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MBA IV SEM- Assignment – International Business Management -MB0037

Assignment Set- 2.

Name : AJAY KUMAR
Roll No : 510932435
Learning centre : ACIIT INSTITUTE,LUDHIANA (01788)
Subject : International Business Management
Assignment Number : MBA – IV SEM/MB0037/Set 2
Date of Submission :
at the Learning Centre

AJAY KUAMR (510932435) Page 1 of 24 MB0037

MBA IV SEM- Assignment – International Business Management -MB0037
Assignment Set- 2.

Q.1 Evaluate the monetary system and currency markets in international business
management.
Ans:

The IMF is an international organization of 185 member countries. It was established to promote international
monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and
high levels of employment; and to provide temporary financial assistance to countries to help ease balance of
payments adjustment.

The race to transform centrally planned economies into market economies has led, ten years later, to one
group of countries approaching the finish line, others languishing at various points along the track, and a few
barely off the starting blocks. Some Central and Eastern European economies (CEE) and the Baltics are
knocking on the doors of the European Union. But in many economies in the Commonwealth of Independent
States (CIS), including Russia, there has been uneven progress and prospects remain murky. (See Box 1 for
the classification of transition economies used in this brief.)

Box 1 Classification of transition economies
Transition economies in Europe and the former Soviet Union
CEE
Albania, Bulgaria, Croatia, Czech Republic, FYR Macedonia, Hungary, Poland, Romania, Slovak Republic,
Slovenia
BALTICS
Estonia, Latvia, Lithuania
CIS
Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Russia, Tajikistan,
Turkmenistan, Ukraine, Uzbekistan
Transition economies in Asia
Cambodia, China, Laos, Vietnam

The main ingredients of the transition process were agreed upon fairly early. They were:

· Liberalization: the process of allowing most prices to be determined in free markets and lowering trade
barriers that had shut off contact with the price structure of the world’s market economies.

· Macroeconomic stabilization: primarily the process through which inflation is brought under control and
lowered over time, after the initial burst of high inflation that follows from liberalization and the release of
pent-up demand.

· Restructuring and privatization: the processes of creating a viable financial sector and reforming the
enterprises in these economies to render them capable of producing goods that could be sold in free markets
and of transferring their ownership into private hands.

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the European Union. modernize antiquated machinery. But. and introduce appropriate competition policies. it was difficult. despite the economic hardship they might impose. The pent-up demand that had built up during the period of central planning sustained the inflation. and provide financing for emerging firms. enhance public infrastructure. establish the rule of law. most economists agreed that. Early in the transition inflation averaged 450 percent a year in CEE. and individual countries CHART OF CAPITAL FIGHT IN TRANSTION ECONOMICS AJAY KUAMR (510932435) Page 3 of 24 MB0037 . nearly 900 percent in the Baltics and over 1000 percent in the CIS. liberalization and macroeconomic stabilization should proceed quickly. for governments in these countries to raise the requisite capital. to get market price mechanisms working. · Legal and institutional reforms: These are needed to redefine the role of the state in these economies. Rather. annual inflation had been lowered to the single digits in the first two groups and around 30 percent in the third. however. MBA IV SEM. external assistance on a much smaller scale was provided primarily by the international financial institutions. The transition thus started in most economies with prices being rapidly liberated from artificially low levels. Capital Flows The move to a market economy required substantial amounts of finance to facilitate the reallocation of investment into productive sectors.Assignment – International Business Management -MB0037 Assignment Set. A `Marshall Plan’ for the transition economies never materialized. The view was that the hardship would be temporary and less severe than if the process were dragged out over time. At the start of the transition.2. By 1998. which led to an immediate burst of corrective inflation. in the initial years of transition.

the yen. may also continue to maintain market-determined floating rates. This variety of exchange rate regimes exists in an environment with the following characteristics: · partly for efficiency reasons. and employment. · international private capital flows finance substantial current account imbalances. The growth of international capital flows and globalization of financial markets has also been spurred by the revolution in telecommunications and information technology. Exchange Rate Markets and Currency Markets The exchange rate regimes adopted by countries in today’s international monetary and financial system. in terms of both their trade in goods and services and of financial transactions. and schemes to reduce volatility are neither likely to be adopted. Thus.2. output. with their repercussions on trade flows.Assignment – International Business Management -MB0037 Assignment Set. and also because of the limited effectiveness of capital controls. industrial countries have generally abandoned such controls and emerging market economies have gradually moved away from them. and developing and transition economies. Many medium-sized industrial countries. but the changes in these flows appear also sometimes to be a cause of macroeconomic disturbances or an important channel through which they are transmitted to the international system. in an environment of increasing capital market integration. prospects are that: · exchange rates among the euro. AJAY KUAMR (510932435) Page 4 of 24 MB0037 . In the Bretton Woods system: · exchange rates were fixed but adjustable. and the dollar are likely to continue to exhibit volatility. while permitting enough flexibility to adjust to fundamental disequilibrium under international supervision. MBA IV SEM. and the system itself. · temporary official financing of payments imbalances. Flexible exchange rates among the major industrial country currencies seem likely to remain a key feature of the system. nor to be desirable as they prevent monetary policy from being devoted consistently to domestic stabilization objectives. but the European Central Bank has a clear mandate to focus monetary policy on the domestic objective of price stability rather than on the exchange rate. · developing and transition countries have been increasingly drawn into the integrating world economy. are profoundly different from those envisaged at the 1944 meeting at Bretton Woods establishing the IMF and the World Bank. although more countries could may adopt harder pegs over the longer term. and widespread use of controls would prevent instability in such flows. The launch of the euro in January 1999 marked a new phase in the evolution of the system. mainly through the IMF. would smooth the adjustment process and avoid unduly sharp correction of current account imbalances. which has dramatically lowered transaction costs in financial markets and further promoted the liberalization and deregulation of international financial transactions. This system aimed both to avoid the undue volatility thought to characterize floating exchange rates and to prevent competitive depreciations. · private capital flows were expected to play only a limited role in financing payments imbalances.

