri Lanka. in Dhaka. India has been constructing a barrier across its borders with Bangladesh and Pakistan.

SAARC countries devised the South Asia Free Trade Agreement which created a framework for the establishment of a free trade area covering 1. and Mexico. Canada. It also is one of the most powerful. Implementation of the North American Free Trade Agreement (NAFTA) began on January 1. Under this agreement. wide-reaching treaties in the world. Under the NAFTA. Canada. the SAARC convention on mutual legal assistance in criminal matters. the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). at the 12th SAARC Summit at Islamabad. This agreement will remove most barriers to trade and investment among the United States.the SAARC development fund.4 billion people. This agreement went into force on January 1. and the protocol on Afghanistan's admission to the South Asia Free Trade Agreement (SAFTA) were adopted with emphasis on regionwide food security. with full implementation beginning January 1. the establishment of a SAARC standard organization. SAARC members will bring their duties down to 20 per cent by 2007. NAFTA The North American Free Trade Agreement (NAFTA) is a trilateral trade bloc in North America created by the governments of the United States. all non-tariff barriers to agricultural trade between the United States and Mexico were eliminated. 2008. with others being phased out over periods of 5 to 15 years. 53 . as of 2007 the trade bloc is the largest in the world and second largest by nominal GDP comparison. 2006. The North American Free Trade Agreement (NAFTA) has two supplements. 1994. many tariffs were eliminated immediately.INTERNATIONAL BUSINESS years later. In terms of combined purchasing power parity GDP of its members. This allowed for an orderly adjustment to free trade with Mexico. The last summit (15th) was held in Colombo where four major agreements . and Mexico. In addition.

-Canada Free Trade Agreement.S. in effect since 1989. computer equipment.INTERNATIONAL BUSINESS The agricultural provisions of the U. textiles and apparel. 1998. The EU generates an estimated 30% share of the world's nominal gross domestic product (US$16. both positive and negative. trade since 1994.S. agribusiness. The Mexican-Canadian agreement eliminated most tariffs either immediately or over 5. located primarily in Europe.S. textile. industries that have high volumes of trade with Mexico and Canada are automotive industry.S. The effects of NAFTA. and microelectronics. chemicals and allied products. or 15 years. The five major U. and apparel industries have experienced the most significant changes in trade flows. trade with Mexico and Canada has grown more rapidly than total U. Some argue that NAFTA has been positive for Mexico. Others argue that NAFTA has been beneficial to business owners and elites in all three countries. Critics also argue that NAFTA has contributed to the rising levels of inequality in both the U. which has seen its poverty rates fall and real income rise (in the form of lower prices. were removed by January 1. were incorporated into the NAFTA. EU The European Union (EU) is a political and economic union of 27 member states. and negative impacts on U. especially food). all tariffs affecting agricultural trade between the United States and Canada. and Mexico. Under these provisions.S. 10. which may also have affected employment levels in these industries. U. workers in manufacturing and assembly industries who lost jobs.S. Mexico and Canada reached a separate bilateral NAFTA agreement on market access for agricultural products. but has had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from U. have been quantified by several economists. with a few exceptions for items covered by tariff-rate quotas. The automotive. even after accounting for the 1994–1995 economic crisis.8 trillion in 54 .S.

which introduced a single currency. OBJECTIVES OF THE EU Its principal goal is to promote and expand cooperation among members’ states in economics. services and factors of production. and abuse of monopoly. services and capital. Services: Any member nation has a right to provide services in other Member States. social issues. The union designed this strategy to prevent price fixing. has a number of policies designed to assist the functioning of the market. Capital: There are no restrictions on the movement of capital and on payments with the EU and between member states and third countries. Fifteen member states have adopted a common currency. foreign policies. security. The EU. It maintains a common trade policy. 55 . and judicial matters. The EU has developed a single market through a standardised system of laws which apply in all member states. defense. the Euro for the EU members. goods. which allows for free movement of goods. Another major goal of the EU is to implement the Economic and Monetary Union. Thus EU presents an enormous export and investor market that is both mature and sophisticated. trade. guaranteeing the freedom of movement of people. 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. the euro. The single market refers to the creation of a fully integrated market within the EU. collusion (secret agreement). in conjunction with Member States. Some of the policies are given below: Competition Policy: The main competition lied in energy and transport sector.INTERNATIONAL BUSINESS 2007).

