Question Bank (International Business, Sem-3rd)

1.Porter’s theory of economic force?

Porter's Five Forces

Five external industry forces affecting an organization.

Definition
Porter’s five forces model
 
is an analysis tool that uses five industry forces to determine the intensity of competition in an
industry and its profitability level.
[1]

Understanding the tool

Five forces model was created by M. Porter in 1979 to understand how five key competitive forces are
affecting an industry. The five forces identified are:

These forces determine an industry structure and the level of competition in that industry. The stronger
competitive forces in the industry are the less profitable it is. An industry with low barriers to enter, having
few buyers and suppliers but many substitute products and competitors will be seen as very competitive and
thus, not so attractive due to its low profitability.
It is every strategist’s job to evaluate company’s competitive position in the industry and to identify what
strengths or weakness can be exploited to strengthen that position. The tool is very useful in formulating
firm’s strategy as it reveals how powerful each of the five key forces is in a particular industry.

Threat of new entrants. This force determines how easy (or not) it is to enter a particular industry. If an
industry is profitable and there are few barriers to enter, rivalry soon intensifies. When more organizations
compete for the same market share, profits start to fall. It is essential for existing organizations to create high
barriers to enter to deter new entrants. Threat of new entrants is high when:

 Low amount of capital is required to enter a market;

 Existing companies can do little to retaliate;
 Existing firms do not possess patents, trademarks or do not have established brand reputation;
 There is no government regulation;
 Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch to other
industries);
 There is low customer loyalty;
 Products are nearly identical;
 Economies of scale can be easily achieved.

Bargaining power of suppliers. Strong bargaining power allows suppliers to sell higher priced or low
quality raw materials to their buyers. This directly affects the buying firms’ profits because it has to pay
more for materials. Suppliers have strong bargaining power when:

 There are few suppliers but many buyers;

 Suppliers are large and threaten to forward integrate;
 Few substitute raw materials exist;
 Suppliers hold scarce resources;
 Cost of switching raw materials is especially high.

Bargaining power of buyers. Buyers have the power to demand lower price or higher product quality from
industry producers when their bargaining power is strong. Lower price means lower revenues for the
producer, while higher quality products usually raise production costs. Both scenarios result in lower profits
for producers. Buyers exert strong bargaining power when:

 Buying in large quantities or control many access points to the final customer;
 Only few buyers exist;
 Switching costs to other supplier are low;
 They threaten to backward integrate;
 There are many substitutes;
 Buyers are price sensitive.

Threat of substitutes. This force is especially threatening when buyers can easily find substitute products
with attractive prices or better quality and when buyers can switch from one product or service to another
with little cost. For example, to switch from coffee to tea doesn’t cost anything, unlike switching from car to
bicycle.

Rivalry among existing competitors. This force is the major determinant on how competitive and
profitable an industry is. In competitive industry, firms have to compete aggressively for a market share,
which results in low profits. Rivalry among competitors is intense when:

 There are many competitors;

 Exit barriers are high;
 Industry of growth is slow or negative;
 Products are not differentiated and can be easily substituted;
 Competitors are of equal size;
 Low customer loyalty.

Although, Porter originally introduced five forces affecting an industry, scholars have suggested including
the sixth force: complements. Complements increase the demand of the primary product with which they
are used, thus, increasing firm’s and industry’s profit potential. For example, iTunes was created to
complement iPod and added value for both products. As a result, both iTunes and iPod sales increased,
increasing Apple’s profits.

Using the tool

We now understand that Porter’s five forces framework is used to analyze industry’s competitive forces and
to shape organization’s strategy according to the results of the analysis. But how to use this tool? We have
identified the following steps:

 Step 1. Gather the information on each of the five forces

 Step 2. Analyze the results and display them on a diagram
 Step 3. Formulate strategies based on the conclusions

Step 1. Gather the information on each of the five forces. What managers should do during this step is to
gather information about their industry and to check it against each of the factors (such as “number of
competitors in the industry”) influencing the force. We have already identified the most important factors in
the table below.
 Porter's Five Forces Factors

Threat of new entry

 Amount of capital required

 Retaliation by existing companies
 Legal barriers (patents, copyrights, etc.)
 Brand reputation
 Product differentiation
 Access to suppliers and distributors
 Economies of scale
 Sunk costs
 Government regulation