and their subsequent depreciations. They range from advocacy of pure floating. Intermediate proposals include target zones. · medium-term swings have been quite large. In the absence of the type of political commitment that accompanied the euro’s introduction. the Japanese yen. the fact that movements of exchange rates among the major currencies have.2.S. Exchange Rate Regimes for Major Currencies Over the past two decades.Assignment – International Business Management -MB0037 Assignment Set. There are two basic objections under current circumstances to any scheme that would attempt to achieve substantial fixity of exchange rates among the euro. how. and various schemes for policy coordination that would take the exchange rate into account. · several of the transition countries of central and eastern Europe. a quasi-fixed exchange rate regime among the major currencies to be achieved by monetary policy rules aimed at the exchange rate. dollar. to proposals for the introduction of a single world currency. and dollar: · the first is that it would require largely devoting monetary policy to the requirements of exchange rate stability. and the deutsche mark with its partner currencies in the exchange rate mechanism of the European Monetary System. or at least moderated. The past decade has highlighted their lack of synchronization in economic activity and there is no reason to believe that differences across them would not continue to prevail in the future. a view espoused especially by those who believe that exchange rates always reflect fundamentals and that governments and central banks do not possess knowledge superior to that of the market in such matters. on many occasions. reflected divergences in cyclical positions among the countries concerned and in the stances of monetary policy needed to achieve price stability and to support growth indicates that this concern is warranted. · these wide swings in exchange rates have entailed misalignments relative to economic fundamentals. and to what extent it might be desirable to attempt to stabilize the exchange rates of major industrial countries differ widely. which is likely to conflict with domestic objectives. including the 1980–85 appreciation of the dollar and the 1990– 95 appreciation of the yen. especially those preparing for membership in the European Union. the three major-currency areas do not conform to the usual criteria for an optimum currency area. MBA IV SEM. · second. AJAY KUAMR (510932435) Page 5 of 24 MB0037 . giving rise to questions of whether and how they can be avoided. exchange rates among the major currencies – the U. including the objective of reasonable price stability. yen. Indeed. in nominal as well as real terms and also significant medium-term misalignments: · volatility has been considerably higher than it was under the Bretton Woods system prevailing from 1945 to 1971. are likely to seek to establish over time the policy disciplines and institutional structures required to make possible the eventual adoption of the euro. any attempt at fixing the exchange rates of the triplet could lack credibility and be rapidly undone by the market. Views on whether. before the introduction of the euro in January 1999 – and the currencies of other large industrial countries currencies have exhibited substantial short-term volatility.

This is not surprising in view of the wide differences among these countries in economic and financial circumstances.Assignment – International Business Management -MB0037 Assignment Set. many developing economies now trade with a wider range of partner countries. The ERM then operated relatively smoothly during the years leading to the advent of the euro and the formation of European Monetary Union in 1999. there has been a shift toward greater flexibility. however. Subsequently. from very hard currency pegs to relatively free floats and with many variations in between. The system came under severe strain during 1992-93. AJAY KUAMR (510932435) Page 6 of 24 MB0037 . contributed to the relatively smooth functioning of the ERM system in the 1980s. most notably in the exchange rate mechanism (ERM) of the European Monetary System. which removed the risk of exchange rate crises within Europe and vindicated efforts to achieve convergence. The following conditions are likely to favour the adoption by a country of some form of pegged exchange rate regime: · its degree of involvement with international capital markets is low. · it is willing to give up monetary independence for its partner’s monetary credibility.2. the system became subject to the major "asymmetric shocks" associated with German unification. when speculative pressures led to the withdrawal of Italy and the United Kingdom. as these countries have adapted to expanding opportunities arising from deeper involvement in an increasingly integrated global economy and to changes in their own economic situations. Exchange Rate Arrangements of Developing and Transition Countries There is considerable diversity in the exchange rate regimes of developing and transition countries. However. · the economic shocks it faces are similar to those facing the country to whose currency a peg is being considered. The presence of some residual restrictions on international capital movements. and became more vulnerable owing to increasing capital mobility and the hardening of exchange rate parities following the negotiation of the 1991 Maastricht Treaty on political and monetary union. Nevertheless. increasing the potential for large and sudden reversals in net flows that would make pegged rates more difficult to maintain. · its share of trade with the country to whose currency a peg is being considered is high. for the following reasons: · gross capital flows to developing countries have risen considerably since the early 1980s. MBA IV SEM. Exchange Rate Regimes of Medium – Sized Industrial Countries Pegged exchange rate regimes have been extensively used over the past quarter century by medium-sized industrial countries. as well as the willingness to make parity adjustments before disequilibria became too large. · consistent with the trend toward globalization. Countries with single-currency pegs are exposed to the wide fluctuations among major currencies. a case can be made for monitoring potential major misalignments within the IMF’s surveillance process and for occasional corrective measures.

by not operating in the country. · Contract manufacturing involves having someone else manufacture products while you take on some of the marketing efforts yourself. but it may be more difficult for the firm to enter on its own later if it decides that larger profits can be made within the country.Assignment – International Business Management -MB0037 Assignment Set. This saves investment.2. learns less about the market (What do consumers really want? Which kinds of advertising campaigns are most successful? What are the most effective methods of distribution?) If an importer is willing to do a good job of marketing. the firm. which differ in aggressiveness. risk.2 a) Mention the different entry strategies to enter international markets. there is generally little point in incurring the costs of attempting to run an independent monetary policy. · fiscal policy is flexible and sustainable. A drawback is that. For example. MBA IV SEM. market share may be below potential. Problems here involve the fact that you are training a potential competitor and that you have little control over how the business is operated. · because of high inherited inflation. but again you may be training a competitor. because the firm makes few if any marketing investments in the new country. Several strategies. are available: · Exporting is a relatively low risk strategy in which few investments are made in the new country. · Licensing and franchising are also low exposure methods of entry – you allow someone else to use your trademarks and accumulated expertise. Q. products just don’t emerge in foreign markets overnight – a firm has to build up a market over time. Your partner puts up the money and assumes the risk. and the CFA franc zone countries. a foreign manufacturer may use lower quality ingredients in manufacturing a brand based on premium contents in the home country. Ans: a) Entry Strategies Methods of entry With rare exceptions. American fast food restaurants have found that foreign franchisees often fail to maintain American standards of cleanliness. and the amount of control that the firm is able to maintain. · labour markets are flexible. including small Caribbean and Pacific island economies. For such countries. AJAY KUAMR (510932435) Page 7 of 24 MB0037 . this arrangement may represent a "win-win" situation. Further. · it has high international reserves. · its economy and financial system already extensively rely on its partner’s currency. When these criteria are applied. one group of countries for which pegged exchange rates would seem to remain sensible are small economies with a dominant trading partner that pursues a reasonably stable monetary policy. exchange–rate–based stabilization is attractive. Similarly.