with further expansion to be seen.6 billion euros ($36. Over the years.6 billion euros last year.2008 at the EU-India summit in Marseille. to expand their cooperation in the fields of nuclear energy and environmental protection and deepen their strategic partnership.7 billion) in 2000 to 55. but compared to International standards they are still high. it accounts for 26% of India’s exports and 25% of its imports.4 bn US$. • Trade between India and the 27-nation EU has more than doubled from 25.4 bn to 28. It is a major contributor of developmental aid and an important source of technology. Top items of trade between India and EU India’s exports to EU Textile and clothing % 35 India’s Imports from EU Gemstones and jewellery Power generating equipment Chemical products Office machinery Transport equipment % 31 28 15 10 6 Leather and leather products 25 Gemstones and jewellery Agriculture products Chemical products 12 10 9 • • • • India is EU’s 17th largest supplier and 20th largest destination for exports. France's largest commercial port. The European Union (EU) and India agreed on September 29. The EU is India’s largest trading partner and biggest source of FDI. Tariff and non-tariffs have been reduced. Under the Bilateral trade between India and EU. EU – India trade has grown from 4. ASEAN 56 .INTERNATIONAL BUSINESS TRADE BETWEEN THE EUROPEAN UNION AND INDIA India was one of the first Asian nations to accord recognition to the European Community in 1962.

Singapore. namely. and Cambodia on 30 April 1999. 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. (iii) To maintain close cooperation with the existing international and regional organizations with similar aims. ASEAN developed a Common Effective Preferential Tariffs (CEPT) plan to reduce tariffs systematically for manufactured and processed products. WORKING OF ASEAN The member countries of ASEAN have Preferential Trading Arrangements (PTA). agricultural and technical development projects and to increase foreign investments in their economies. the ASEAN Industrial Joint Ventures Programme (AJIV) etc. Laos and . Vietnam on 28 July 1995. Philippines. Malaysia. These efforts include an ASEAN finance corporation. social progress and cultural development in the region through joint endeavors. ASEAN nations have introduced some programmes for greater diversification in their economies. Myanmar on 23 July 1997. 57 Brunei Darussalam joined on 8 January 1984. Indonesia. The members have also established a series of co-operative efforts to encourage joint participation in industrial.INTERNATIONAL BUSINESS The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in Bangkok by the five original Member Countries. In 1992. and Thailand. which reduces tariffs on products traded among member countries. OBJECTIVES The ASEAN Declaration states that the aims and purposes of the Association are: (i) (ii) To accelerate the economic growth.

but the IMF expects world growth to slow to 3 percent in 2009 . science and technology and training of personnel. Three major European economies (Italy. and forecasts 58 . India’s trade with ASEAN countries is satisfactory in recent years. Also. as these countries are closer to India. Slower global growth: Global growth stood at 5 percent in 2007. Economic contraction in some countries : In G7 countries except for the United States and Canada.INTERNATIONAL BUSINESS INDIA AND ASEAN India is interested in maintaining close economic relations with the members of ASEAN. GDP growth was slower in Q2 of 2008 compared to Q1. France and Germany) experienced negative GDP growth in Q2. investment. EFFECT OF CURRENT ECONOMIC MELTDOWN ON INTERNATIONAL BUSINESS 1. The ASEAN countries are offering co-operation to India in the field of trade. 2.9 percentage points lower than forecasted in July 2008.0.