Supplier power

 Number of suppliers
 Suppliers’ size
 Ability to find substitute materials
 Materials scarcity
 Cost of switching to alternative materials
 Threat of integrating forward

Buyer power

 Number of buyers
 Size of buyers
 Size of each order
 Buyers’ cost of switching suppliers
 There are many substitutes
 Price sensitivity
 Threat of integrating backward

Threat of substitutes

 Number of substitutes
 Performance of substitutes
 Cost of changing

Rivalry among existing competitors

 Number of competitors
 Cost of leaving an industry
 Industry growth rate and size
 Product differentiation
 Competitors’ size
 Customer loyalty
 Threat of horizontal integration
 Level of advertising expense

Step 2. Analyze the results and display them on a diagram. After gathering all the information, you
should analyze it and determine how each force is affecting an industry. For example, if there are many
companies of equal size operating in the slow growth industry, it means that rivalry between existing
companies is strong. Remember that five forces affect different industries differently so don’t use the same
results of analysis for even similar industries!

Step 3. Formulate strategies based on the conclusions. At this stage, managers should formulate firm’s
strategies using the results of the analysis For example, if it is hard to achieve economies of scale in the
market, the company should pursue cost leadership strategy. Product development strategy should be used if
the current market growth is slow and the market is saturated.

Although, Porter’s five forces is a great tool to analyze industry’s structure and use the results to formulate
firm’s strategy, it has its limitations and requires further analysis to be done, such as SWOT, PEST or Value
Chain analysis.

Example
This is Porter’s five forces analysis example for an automotive industry.

2.VUCA analysis?

You can use VUCA analysis for better issue management

VUCA analysis has become a trendy term in some management circles,
especially in the finance sector. VUCA is an acronym standing
for Volatility, Uncertainty, Complexity, and Ambiguity, and is used to
describe key characteristics of the external environment. It is another
analytical tool that can be used in issue management.
Some knowledge of VUCA factors is valuable to communicators. Apart from considering these
factors in your own communication plans, you will impress senior management by being
knowledgeable about the terms during planning sessions.
Confronted by this buzzword/buzzphrase, some managers can be overwhelmed and use it as an
excuse not to engage in rigorous development of strategy because such factors apparently
make it intimidating to look ahead.
However, VUCA types of factors are not new. They have always been integral to scenario
planning and in PESTLE analysis (Political, Economic, Social, Technological, Legal and
Environmental) of the external environment in issue management.
(Personally, I would add a ‘C’ to PESTLE analysis – Communication Climate – so it becomes
PESTLEC. A crucial part of issue management is analysis of factors affecting communication
and stakeholder relations. You can read in more depth about SWOT and PESTLE analysis in my
ebook on How to write a strategic annual communication plan.
Anyway, planners and managers have always had to cope with ambiguity and uncertainty in
decision-making, and they have always been obliged to try to predict the outcomes of their
actions. Therefore, VUCA is not a dramatic step forward. Nevertheless, it can be a useful
reminder in PESTLE analysis and scenario planning.
SWOT analysis
The well-known technique of SWOT analysis is also used for issue management, especially for
internal issues. You can read more about SWOT analysis in my article, ”