The firm gains more knowledge about the local market and maintains greater control. evidenced by the high market capitalization of firms involved in this kind of business. MBA IV SEM. Q2. sales over the Internet account for only a small portion of sales – especially outside the U. there are legal problems.g. fines for those caught through random checks can be severe. 25% in Denmark and 16% in Germany). which can be prohibitive (e. While the Clinton Administration has sought to get the WTO to go along with a three year tax "moratorium" on Internet purchases much like the one observed in the U.Assignment – International Business Management -MB0037 Assignment Set. however. 2. Some firms will ship to customers in neighbouring countries without collecting sales taxes or duties. Yet. Locus of the site AJAY KUAMR (510932435) Page 8 of 24 MB0037 . Growth rates have been considerable over the last two years and are expected to persist. have considerably greater staying power. "Glitches" in online ordering systems may also frustrate consumers. Currently. Obstacles to diffusion Obstacles to the diffusion of Internet trade come both from enduring sources and temporary roadblocks which may be overcome as consumer attitudes change and technology is improved. Further. but also the greatest opportunities for profits. · Direct entry strategies. the maintenance of databases.2. Internet connections are slower than desired so that downloading pictures and other information may take longer than consumers are willing to wait. Further. Although most consumers who order and do not arrange to pay for these taxes get away with it. shipping small packages across countries may be inefficient due to high local postage rates and inefficiencies in customs processing.. and registering domain names in some countries is difficult. b) How has E-commerce helped in international marketing? Ans.S. with the responsibility of paying falling on the consumer. Other obstacles may. In some countries. A variation involves a joint venture. strong opposition is expected. The lack of non- English language sites in some areas may also be off-putting to consumers. 3.. A great attraction of e-commerce in Europe is that people may order from other countries and thus evade local sales taxes. Most of these obstacles may be overcome within next few years.S. so direct investment entails an additional risk. may conflict with the privacy rules of some countries – this is currently a hot issue of contention between the United States and the European Union. Prospects for electronic commerce Electronic commerce – usually in the form of sales. at least to some extent. promotion. b) Electronic Commerce 1. there are issues of taxation and collection. where a local firm puts up some of the money and knowledge about the local market. but now has a huge investment. First. it should be recognized that so far. or support through the Internet – is a hot topic at the moment. for at least the next several years. who are unable to place their orders at a given time or have difficulty navigating through a malfunctioning site. which are essential to delivering on the promises of e-commerce. the government may expropriate assets without compensation. Finally. where the firm either acquires a firm or builds operations "from scratch" involve the highest exposure. as several different countries may seek to impose their jurisdiction on advertising and laws of product assortment and business practices.

a schedule of costs for services supplied or to be supplied. Letter of Credit is abbreviated as an LC or L/C. some British users are put off by American English).S. and ". in electronic commerce. ". Some firms have experienced problems getting their banks to accept credit card charges in more than one currency. air and sea. Once the beneficiary or a presenting bank acting on its behalf.") 4. and the terms for transporting the shipment to its final destination. In some cases.. Ans: a) BILL OF LADING A Bill of Lading is a type of document that is used to acknowledge the receipt of a shipment of goods and is an essential document in transporting goods overland to the exporter’s international carrier. Further. documentary letter of credit. rail. the fact that consumers in most countries have to pay a per minute phone charge discourages the essential casual and relaxed browsing common in the U. Note that some confusion exists since many sites outside the U. through. based on current exchange rates. some factors which cause most countries run behind. ocean. others.au" for Australia). confirmed.se" for Sweden. although the charge could be off "by a few pennies. Inland. and even in European countries with high penetration rates. or simply as credit (as in the UCP 500 and UCP 600). have unique sites for each country. LETTER OF CREDIT A letter of credit is a document issued mostly by a financial institution which usually provides an irrevocable payment undertaking (it can also be revocable. maintain the ". their intended destination. Internet access penetration rates are lower than they are in the U. such as inadequate adaptation (for example. abbreviated as DC or D/C. The term derives from the noun "bill". so long as unlimited cable or hardwired access is not offered.3 a) Explain Bill of Lading and Letters of credit. however. makes a presentation AJAY KUAMR (510932435) Page 9 of 24 MB0037 . credit card penetration is lower. in contrast. a Bill of Lading indicates the particular vessel on which the goods have been placed. and airway bill are the names given to bills of lading. There are.2. with reference only to local sales or support offices. Q. In addition to acknowledging the receipt of goods. ".Assignment – International Business Management -MB0037 Assignment Set.S. transferable or others e. Some firms have chosen to maintain a global site. MBA IV SEM.de" for Germany. Even in Europe. and from the verb "to lade" which means to load a cargo onto a ship or other form of transport.g. In some countries. back to back: revolving but is most commonly irrevocable/confirmed) to a beneficiary against complying documents as stated in the credit. and often is referred to as a documentary credit.g. suggesting that lack of success among American retailers may have other origins. global sites will hyperlink surfers to a country or region relevant to the site. and thus it may be difficult to indicate precise prices in more than one denomination (one site based in Britain offered its American customers to be as accurate as possible. but some sources dispute this. unconfirmed.com" designation rather than their countries’ respective suffix (e..S. and the slower speed associated with downloading Asian characters is discouraging.S. consumers are reluctant to use them. Lifecycle stages across the World It has been suggested that Europe runs some five years behind the U. A through Bill of Lading involves the use of at least two different modes of transport from road.