Even administrative costs may be difficult to come by.7 percent in 2008 to 6. something no government could ever guarantee. Financing challenges for governments: State and local governments may be faced with financial crisis. as “the most poor are the most defenseless. at least not on a short-term basis. The IMF forecasts around 0 percent growth for advanced economies in 2009. Rising unemployment: According to IMF. the world trade will grow only at the rate of 1. There is a risk that lowincome countries and lower-income groups within countries will bear the brunt of challenges. real estate services will experience disproportionate employment declines.” says World Bank President Robert Zoellick. Depth of slowdown: It is observed that economic slowdowns.5 percent in 2009. preceded by financial stress tend to be more severe. as well as capital inflow. Large employment losses in sectors : Some sectors like construction. In addition there will be significant job losses in the financial sector. it has not been as severe as that during 1990-91. 4. may trigger a falloff in investments. the investment and retirement savings of many individuals have lost significant value. unemployment in the advanced economies will rise from 5. A drop in exports.g. For e. 7. Reduced world trade volume: According to the IMF.9% as against the earlier estimate of 4. 3. In the case of Iceland the banking sector has assets of around 300% of GDP.INTERNATIONAL BUSINESS are for a continued decline in Q3. The governments would be hard pressed for funds for guarantees and development work. 8.1% for 2009. 5. 59 . Although employment has contracted in several countries in recent months. 6. Rising income insecurity and disproportionate impact on lowincome 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.

For e. BPO Operations: India is likely to face a severe crunch on the IT and DISCUSS SWAPS.g. President-elect Barrack Obama has already announced his intention to reduce outsourcing from US by 30%. AIG and Citibank 12. d. Airlines. This might start a local business environment. OPTIONS. FUTURES SWAPS 60 .INTERNATIONAL BUSINESS 9. rendered by Indian BPO Companies. India’s trade deficit has grown where exports are not meeting the set targets while imports continue to grow. 50 a dollar. Surplus Production Capacities: In line with demand destruction.g.g. The rupee has already depreciated to Rs. and Telecommunication etc. Falling Currency: as the demand for dollars increases the Indian rupee is likely to weaken. 10. b. For e. Pressure on Services Sector: As the demand for services is destroyed. a. Car. Increase in Government Controls: In order to bail out sinking Corporates the governments. many branded products may face surplus capacities. Increase in Trade Deficit: Already in the last quarter. would buy out or control the operations of large companies. 11. Impact on India: 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. will face salary and employment cutbacks. c. Steel & Aircrafts manufacturers are already staring at excess capacity. For e. these sunshine industries such as BPOs.

futures market. currency swaps. credit swaps. are: interest rate swaps. traded on a futures exchange. Consequently. c) A futures contract gives the holder the obligation to make or take delivery under the terms of the contract. to buy or sell a standardized quantity of a specified commodity of standardized quality at a certain date in the future. the Chicago Board Options Exchange and Frankfurt-based Eurex AG. "tailor-made" for the counterparties. the largest U. Some types of swaps are also exchanged on futures markets such as the Chicago Mercantile Exchange Holdings Inc. since counterparties can earn the profit or loss from movements in price without having to post the notional amount in cash or collateral. d) Most swaps are traded over-the-counter (OTC). 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.. 61 . These streams are called the legs of the swap.INTERNATIONAL BUSINESS a) A swap is a derivative in which two counterparties agree to exchange one stream of cash flows against another stream. or to speculate on changes in the underlying prices. 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. b) The cash flows are calculated over a notional principal amount. e) The five generic types of swaps.S. swaps can be used to create unfunded exposures to an underlying asset. commodity swaps and equity swaps. b) The future date is called the delivery date or final settlement date. in order of their quantitative importance. which is usually not exchanged between counterparties. FUTURES a) A futures contract is a standardized contract. c) Swaps can be used to hedge certain risks such as interest rate risk.