VUCA factors
Two key questions that VUCA analysis can help to address are:
 How much do you know about the situation?
 How well can you predict the results of your actions?
Professor Nathan Bennett from Georgia State University explained the VUCA concept in a
recent Harvard Business Review article (subscription access). He said each factor needed to
be analyzed separately from the others; the 4 factors don’t just add up to one big variable.
Prof. Bennett discussed the characteristics, as well as a business example and business
approach relating to each VUCA factor. These are shown below in my own words. In addition I
have outlined in italics an example of a communication role relating to each factor to show
how the analytical elements of the corporate communication planning model is vital to issue
management. It should be noted that fully comprehensive information is seldom available in
any situation, and therefore managers are invariably obliged to make decisions based on the
best information they can assemble.
Volatility
Characteristics
Relatively unstable change. The challenge is unexpected and may be of unknown duration, but
it is not necessarily hard to understand; knowledge about it is often available.
Business example
Prices fluctuate after a natural disaster, such as when a fire takes out a supplier.
Business approach
Conduct risk analysis, build in spare capacity and devote resources to preparedness – for
instance, stockpile inventory or overbuy talent. These steps are typically costly and therefore
management should only commit where the cost is justified by the downside.
Communication role
Prepare a crisis management strategy. The communication function should be integrally
involved.
Uncertainty
Characteristics
Lack of knowledge. Nevertheless, the situation’s basic cause and effect are known.
Business example
A competitor’s expected product launch can change the future of the business and the market.
Business approach
Increase business intelligence activities. Collect, interpret, and share relevant information.
Engage in serious boundary-spanning collaboration.
Communication role
The organization’s communication function is the logical area in which to build these
resources, especially as the role incorporates boundary-spanning.
Complexity
Characteristics
Complexity variables are the easiest of the 4 factors to understand, but managers can’t know
what they don’t know, which compounds the complexity of the situation. Managers may know
the likely outcomes but not the unintended consequences of complexity factors. For instance,
writing new computer code may open up the further complexity of unforeseen security risks.
Some information is available or can be predicted, but the volume or nature of it can be
overwhelming.
Business example
The company operates in many countries, each of which has its own regulatory environment,
tariffs and cultural values.
Business approach
Restructure, bring in or develop specialists, and increase resources adequate to address the
complexity.
Communication role
Identify the key stakeholders in each country and initiate a systematic stakeholder relations
management program. Tailor messages for each country and its unique culture. Government
relations is crucial.
Ambiguity
Characteristics
Causal relationships are completely unclear. No precedents exist; management faces
“unknown unknowns.”
Business example
The company decides to move into developing markets or to launch new types of products that
are outside its previous experience.
Business approach
Companies need to be prepared to take on risk, perhaps initially in trial markets, to evaluate
outcomes. Lessons learnt can be applied progressively over time to other markets.
Communication role
Communicators can support with gathering intelligence about the operating environment
including regulatory parameters, and in preparing broad issue management and crisis
communication strategies in advance.

3.Hofstede Index?

hat is the Hofstede’s Cultural Dimensions Theory?

The Hofstede’s Cultural Dimensions Theory, developed by Geert Hofstede, is a framework used
to understand the differences in culture across countries and to discern the ways that business
is done across different cultures. In other words, the framework is used to distinguish between
different national cultures, the dimensions of culture, and their impact on a business setting.

The Hofstede’s Cultural Dimensions Theory was created in 1980 by Dutch management
researcher Geert Hofstede. The aim of the study was to determine the dimensions in which
cultures vary.

Hofstede identified six categories that define culture:

1. Power Distance Index

 2. Collectivism vs. Individualism
3. Uncertainty Avoidance Index
4. Femininity vs. Masculinity
5. Short-Term vs. Long-Term Orientation
6. Restraint vs. Indulgence

Power Distance Index

The power distance index considers the extent to which inequality and power are tolerated. In
this dimension, inequality and power are viewed from the viewpoint of the followers – the
lower level.

 High power distance index indicates that a culture accepts inequity and power
differences, encourages bureaucracy, and shows high respect for rank and authority.
 Low power distance index indicates that a culture encourages organizational
structures that are flat, decentralized decision-making responsibility, participative style
of management, and places emphasis on power distribution.

Individualism vs. Collectivism

The individualism vs. collectivism dimension considers the degree to which societies are
integrated into groups and their perceived obligation and dependence on groups.

 Individualism indicates that there is greater importance on attaining personal goals. A

person’s self-image in this category is defined as “I.”
 Collectivism indicates that there is greater importance on the goals and well-being of
the group. A person’s self-image in this category is defined as “We”.

Uncertainty Avoidance Index

The uncertainty avoidance index considers the extent to which uncertainty and ambiguity are
tolerated. This dimension considers how unknown situations, and unexpected events are dealt
with.

 High uncertainty avoidance index indicates a low tolerance for uncertainty, ambiguity,
and risk-taking. The unknown is minimized through strict rules, regulations, etc.
 Low uncertainty avoidance index indicates a high tolerance for uncertainty, ambiguity,
and risk-taking. The unknown is more openly accepted, and there are lax rules,
regulations, etc.

 
Masculinity vs. Femininity
The masculinity vs. femininity dimension is also referred to as “tough vs. tender,” and considers
the preference of society for achievement, attitude towards sexuality equality, behavior, etc.

 Masculinity comes with the following characteristics: distinct gender roles, assertive, and
concentrated on material achievements and wealth-building.
 Femininity comes with the following characteristics: fluid gender roles, modest,
nurturing, and concerned with the quality of life.