authorizing another bank. on behalf of one of its customers. if any. The issuing bank. whereas the standby letter of credit is a secondary payment mechanism. comprising documents complying with the terms and conditions of the LC. within the expiry date of the LC. Commercial Letter of Credit Commercial letters of credit have been used for centuries to facilitate payment in international trade. for the purpose of facilitating trade. is obliged to honour irrespective of any instructions from the applicant to the contrary. Domestic collections in the United States are governed by the Uniform Commercial Code. the issuing bank replaces the bank’s customer as the payee. to the issuing bank or confirming bank. Elements of a Letter of Credit · A payment undertaking given by a bank (issuing bank) · On behalf of a buyer (applicant) · To pay a seller (beneficiary) for a given amount of money · On presentation of specified documents representing the supply of goods · Within specified time limits · Documents must conform to terms and conditions set out in the letter of credit · Documents to be presented at a specified place AJAY KUAMR (510932435) Page 10 of 24 MB0037 . Essentially. The issuing bank makes a commitment to honour drawings made under the credit. if any. Their use will continue to increase as the global economy evolves. MBA IV SEM.2. Letters of credit used in international transactions are governed by the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits. In other words. if any. to make payment to the beneficiary. There are basically two types: commercial and standby. The commercial letter of credit is the primary payment mechanism for a transaction. the applicable UCP and international standard banking practice. A commercial letter of credit is a contractual agreement between issuing banks. on the request of its customer. opens the letter of credit. Letters of credit accomplish their purpose by substituting the credit of the bank for that of the customer. the issuing bank or confirming bank. known as the advising or confirming bank. The beneficiary is normally the provider of goods and/or services. Non-banks can also issue letters of credit however parties must balance potential risks.Assignment – International Business Management -MB0037 Assignment Set. the obligation to honour (usually payment) is shifted from the applicant to the issuing bank or confirming bank. The general provisions and definitions of the International Chamber of Commerce are binding on all parties.

Assignment – International Business Management -MB0037 Assignment Set. the letter of credit must include an unconditional promise AJAY KUAMR (510932435) Page 11 of 24 MB0037 . Generally. Letters of credit deal in documents. The advising bank has no other obligation under the letter of credit. The confirming bank is usually the advising bank.2. If the issuing bank does not pay the beneficiary. The confirming bank would not confirm the credit until it evaluated the country and bank where the letter of credit originates. but there are many others. the seller must be paid by the bank. To be negotiable. but also any bank nominated by the beneficiary. Advising Bank An advising bank. If the beneficiary (seller) conforms to the letter of credit. Issuing Bank The issuing bank’s liability to pay and to be reimbursed from its customer becomes absolute upon the completion of the terms and conditions of the letter of credit. Upon requesting demand for payment the beneficiary warrants that all conditions of the agreement have been complied with. not goods. All parties deal in documents and not in goods. the correspondent obligates itself to insure payment under the letter of credit. the advising bank would be responsible for sending the documents to the issuing bank. MBA IV SEM. Letter of Credit Characteristics Negotiability Letters of credit are usually negotiable. usually a foreign correspondent bank of the issuing bank will advise the beneficiary. the bank will pay the seller the amount due and to examine the documents. At the request of the issuing bank. the advising bank is not obligated to pay. a transport document such as a bill of lading or airway bill and an insurance document. Beneficiary The beneficiary is entitled to payment as long as he can provide the documentary evidence required by the letter of credit. and only pay if these documents comply with the terms and conditions set out in the letter of credit. The issuing bank is obligated to pay not only the beneficiary. The issuing bank’s obligation to the buyer is to examine all documents to insure that they meet all the terms and conditions of the credit. the bank is given a reasonable amount of time after receipt of the documents to honour the draft. The issuing banks’ role is to provide a guarantee to the seller that if compliant documents are presented. The issuing bank is not liable for performance of the underlying contract between the customers and beneficiary. Under the provisions of the Uniform Customs and Practice for Documentary Credits. The letter of credit is a distinct and separate transaction from the contract on which it is based. the beneficiary would want to use a local bank to insure that the letter of credit is valid. Negotiable instruments are passed freely from one party to another almost in the same way as money. Typically the documents requested will include a commercial invoice. In addition. Confirming Bank The correspondent bank may confirm the letter of credit for the beneficiary.

The transaction is considered a straight negotiation if the issuing bank’s payment obligation extends only to the beneficiary of the credit. and the draft is honoured. Sight and Time Drafts All letters of credit require the beneficiary to present a draft and specified documents in order to receive payment. The irrevocable letter of credit may not be revoked or amended without the agreement of the issuing bank. If a letter of credit is a straight negotiation it is referenced on its face by "we engage with you" or "available with ourselves". The nominated bank becomes a holder in due course. Under these conditions the promise does not pass to a purchaser of the draft as a holder in due course. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the required documents are presented and the terms and conditions are complied with. MBA IV SEM.Assignment – International Business Management -MB0037 Assignment Set. A holder in due course is treated favourably under the UCC. AJAY KUAMR (510932435) Page 12 of 24 MB0037 . payment will be made. The revocable letter of credit is not a commonly used instrument. Transfer and Assignment The beneficiary has the right to transfer or assign the right to draw. The bank is allowed a reasonable time to review the documents before making payment. in good faith. If a letter of credit is revocable it would be referenced on its face. Revocability Letters of credit may be either revocable or irrevocable. it serves as the advising bank. If a correspondent bank is engaged in a transaction that involves a revocable letter of credit. the letter of credit cannot be revoked. A revocable letter of credit may be revoked or modified for any reason. There are two types of drafts: sight and time. the beneficiary may transfer their rights prior to performance of conditions of the credit. A draft is a written order by which the party creating it. to pay. on demand or at a definite time.2. under a credit only when the credit states that it is transferable or assignable. A revocable letter of credit cannot be confirmed. Credits governed by the Uniform Commercial Code (Domestic) maybe transferred an unlimited number of times. If a letter of credit is irrevocable it is referenced on its face. Under the Uniform Customs Practice for Documentary Credits (International) the credit may be transferred only once. Once the documents have been presented and meet the terms and conditions in the letter of credit. the confirming bank. A sight draft is payable as soon as it is presented for payment. However. even if the credit specifies that it is non- transferable or non-assignable. without notice of any claims against it. It is generally used to provide guidelines for shipment. orders another party to pay money to a third party. at any time by the issuing bank without notification. the holder takes the letter of credit for value. and the beneficiary. A draft is also called a bill of exchange. As a holder in due course.