a futures contract. which are developed by quantitative analysts. such as a piece of property.INTERNATIONAL BUSINESS d) Both parties of a "futures contract" must fulfill the contract on the settlement date. then cash is transferred from the futures trader who sustained a loss to the one who made a profit. attempt to predict how the value of the option will change in response to changing conditions. 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. In return for granting the option. effectively closing out the futures position and its contract obligations. the seller collects a payment (the premium) from the buyer. sets margin requirements. b) For example. while buying a put option provides the right to sell. are exchange traded derivatives. c) The theoretical value of an option can be evaluated according to several models. Hence. than with some other investments. owning. 62 . the party who sold. The exchange's clearinghouse acts as counterparty on all contracts. or simply futures. The seller delivers the underlying asset to the buyer. among others. Upon the option holder's choice to exercise the option. the risks associated with granting. if it is a cash-settled futures contract. or wrote. These models. or trading options may be quantified and managed with a greater degree of precision. To exit the commitment prior to the settlement date. perhaps. such as. or shares of stock or some other underlying security. e) Futures contracts. or. 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. the option must fulfill the terms of the contract. 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.

training and developing and motivating the personnel. economic systems. recruiting. e) d) Another important class of options. INTERNATIONAL HUMAN RESOURCE MANAGEMENT • International the human resource management needs. • “The strategic role of HRM is complex enough in a purely domestic firm.S. for example real estate options are often used to assemble large parcels of land. facilitating trading among independent parties. but it is more complex in an international business. and compensation activities are complicated by profound differences between countries in labour markets. are employee stock options. Over-the-counter options are traded between private parties. management development.. but it is equally important that they fit in to the organizational 63 . culture. staffing organizational strategy. (HRM) involves the ascertaining the corporate strategy of the company and assessing corresponding human and resource determining recruitment. 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. inducting. where staffing.” • It is not enough that the people recruited fit the skill requirement. particularly in the U.INTERNATIONAL BUSINESS Exchange-traded options form an important class of options which have standardized contract features and trade on public exchanges. putting in place the performance appraisal and compensation plans and industrial relations strategy and the effective management of all these. and prepayment options are usually included in mortgage loans. performance evaluation. and the like. legal systems. often well-capitalized institutions that have negotiated separate trading and clearing arrangements with each other.

FACTORS AFFECTING INTERNATIONAL HRM The following are some of the important factors. Thailand and China. many developing countries have abundance of skilled and scientific manpower as well as unskilled and semiskilled labour. many countries have abundance. 64 . the demand and supply conditions and the behaviour characteristics of labour vary widely between countries. • This changing trend is incasing significant shift of location of business activities. Today. today sophisticated activities also find favour with developing countries. which make international HRM complex and challenging: DIFFERENCES IN LABOUR MARKET CHARACTERISTICS • The skill levels. The changing quality attributes of human resources in the developing countries and wage differentials are causing a location shift in business activities. developing countries were regarded. resulting in new trends in the global supply chain management. as pools of unskilled labour.INTERNATIONAL BUSINESS culture and the demand of the diverse environments in which the organization functions. • In the past. Hard disk drive manufacturers are reported to be shifting their production base from Singapore to cheaper locations like Malaysia. however. • While in the past unskilled and semiskilled labour intensive activities tended • to be located in the developing countries. While some countries experience human resource shortage in certain sectors. generally.

This makes delivering and organisational restructuring difficult. the social environment. DIFFERENCES IN REGULATORY ENVIRONMENT • A firm operating in different countries is confronted with different environments with respect to government policies and regulations regarding labour. loyalty. so and so but in countries like India addressing the boss by name would not be welcome. which affect industrial relations. CULTURAL DIFFERENCES • • Cultural differences cause a great challenge to HRM. productivity etc. And this causes a great challenge for strategic HRM. outlooks etc. In some countries 65 . values. Cultural factors are very relevant in inter personal behaviour also. In short. The behavioural attitude of workers.INTERNATIONAL BUSINESS • • India is reported to be emerging as a global R&D hub. the labour changing labour market characteristics have been causing global restructuring of business processes and industries.. • In countries like India people attach great value to designations and hierarchical levels. • There are also significant differences in aspects related to labour mobility. beliefs. • In some countries it is common to address the boss Mr. India and several other developing countries are large sources of IT personnel. • The attitude of employers and employees towards employment of people show great variations is different nations. are important factors.