Long-Term Orientation vs. Short-Term Orientation

The long-term orientation vs. short-term orientation dimension considers the extent to with a
society view its time horizon.

 Long-term orientation shows focus on the future and involves delaying short-term
success or gratification in order to achieve long-term success. Long-term orientation
emphasizes persistence, perseverance, and long-term growth.
 Short-term orientation shows focus on the near future, involves delivering short-term
success or gratification and places a stronger emphasis on the present than the future.
Short-term orientation emphasizes quick results and respect for tradition.

Indulgence vs. Restraint

The indulgence vs. restraint dimension considers the extent and tendency for a society to fulfill
its desires. In other words, this dimension revolves around how societies can control their
impulses and desires.

 Indulgence indicates that a society allows relatively free gratification related to enjoying
life and having fun.
 Restraint indicates that a society suppresses gratification of needs and regulates it
through social norms.

Country Comparisons: Hofstede Insights

Hofstede Insights is a great resource to understand the impact of culture on work and life. It
can be accessed here to understand how the different dimensions differs among countries
under the Hofstede’s Cultural Dimensions Theory.

Related Readings
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those
looking to take their careers to the next level. To keep learning and advancing your career, the
following resources will be helpful:
  Demographics
 Emotional Intelligence
 Interpersonal Skills
 Supportive Leadership

4.Ansoff Matrix?

5.Laffer curve?

Laffer Curve
What is the Laffer Curve?
The Laffer Curve is a theory developed by supply-side economist Arthur Laffer to show the
relationship between tax rates and the amount of tax revenue collected by governments. The
curve is used to illustrate Laffer’s argument that sometimes cutting tax rates can increase total tax
revenue.

KEY TAKEAWAYS

 The Laffer Curve describes the relationship between tax rates and total tax revenue, with an optimal
tax rate that maximizes total government tax revenue.
 If taxes are too high along the Laffer Curve, then they will discourage the taxed activities, such as
work and investment, enough to actually reduce total tax revenue. In this case, cutting tax rates will
both stimulate economic incentives and increase tax revenue.
 The Laffer Curve was used as a basis for tax cuts in the 1980's with apparent success, but criticized
on practical grounds on the basis of its simplistic assumptions, and on economic grounds that
increasing government revenue might not always be optimal.
Understanding the Laffer Curve
The Laffer Curve is based on the economic idea that people will adjust their behavior in the face of
the incentives created by income tax rates. Higher income tax rates decrease the incentive to work
and invest compared lower rates. If this effect is large enough, it means that at some tax rate, and
further increase in the rate will actually lead to decrease in total tax revenue. For every type of tax,
there is a threshold rate above which the incentive to produce more diminishes, thereby reducing
the amount of revenue the government receives.

At a 0% tax rate, tax revenue would obviously be zero. As tax rates increase from low levels, tax
revenue collected by the also government increases. Eventually, if tax rates reached 100 percent,
shown as the far right on the Laffer Curve, all people would choose not to work because
everything they earned would go to the government. Therefore it is necessarily true that at some
point in the range where tax revenue is positive, it must reach a maximum point. This is
represented by T* on the graph below. To the left of T* an increase in tax rate raises more
revenue than is lost to offsetting worker and investor behavior. Increasing rates beyond T*
however would cause people not to work as much or not at all, thereby reducing total tax revenue.

Therefore at any tax rate to the right of T*, a reduction in tax rate will actually increase total
revenue. The shape of the Laffer Curve, and thus the location of T* is dependent on worker and
investor preferences for work, leisure, and income, as well as technology and other economic
factors. Governments would like to be at point T* because it is the point at which the government
collects maximum amount of tax revenue while people continue to work hard. If the current tax
rate is to the right of T*, then lowering the tax rate will both stimulate economic growth by
increasing incentives to work and invest, and increase government revenue because more work
and investment means a larger tax base.

The Laffer Curve Explained

The first presentation of the Laffer Curve was performed on a paper napkin back in 1974 when its
author was speaking with senior staff members of President Gerald Ford’s administration about a
proposed tax rate increase in the midst of a period of economic malaise that had engulfed the
country. At the time, most believed that an increase in tax rates would increase tax revenue.