· If the documents are correct. · Advising or confirming bank examines the documents for compliance with the terms and conditions of the letter of credit. The standby credit is a domestic transaction. A time draft is not payable until the lapse of a particular time period stated on the draft.Waiting until the issuing bank remits. AJAY KUAMR (510932435) Page 13 of 24 MB0037 . The issuing bank is obligated to accept drafts and pay them at maturity. · Buyer applies to his bank for a letter of credit in favour of the seller. Procedures for Using the Tool The following procedures include a flow of events that follow the decision to use a Commercial Letter of Credit. after receiving the documents. The correspondent bank is usually located in the same geographical location as the seller (beneficiary). Standby Letter of Credit The standby letter of credit serves a different function than the commercial letter of credit. The bank is required to accept the draft as soon as the documents comply with credit terms. The seller wants a letter of credit to guarantee payment. issues and forwards the credit to its correspondent bank (advising or confirming). Procedures required to execute a Standby Letter of Credit are less rigorous.Assignment – International Business Management -MB0037 Assignment Set. MBA IV SEM. · Seller (beneficiary) ships the goods. The documentation requirements are also less tedious. A bank will issue a standby letter of credit on behalf of a customer to provide assurances of his ability to perform under the terms of a contract between the beneficiaries. It does not require a correspondent bank (advising or confirming). The standby letter of credit serves as a secondary payment mechanism. The parties involved with the transaction do not expect that the letter of credit will ever be drawn upon. then verifies and develops the documentary requirements to support the letter of credit.2. Documentary requirements may vary greatly depending on the perceived risk involved in dealing with a particular company. · Seller presents the required documents to the advising or confirming bank to be processed for payment. The issuing bank has a reasonable time to examine those documents. .Debiting the account of the issuing bank. The commercial letter of credit is the primary payment mechanism for a transaction. · Advising bank will authenticate the credit and forward the original credit to the seller (beneficiary). Step-by-step process: · Buyer and seller agree to conduct business. · Buyer’s bank approves the credit risk of the buyer. the advising or confirming bank will claim the funds by: .

Indemnification is generally used to guaranty that shipping documents will be provided in good order when available. the most common documents that must accompany the draft include: Commercial Invoice The billing for the goods and services: It includes a description of merchandise. . price. Requirements set forth in the letter of credit cannot be waived or altered by the issuing bank without the express consent of the customer. It is generally issued to the purchaser and issuing bank expressing an agreement to indemnify and hold both parties harmless. This is a method of certifying clear title to product transfer. · Issuing bank will examine the documents for compliance. Commonly found discrepancies between the letter of credit and supporting documents include: · Letter of Credit has expired prior to presentation of draft. A discrepancy is an irregularity in the documents that causes them to be in non-compliance to the letter of credit. the issuing bank must verify that all documents and drafts conform precisely to the terms and conditions of the letter of credit. Unless the letter of credit specifically states otherwise. · Advising or confirming bank will forward the documents to the issuing bank. Letter of Indemnity Specifically indemnifies the purchaser against a certain stated circumstance. Although the credit can require an array of documents. The beneficiary should prepare and examine all documents carefully before presentation to the paying bank to avoid any delay in receipt of payment. FOB origin.2. · Bill of Lading evidences delivery prior to or after the date range stated in the credit. and name and address of buyer and seller. AJAY KUAMR (510932435) Page 14 of 24 MB0037 . the issuing bank will debit the buyer’s account. MBA IV SEM. Warranty of Title A warranty given by a seller to a buyer of goods that states that the title conveyed is good and the transfer is rightful. · Issuing bank then forwards the documents to the buyer. Common Defects in Documentation About half of all drawings presented contain discrepancies.Reimburse on another bank as required in the credit. The buyer and seller information must correspond exactly to the description in the letter of credit. a generic description of the merchandise is usually acceptable in the other accompanying documents. Standard Forms of Documentation When making payment for product on behalf of its customer. If they are in order.Assignment – International Business Management -MB0037 Assignment Set.

quality. · Ports of loading and destination not as specified in the credit.Assignment – International Business Management -MB0037 Assignment Set. · Upon first advice of the letter of credit. the exporter should request that the negotiating bank return the documents for corrections. · Names of documents not exact as described in the credit. When a discrepancy is detected by the negotiating bank. check that all its terms and conditions can be complied with within the prescribed time limits. Beneficiary information must be exact. so you can check for terms or conditions that may cause you problems in compliance. · Invoice amount not equal to draft amount. · Documents are inconsistent as to general information such as volume. · Description of merchandise is not as stated in credit. Tips for Exporters · Communicate with your customers in detail before they apply for letters of credit. If time is not a factor. a correction to the document may be allowed if it can be done quickly while remaining in the control of the bank. · Inconsistent description of goods. · Consider whether a confirmed letter of credit is needed. · Changes included in the invoice not authorized in the credit. · Stale dated documents.2. the exporter should request that the negotiating bank send the documents to the issuing bank on an approval basis or notify the issuing bank by wire. · Ask for a copy of the application to be fax to you. AJAY KUAMR (510932435) Page 15 of 24 MB0037 . If there is not enough time to make corrections. Payment cannot be made until all parties have agreed to jointly waive the discrepancy. · Invoice or statement is not signed as stipulated in the letter of credit. and request authority to pay. etc. · A document required by the credit is not presented. outline the discrepancies. · Insurance document errors. MBA IV SEM.