CASE STUDY: ORGANIZATIONAL CHANGE AT UNILEVER Unilever is a very old multinational with worldwide operations in the detergent and food industries. there are several conditions of employment the differences of which cause significant challenge to international HRM. is changing in many countries. vary significantly between countries. they had a right to lifetime employment in the organisation they were employed with. with each subsidiary carrying out the full range of value cre66 .INTERNATIONAL BUSINESS hire and fire is the common thing whereas in a number of countries the ideal norm has been lifetime employment.. • In such situations it is very difficult to get rid of inefficient or surplus manpower. The situation. A subsidiary was set up in each major national market and allowed to operate largely autonomously. • In countries like India workers generally felt that while they. promotion. Unilever managed its worldwide detergents activities in an arm's-length manner. incentives and motivation. however. as they preferred. system of labour welfare and social security etc. including India. • The system of rewards. have the right to change organisations. DIFFERENCE IN CONDITIONS OF EMPLOYMENT • Besides the tenancy of employment. For decades.

with detergent production for the European market concentrated in a few key locations. repeatedly stole the lead in bringing new products to market. As a consequence of these changes. to innovate.INTERNATIONAL BUSINESS ation activities. Unilever was handicapped by a high-cost structure from the duplication of manufacturing facilities from country to country and by the company's inability to enjoy the same kind of scale economies as P&G. Unilever estimates it may save as much as $400 million a year in its European . In the 1990s. Within Unilever. and R&D. By taking operations. "persuading" the 17 European operations to adopt new products could take four to five years. Unilever's high costs ruled out its use of competitive pricing. manufacturing is now being rationalized. and some new products will be manufactured at only one site. Procter & Gamble. Product sizing and packaging are being harmonized to cut purchasing costs and to pave the way for unified pan-European" advertising. marketing. Implicit in this new approach is a bargain: The 17 companies are relinquishing autonomy in their traditional markets in exchange for opportunities to help develop and execute a unified panEuropean strategy. The company had 17 autonomous national operations in Europe alone by the mid-1980s. 67 these steps. To change this situation. including manufacturing. The point was driven home in the 1980s when the company's archrival. The 17 European companies now report directly to Lever Europe. and to respond quickly to changing market trends. Unilever established product divisions to coordinate regional operations. In addition. The number of European plants manufacturing soap has been cut from 10 to 2. Unilever began to transform its worldwide detergents activities from a loose confederation into a tightly managed business with a global strategy. The shift was prompted by Unilever's realization that its traditional way of doing business was no longer effective in an arena where it had become essential to realize substantial cost economies.

Procter & Gamble's leading laundry detergent carries the same brand name across Europe. it believes it would be foolish to scrap them in the interest of pan-European standardization. on December 15 & 16. http://www. but Unilever sells its product under a variety of names. But history still imposes constraints. The inaugural meeting of the G-20 took place in Berlin.INTERNATIONAL BUSINESS Lever Europe is attempting to speed its development of new products and to synchronize the launch of new products throughout Europe. Having spent 100 years building these brand names. MANDATE 68 . hosted by German and Canadian finance ministers. 1999. The company has no plans to change this.com a year later—a distinct G20 WHAT IS THE G-20 The Group of Twenty (G-20) Finance Ministers and Central Bank Governors was established in 1999 to bring together systemically important industrialized and developing economies to discuss key issues in the global economy. Its efforts seem to be paying off: A dishwasher detergent introduced in Germany in the early 1990s was available across Europe improvement.unilever.

and international financial institutions. • The proposals made by the G-22 and the G-33 to reduce the world economy's susceptibility to crises showed the potential benefits of a regular international consultative forum embracing the emergingmarket countries. international co-operation.INTERNATIONAL BUSINESS The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. • Such a regular dialogue with a constant set of partners was institutionalized by the creation of the G-20 in 1999. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies. MEMBERSHIP The G-20 is made up of the finance ministers and central bank governors of 19 countries: • • Argentina Australia 69 . ORIGINS • The G-20 was created as a response both to the financial crises of the late 1990s and to a growing recognition that key emergingmarket countries were not adequately included in the core of global economic discussion and governance. the G-20 helps to support growth and development across the globe.