Laffer countered that the more money was taken from a business out of each additional dollar of
income in the form of taxes, the less money it will be willing to invest. A business is more likely to
find ways to protect its capital from taxation or to relocate all or a part of its operations overseas.
Investors are less likely to risk their capital if a larger percentage of their profits are taken. When
workers see an increasing portion of their paychecks taken due to increased efforts on their part,
they will lose the incentive to work harder. Put together these could all mean less total revenue
coming in if tax rates were raised.

Laffer further argued that the economic effects of reducing incentives to work and invest by raising
tax rates would be damaging in the best of times and even worse in the midst of a stagnant
economy. This theory, supply-side economics, later became a cornerstone of President Ronald
Reagan’s economic policy, which resulted in one of the biggest tax cuts in history. During his time
in office, annual federal government current tax receipts from $344 billion in 1980 to $550 billion in
1988, and the economy boomed.

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Laffer Curve
Is the Laffer Curve Too Simple a Theory?
There are some fundamental problems with the Laffer Curve — notably that it is far too simplistic
in its assumptions. First, that the optimal tax revenue maximizing tax rate T* is unique and static,
or at least stable. Second that the shape of the Laffer Curve, at least in the vicinity of the current
tax rate and T* is known or even knowable to policy makers. Lastly, that maximizing or even
increasing tax revenue is a desirable policy goal.

In the first case, the existence and position of T* depends entirely on the shape of the Laffer
Curve. The underlying concept of the Laffer Curve only requires that tax revenue be zero at 0%
and at 100%, and positive in between. It says nothing about the specific shape of the curve at
points in between 0% and 100% or the position of T*. The shape of the actual Laffer Curve might
be dramatically different from the simple, single peaked curve commonly depicted. If the curve has
multiple peaks, flat spots, or discontinuities, then multiple T*’s might exist. If the curve is skewed
deeply to the left or right, T* might occur at extreme tax rates like 1% tax rate or a 99% tax rate,
which might put tax revenue maximizing policy into serious conflict with social equity or other
policy goals. Furthermore, just as the basic concept does not necessarily imply a simply shaped
curve, it does not imply that a Laffer Curve of any shape would be static. The Laffer Curve might
easily shift and change shape over time, which would mean that to maximize revenue, or just
avoid falling revenue, policy makers would have to constantly adjust tax rates.

This leads to the second criticism, that policy makers would be in practice unable to observe the
shape of the Laffer Curve, the location of T*, whether multiple T*’s exist, or whether and how the
Laffer Curve might shift over time. The only thing policy makers can reliably observe is the current
tax rate and associated revenue receipts (and past combinations of rates and revenue).
Economists can guess at what the shape might be, but only trial and error could actually reveal the
true shape of the curve, and only at those tax rates that are actually implemented. Raising or
lowering tax rates might move the rate toward T*, or it might not. Moreover, if the Laffer Curve has
any shape other than the assumed simple, single peaked parabola, then tax revenue at points
between the current tax rate and T* could have any range of values higher or lower than revenue
at the current rate and the same or lower than T*. An increase in tax revenue after a rate change
would not necessarily signal that the new rate is closer to T* (nor a decrease in revenue signal that
it is further away). Even worse, because tax policy changes are made and applied over time, the
shape of the Laffer Curve could shift; policy makers could never know if an increase in tax revenue
in response to a tax rate change represented a movement along the Laffer Curve toward T*, or a
shift in the Laffer Curve itself, with a new T*. Policy makers trying to reach T* would effectively be
groping in the dark after a moving target.

Lastly, it is not clear on economic grounds that maximizing or increasing government revenue (by
moving toward T* on the Laffer Curve) is even an appropriate goal for choosing tax rates. It might
easily be the case that a government could meet the otherwise unmet needs of its citizens and
provide any necessary public goods at some level of revenue lower than the maximum it can
potentially extract from the economy, perhaps much lower depending on the position of T*. If so,
then given the well researched principal-agent problems, rent-seeking, and knowledge problems
that arise with politically driven allocation of resources, putting additional funds in public coffers
beyond this socially optimal level might just produce additional unnecessary social costs,
inefficiencies, and dead-weight losses. Maximizing government tax revenue by taxing at T* would
also likely maximize these costs. A more appropriate goal might be to reach the minimum tax
revenue necessary to achieve only those socially necessary policy goals, which would seem to be
almost the exact opposite of the purpose of the Laffer Curve.

6.PESTLE+C analysis?