2. Ans: Segmentation. this may take to complete. the buyer should be requested to amend the credit. In establishing the Commission. · Many presentations of documents run into problems with time-limits. Composition The Commission is composed of sixty member States elected by the General Assembly. and Positioning 1. When compliance is in question. · After dispatch of the goods. Targeting. Members of the Commission are elected for terms of six years. The importance of STP AJAY KUAMR (510932435) Page 16 of 24 MB0037 . Q3. Membership is structured so as to be representative of the world’s various geographic regions and its principal economic and legal systems. the terms of half the members expiring every three years Q. the credit professional should review all items carefully to insure that what is expected of the seller is fully understood and that he can comply with all the terms and conditions. the latest shipping date and the maximum time allowed between dispatch and presentation. MBA IV SEM. and it regarded the Commission as the vehicle by which the United Nations could play a more active role in reducing or removing these obstacles. make reasonable allowance for the time. check all the documents both against the terms of the credit and against each other for internal consistency. The Commission has since come to be the core legal body of the United Nations system in the field of international trade law. Upon receipt of the letter of credit.4.Assignment – International Business Management -MB0037 Assignment Set. b) What is UNCITRAL and what it does? Ans 3b: United Nations Commission on International Trade Law (UNCITRAL) The United Nations Commission on International Trade Law (UNCITRAL) was established by the General Assembly in 1966 (Resolution 2205(XXI) of 17 December 1966). You must be aware of at least three time constraints – the expiration date of the credit. the General Assembly recognized that disparities in national laws governing international trade created obstacles to the flow of trade. Mandate The General Assembly gave the Commission the general mandate to further the progressive harmonization and unification of the law of international trade. · If the letter of credit calls for documents supplied by third parties. Explain the importance of STP in international markets.

countries are seen as segments. where one looks at segments within countries." members of a segment should generally be as similar as possible to each other on a relevant dimension (e. For example. there will only be a large market for expensive pharmaceuticals in countries with certain income levels. it was found that more units of the inexpensive kind were sold in Germany than in Italy—although many German consumers fit the predicted profile. significant differences within countries. Inter-market segmentation entails several benefits. the cultures of each country may cause people to respond differently to the "hard sell" advertising that has been successful in one). At the micro level. it should be noted that it is still necessary to learn about the local market. Segmentation is the cornerstone of marketing – almost all marketing efforts in some way relate to decisions on who to serve or how to implement positioning through the different parts of the marketing mix. The fact that products and promotional campaigns may be used across markets introduces economies of scale. buyers.2.g." this is a dangerous strategy because the firm may lose its distinctive appeal to its chosen segments.. while it is considerably smaller in the U. members should respond in similar ways to various treatments (such as discounts or high service) so that common campaigns can be aimed at segment members. very reliable ones. preference for quality vs. 2. one’s distribution strategy should consider where one’s target market is most likely to buy the product. Intra-market segmentation involves segmenting each country’s markets from scratch –i. and their use often parallels the firm’s stage of international involvement. an American firm going into the Brazilian market would do research to segment Brazilian consumers without incorporating knowledge of U. there is a huge small car segment in Europe. (Even though segments may be similar across the cultures. In terms of the "big picture. and entry opportunities into infant clothing will be significantly greater in countries with large and growing birth-rates (in countries with smaller birth-rates or stable to declining birth-rates. and a promotional strategy should consider the target’s media habits and which kinds of messages will be most persuasive. Approaches to global segmentation There are two main approaches to global segmentation. and learning that has been acquired in one market may be used in another – e.. For example. low price) and as different as possible from members of other segments. inter-market segmentation involves the detection of segments that exist across borders. however. entrenched competitors will fight hard to keep the market share). a firm that has been serving a segment of premium quality cellular phone buyers in one country can put its experience to use in another country that features that same segment.. For example. MBA IV SEM.e. AJAY KUAMR (510932435) Page 17 of 24 MB0037 . given that country aggregate characteristics and statistics tend to differ significantly. Although it is often tempting. when observing large markets. their members should have their own unique response behaviour. to try to be "all things to all people. There are.Assignment – International Business Management -MB0037 Assignment Set.S. Two approaches exist. Note that not all segments that exist in one country will exist in another and that the sizes of the segments may differ significantly.g. although it was thought that the Italian market would demand "no frills" inexpensive washing machines while German consumers would insist on high quality. For example. but in order to justify a different treatment of other segments. there were large segment differences within that country. although a segment common across two countries may seek the same benefits. That is.S. At the macro level. For example. In contrast.