INTERNATIONAL BUSINESS • • • • • • • • • • • • • • • • • • Brazil Canada China France Germany India Indonesia Italy Japan Mexico Russia Saudi Arabia South Africa South Korea Turkey United Kingdom United States of America The European Union. who is represented by the rotating Council presidency and the European Central Bank. the Managing Director of the International Monetary Fund (IMF) and the 70 . • To ensure global economic for a and institutions work together. is the 20th member of the G-20.

The G-20 also plays a signficant role in matters concerned with the reform of the international financial architecture. plus the chairs of the International Monetary and Financial Committee and Development Committee of the IMF and World Bank. also participate in G-20 meetings on an exofficio basis. dealing with financial crises and combating terrorist financing.INTERNATIONAL BUSINESS President of the World Bank. • The G-20's economic weight and broad membership gives it a high degree of legitimacy and influence over the management of the global economy and financial system. • The G-20 thus brings together important industrial and emergingmarket countries from all regions of the world. 80 per cent of world trade (including EU intra-trade) as well as two-thirds of the world's population. • The G-20 also aims to foster the adoption of internationally recognized standards through the example set by its members in areas such as the transparency of fiscal policy and combating money laundering and the financing of terrorism. This aims to combat abuses of the financial system and illicit activities including tax evasion. including agreement about policies for growth. G-20 countries committed to new higher standards of transparency and exchange of information on tax matters. member countries represent around 90 per cent of global gross national product. • In 2004. Together. ACHIEVEMENTS • The G-20 has progressed a range of issues since 1999. 71 . reducing abuse of the financial system.

• The participation of the President of the World Bank. • The G-20 also works with. INTERACTION WITH OTHER INTERNATIONAL ORGANIZATIONS • The G-20 cooperates closely with various other major international organizations and for a. • This technical work takes the form of workshops. as the potential to develop common positions on complex issues among G-20 members can add political momentum to decision-making in other bodies.INTERNATIONAL BUSINESS • The G-20 has also aimed to develop a common view among members on issues related to further development of the global economic and financial system and held an extraordinary meeting in the margins of the 2008 IMF and World Bank annual meetings in recognition of the current economic situation. and encourages. that aim to provide ministers and governors with contemporary analysis and insights. such as the Financial Stability Forum. in progressing international and domestic economic policy reforms. MEETINGS AND ACTIVITIES • It is normal practice for the G-20 finance ministers and central bank governors to meet once a year. other international groups and organizations. the Managing Director of the IMF and the chairs of the International Monetary and Financial Committee and the Development Committee in the G-20 meetings ensures that the G-20 process is well integrated with the activities of the Bretton Woods Institutions. reports and case studies on specific subjects. • The ministers' and governors' meeting is usually preceded by two deputies' meetings and extensive technical work. to better inform their consideration of policy challenges and options. In 72 .

• Although participation in the meetings is reserved for members. the G-20 publishes a communiqué which records the agreements reached and measures outlined. 73 . Material on the forward work program is also made public. is informed about what was discussed and agreed immediately after the meeting of ministers and governors has • After each meeting of ministers and governors.INTERNATIONAL BUSINESS addition. the public ended. EXTERNAL COMMUNICATION • The country currently chairing the G-20 posts details of the group's meetings and work program on a dedicated website. experts from private-sector institutions and non- government organisations are invited to G-20 meetings on an ad hoc basis in order to exploit synergies in analyzing selected topics and avoid overlap.