MARKETING THEORIES – PESTEL ANALYSIS

Visit our Marketing Theories Page to see more of our marketing buzzword
busting blogs. 
Welcome to our Marketing Theories series. In this post we will be looking at
the PESTEL Analysis in a bit more detail.
A PESTEL analysis is a framework or tool used by marketers to analyse and monitor
the macro-environmental (external marketing environment) factors that have an impact
on an organisation. The result of which is used to identify threats and weaknesses
which is used in a SWOT analysis.
PESTEL stands for:
 P – Political
 E – Economic
 S – Social
 T – Technological
 E – Environmental
 L – Legal
 C- culture
Lets look at each of these macro-environmental factors in turn.
All the external environmental factors (PESTEL factors)
Political Factors
These are all about how and to what degree a government intervenes in the economy.
This can include – government policy, political stability or instability in overseas
markets, foreign trade policy, tax policy, labour law, environmental law, trade
restrictions and so on.
It is clear from the list above that political factors often have an impact on organisations
and how they do business. Organisations need to be able to respond to the current and
anticipated future legislation, and adjust their marketing policy accordingly.
Economic Factors
Economic factors have a significant impact on how an organisation does business and
also how profitable they are. Factors include – economic growth, interest rates,
exchange rates, inflation, disposable income of consumers and businesses and so on.
These factors can be further broken down into macro-economical and micro-
economical factors. Macro-economical  factors deal with the management of demand in
any given economy. Governments use interest rate control, taxation policy and
government expenditure as their main mechanisms they use for this.
Micro-economic factors are all about the way people spend their incomes. This has a
large impact on B2C organisations in particular.
Social Factors
Also known as socio-cultural factors, are the areas that involve the shared belief and
attitudes of the population. These factors include – population growth, age distribution,
health consciousness, career attitudes and so on. These factors are of particular
interest as they have a direct effect on how marketers understand customers and what
drives them.
Technological Factors
We all know how fast the technological landscape changes and how this impacts the
way we market our products. Technological factors affect marketing and the
management thereof in three distinct ways:
 New ways of producing goods and services
 New ways of distributing goods and services
 New ways of communicating with target markets
Environmental Factors
These factors have only really come to the forefront in the last fifteen years or so. They
have become important due to the increasing scarcity of raw materials, polution targets,
doing business as an ethical and sustainable company, carbon footprint targets set by
governments (this is a good example were one factor could be classes as political and
environmental at the same time). These are just some of the issues marketers are
 facing within this factor. More and more consumers are demanding that the products
they buy are sourced ethically, and if possible from a sustainable source.
Legal Factors
Legal factors include - health and safety, equal opportunities, advertising standards,
consumer rights and laws, product labelling and product safety. It is clear that
companies need to know what is and what is not legal in order to trade successfully. If
an organisation trades globally this becomes a very tricky area to get right as each
country has its own set of rules and regulations.
After you have completed a PESTEL analysis you should be able to use this to help
you identify the strengths and weaknesses for a SWOT analysis.
We hope that you have found the above information useful. The PESTEL analysis is
taught in our CIM courses.
If you would like help referencing this blog, check out
our Harvard Referencing Blog.

7.Economies of scale/scope

How do Economies of Scope and Economies of Scale

Differ?
 FACEBOOK
 TWITTER
 LINKEDIN

BY STEVEN NICKOLAS
 

 Updated May 6, 2019

Economy of scope and economy of scale are two different concepts used to help cut a company's
costs. Economies of scope focuses on the average total cost of production of a variety of goods,
whereas economies of scale focuses on the cost advantage that arises when there is a higher
level of production of one good.

Economies of Scope
The theory of an economy of scope states the average total cost of a company's production
decreases when there is an increasing variety of goods produced. Economy of scope gives a cost
advantage to a company when it produces a complementary range of products while focusing on
its core competencies. Economy of scope is an easily misunderstood concept, especially since it
appears to run counter to the concepts of specialization and scale economies. One simple way to
think about economy of scope is to imagine that it's cheaper for two products to share the same
resource inputs (if possible) than for each of them to have separate inputs.

An easy way to illustrate economy of scope is with rail transportation. A single train can carry both
passengers and freight more cheaply than having separate trains, one for passengers and another
for freight. In this case, joint production reduces total input costs. (In economic terminology, this
means that one input factor's net marginal benefit increases after product diversification.)
For example, company ABC is the leading desktop computer producer in the industry. Company
ABC wants to increase its product line and remodels its manufacturing building to produce a
variety of electronic devices, such as laptops, tablets and phones. Since the cost of operating the
manufacturing building is spread out across a variety of products, the average total cost of
production decreases. The costs of producing each electronic device in another building would be
greater than just using a single manufacturing building to produce multiple products.