or Japan will emerge after several years (or even decades) in a "late adopter" country such as Britain or most developing countries. Unfortunately not everyone upholds them. because not only may the equipment have been legitimately bought overseas. It is common practice in Africa that if the original equipment has not been bought through an authorized dealer in the country. On the one hand. There are strict process controls and built – in quality control. The machines are geared to high production. that dealer refuses to honour the warranty. There are no easy answers here. restaurants would go against the family image of the restaurant carefully nurtured over several decades. while serving alcohol in U. especially when contaminated with AJAY KUAMR (510932435) Page 18 of 24 MB0037 . unless all countries are members of a convention. Ans: Branding and trademarks It is difficult to protect a trademark or brand. a segment that has existed for some time in an "early adopter" country such as the U. This is unfortunate.2. Poor raw material. the reticent dealer will suffer. and hence enhance the "subjective" product characteristics. A family brand of products under the Zeneca (ex ICI) label or Sterling Health are likely to be recognized worldwide. are automated and are of a precision for constant quality provision. (We will discuss this issue in more detail when we cover the product mix in the second half of the term). Brand "piracy" is widespread in many developing countries.S. significant accommodations are made to local tastes and preferences – for example. Positioning across markets Firms often have to make a trade-off between adapting their products to the unique demands of a country market or gaining benefits of standardization such as cost savings and the maintenance of a consistent global brand image. on the other hand. The international product life cycle suggests that product adoption and spread in some markets may lag significantly behind those of others. Write a short note on branding and trademarks. it also actually builds up consumer resistance to the dealer. for example.Assignment – International Business Management -MB0037 Assignment Set. 5 a. MBA IV SEM. McDonald’s has accommodated this demand of European patrons. 3.S. Q. then. that is they can usually switch to a variety of yarn requirements. Often. McDonald’s has spent a great deal of resources to promote its global image. When the consumer is eventually offered with a choice. Other aspects of branding include the promotional aspects. with the new dealers coming up. Warranty Many large value agricultural products like machinery require warranties. Case of Cotton Production/Marketing Interface Spinners Machines are highly flexible.

Product communications extension This strategy is very low cost and merely takes the same product and communication strategy into other markets. grid knives. but due to exchange regulations. MBA IV SEM. fans and card clothing. Cotton grading The Liverpool Cotton exchange. The system can handle large numbers of bales. Product strategies There are five major product strategies in international marketing. For cotton exporters the system offers the following advantages: · enhanced objectivity in classification · improve communication if similar systems are used by sellers or buyers · reduced conflict and need for arbitration · enhanced competitiveness against synthetic fibres · improved integration with modern spinning machines · reduced costs on training of experts and in measuring time.2. the growers have to ensure that the production. Service In agricultural machinery.Assignment – International Business Management -MB0037 Assignment Set. this is no fault of the agent. picking and ginning is of a very high standard. distributor or dealer in the foreign country. service is a prerequisite. relied on the skills of its experts to manually classify raw fibre purchases for its clients. damages opening mills.. In selling to many developing countries. manufacturers have found their negotiations at stake due to the poor back-up service. AJAY KUAMR (510932435) Page 19 of 24 MB0037 . Often. processing equipment and other items which are of substantial value and technology. However it can be risky if misjudgments are made. which make obtaining spare parts difficult. metal particles. for one. Suppliers In order to meet these high quality demands. reduce variation in classification and the need for highly trained bate classifiers. Previous devices employed to remove these (magnets) are becoming less effective.

The development costs may be high. Extension Adaptation Different Same Soups 3. International strategic alternatives Product Communications Product/ Conditions Examples strategy strategy of product functions use Met 1. Extension Extension Same Same Pepsi 2. MBA IV SEM. Product adaptation – communications extension The product is adapted to fit usage conditions but the communication stays the same. This is very much a strategy which could be ideal in a Third World situation. but the advantages are also very high. Adaptation Adaptation Different Different Farm implements 5. Extended product – communications adaptation If the product basically fits the different needs or segments of a market it may need an adjustment in marketing communications only. Product invention This needs a totally new idea to fit the exclusive conditions of the market. but different product functions have to be identified and a suitable communications mix developed. The assumption is that the product will serve the same function in foreign markets under different usage conditions.2. Invention New Same – Tyson turbine water pump Thailand tuna AJAY KUAMR (510932435) Page 20 of 24 MB0037 . Table below summarizes the strategic alternatives with examples. Adaptation Extension Same Different Agriculture chemicals 4. Again this is a low cost strategy. Product adaptation – communications adaptation Both product and communication strategies need attention to fit the peculiar need of the market.Assignment – International Business Management -MB0037 Assignment Set.

and also because of the limited effectiveness of capital controls. This system aimed both to avoid the undue volatility thought to characterize floating exchange rates and to prevent competitive depreciations. · Private capital flows were expected to play only a limited role in financing payments imbalances. dollar.Assignment – International Business Management -MB0037 Assignment Set. Flexible exchange rates among the major industrial country currencies seem likely to remain a key feature of the system. and Japanese yen) fluctuate in response to market forces. · international private capital flows finance substantial current account imbalances. in terms of both their trade in goods and services and of financial transactions. would smooth the adjustment process and avoid unduly sharp correction of current account imbalances. mainly through the IMF. · temporary official financing of payments imbalances. and widespread use of controls would prevent instability in such flows. MBA IV SEM. and the system itself.The exchange rate regimes adopted by countries in today’s international monetary and financial system. Lessons from the recent crises in emerging markets are that for such countries with important linkages to global capital markets. In the current system. The launch of the euro in January 1999 marked a new phase in the evolution of the system. and employment. output. AJAY KUAMR (510932435) Page 21 of 24 MB0037 . Q 5b) what are the features of exchange and currency market Ans 5b):. with their repercussions on trade flows. but the changes in these flows appear also sometimes to be a cause of macroeconomic disturbances or an important channel through which they are transmitted to the international system.S. but the European Central Bank has a clear mandate to focus monetary policy on the domestic objective of price stability rather than on the exchange rate.2. In the Bretton Woods system: · Exchange rates were fixed but adjustable. are profoundly different from those envisaged at the 1944 meeting at Bretton Woods establishing the IMF and the World Bank. with short-run volatility and occasional large medium- run swings This variety of exchange rate regimes exists in an environment with the following characteristics: · partly for efficiency reasons. industrial countries have generally abandoned such controls and emerging market economies have gradually moved away from them. exchange rates among the major currencies (principally the U. the requirements for sustaining pegged exchange rate regimes have become more demanding as a result of the increased mobility of capital. while permitting enough flexibility to adjust to fundamental disequilibrium under international supervision. the euro. · developing and transition countries have been increasingly drawn into the integrating world economy.

most developing countries are in no position to compete on the world stage with many manufactured value-added products. This may involve organizations producing symbolic offerings represented by meaning laden products that chase stimulation-loving consumers who seek experience – producing situations. prospects are that: · exchange rates among the euro. the product’s physical properties are enhanced by the image CARMEL creates. Quality. for example. are likely to seek to establish over time the policy disciplines and institutional structures required to make possible the eventual adoption of the euro. The decision whether to sell globally standardized or adapted products is too simplistic for today’s market place. size and shape. is often the major letdown A product can be defined as a collection of physical. or lack of it. These can include the imposition of a global standardized product where it is inapplicable. price. but once the label CARMEL.2. It may have to be "Antarctic" in source. Unfortunately. service and symbolic attributes which yield satisfaction or benefits to a user or buyer. 6 Discuss the various International product and pricing decisions. selling mineral water may not be enough. its strengths and weaknesses and its global objectives. Ans: Decisions regarding the product. and flavoured. promotion and distribution channels are decisions on the elements of the "marketing mix". They can be convenience or shopping goods or durables and non-durables. for example. . Many product decisions lie between these two extremes. for example large horsepower tractors may be totally unsuitable for areas where small scale farming exists and where incomes are low. A product’s physical properties are characterized the same the world over. and the attempt to sell products into a country without cognizance of cultural adaptation needs. As cited earlier.Thus. the organization’s own product portfolio. and subjective attributes say image or "quality". A product is a combination of physical attributes say. an avocado pear is similar the world over in terms of physical characteristics. especially those preparing for membership in the European Union. however. AJAY KUAMR (510932435) Page 22 of 24 MB0037 . A customer purchases on both dimensions. · several of the transition countries of central and eastern Europe. This opens up a wealth of new marketing opportunities for producers. to consider the choice of regime to be a matter for each country to decide and to provide policy advice that is consistent with the maintenance of the chosen regime Q. and the dollar are likely to continue to exhibit volatility. Cognizance has also to be taken of the stage in the international life cycle. In "post modernisation" it is increasingly important that the product fulfils the image which the producer is wishing to project.Assignment – International Business Management -MB0037 Assignment Set. MBA IV SEM. one can classify products according to their degree of potential for global marketing: · local products – seen as only suitable in one single market. devolving decisions to affiliated countries which may let quality slip. nor to be desirable as they prevent monetary policy from being devoted consistently to domestic stabilization objectives. It can be argued that product decisions are probably the most crucial as the product is the very epitome of marketing planning. So. and schemes to reduce volatility are neither likely to be adopted. is put on it. The approach taken by the IMF continues to be to advise member countries on the implications of adopting different exchange rate regimes. the yen. Errors in product decisions are legion.

the international monetary transmission mechanism differs markedly under these two alternatives. Pricing-to-market models have been able to replicate a number of key international business-cycle properties. In some markets product saturation has been reached. in soups. This is hardly surprising given the lack of resources. Bayer. These deviations in turn generate movements in the real exchange rate. Given the crucial role played by the international price- setting regime in the international transmission mechanism of monetary disturbances. both for floating exchange rate periods and across alternative regimes. These world brand names have been built up over the years with great investments in marketing and production. A failure to maintain these will lead to consumer dissatisfaction. · multinational products – products adapted to the perceived unique characteristics of national markets. which occur in response to unexpected changes in the exchange rate. yet surprisingly the same product may not have reached saturation in other similar markets. the price-setting assumption determines the role of exchange rates in shifting consumer allocation decisions across countries. have originated from developing countries. In fertilizers. in chemicals. distribution. which is the means by which an organization reaches its target market. it is clearly positive (but incomplete) at the producer level. a relation that is not supported by the data. Since the nature of price setting determines the effect of exchange rate changes on the relative price of imported to domestic goods in the short run.2. as a prerequisite to export marketing. it is clearly important to explore the implications of distinct exchange rate pass-through at the consumer and producer levels. brands like Norsk Hydro are universal. MBA IV SEM. in tractors. hence raising the opportunity to enter deeper into this market. In pricing-to-market models. BAT. promotion and people decisions. pricing. These are usually shortened to an acronym AJAY KUAMR (510932435) Page 23 of 24 MB0037 . It is becoming increasingly important to maintain quality products based on the ISO 9000 standard. same positioning and same marketing mix but there may be changes in message or other image. the UK market is not yet. however. in tobacco. yielding very different predictions for many substantial issues in international economics. World brands in agriculture are legion. While the data suggests that exchange rate pass-through at the consumer level is indeed close to zero. Consumer beliefs or perceptions also affect the "world brand" concept. Few world brands. Whilst France has long been saturated by avocadoes. This is typified by agricultural machinery where the lack of spares and/or foreign exchange can lead to lengthy downtimes. Therefore. The marketing mix. as is suggested by recent empirical evidence. method of operation or use and maintenance (if necessary) are catchwords in international marketing. exchange rate pass-through to consumer import prices is zero in the short run. is made up of product. Quality. World brands are based on the same strategic principles. Massey Ferguson. Heinz. · international products – seen as having extension potential into other markets. Assuming that prices are set in advance in the consumer’s currency allows for short-run deviations in the law of one price for tradable goods.Assignment – International Business Management -MB0037 Assignment Set. This feature of the model implies that exchange rate depreciations and the terms of trade are positively correlated. · global products – products designed to meet global segments. Most of the recent research in this field has progressed under the assumption of either producer-currency pricing or consumer-currency pricing.

) and product line management. etc. adaptation and invention. "5P’s". AJAY KUAMR (510932435) Page 24 of 24 MB0037 . Product decisions are based on how much the organization has to adjust the product on the standardization – adaptation continuum to differing market conditions. Extension is the nearest to a standardized product. The more adaptive the policy the more costly it will be for the organization. adaptation. Product decisions revolve around decisions regarding the physical product (size.2.Assignment – International Business Management -MB0037 Assignment Set. an adaptation strategy. specification. This results in the evolution of five basic strategic alternatives – extension. communications strategy and Invention at the other end of the continuum. that is. MBA IV SEM. extension. adaptation. style. extension.