Real-world examples of the economy of scope can be seen in mergers and acquisitions (M&A),
newly discovered uses of resource byproducts (such as crude petroleum) and when two producers
agree to share the same factors of production. 

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Economies of Scope
Economies of Scale
Conversely, an economy of scale is the cost advantage a company has with the increased output
of a good or service. There is an inverse relationship between the volume of output of goods and
services and the fixed costs per unit to a company.

For example, suppose company ABC, a seller of computer processors, is considering purchasing
processors in bulk. The producer of the computer processors, company DEF, quotes a price of
$10,000 for 100 processors. However, if company ABC buys 500 computer processors, the
producer quotes a price of $37,500. If company ABC decides to purchase 100 processors from
company DEF, ABC's per unit cost is $100. However, if ABC purchases 500 processors, its per
unit cost is $75.

In this example, the producer is passing on the cost advantage of producing a larger number of
computer processors onto company ABC. This cost advantage arises because the fixed cost of
producing the processors has the same fixed cost whether it produces 100 or 500 processors.
Generally, when the fixed costs are covered, the marginal cost of production for each additional
computer processor decreases. At lower marginal costs, additional units represent increasing
profit margins. It offers companies the ability to drop prices if need be, improving the
competitiveness of their products. Large, warehouse-style retailers such as Costco and Sam's
Club package and sell large items in bulk due in part to realized economy of scale.

Although an economy of scale may seem beneficial to a company, it has some limits. Marginal
costs never decrease perpetually. At some point, operations become too large to keep
experiencing economies of scale. This forces companies to innovate, improve their working
capital or remain at their present optimal level of production. For example, if the company that
produces the computer processors surpasses its optimal production point, the cost of each
additional unit may begin to increase instead of continuing to decrease.

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Content: Economies of Scale Vs Economies of Scope

1. Comparison Chart
 2. Definition
3. Key Differences
4. Conclusion

Comparison Chart
BASIS FOR ECONOMIES OF
ECONOMIES OF SCOPE
COMPARISON SCALE

Meaning Economies of scale Economies of scope means

refers to savings in the savings in cost due to the
cost due to increase in production of two or more
output produced. distinct products, using same
operations.

Reduction in The average cost of The average cost of

producing one product. producing multiple products.

Cost advantage Due to volume Due to variety

Strategy Old Relatively New

Involves Product standardization Product diversification

Use of Large amount of Common resources

resources

8.Absolute Advtg Theory?

The Theory of Absolute Advantage

Let us make in-depth study of the theory of absolute advantage.
The theory of absolute advantage was put forward by Adam Smith who argued that
different countries enjoyed absolute advantage in the production of some goods which
formed the basis of trade between the countries.

Consider Table 23.1 where man-hours required to produce a unit of wheat

or cloth in the U.S.A. and India are given:
It will be seen from the above table that to produce one unit of wheat in the U.S.A. 3
man-hours and in India 10 man-hours are required. On the other hand, to produce one
unit of cloth, in the U.S.A. 6 man-hours and in India 4 man-hours are required. Thus
the U.S.A. can produce wheat more efficiently (that is, at a lower cost), while India can
produce cloth more efficiently.

To put it in other words, while the U.S.A. has an absolute advantage in the production
of wheat, India has an absolute advantage in the production of cloth. Adam Smith
showed that the two countries would benefit and world output will increase if the two
countries specialize in the production of goods in which they have absolute advantage
and trade with each other. How such specialization and trade would lead to gain in
output and would be mutually beneficial for the two countries is shown in Table 23.2.

Suppose to specialize in the production of Wheat, the U.S.A. withdraws 6 man-hours

from the production of cloth and devote them to the production of wheat, it will lose 1
unit of cloth and gain 2 units of wheat.

ADVERTISEMENTS:

Similarly, to specialize in the production of cloth if India withdraws 10 hours of labour

from wheat and use them for the production of cloth, it will lose one unit of wheat but
gain 2.5 units of cloth.

In this way, transfer of labour resources to the goods in which they have absolute
advantage, will result in the net gain of one unit of wheat and 2.5 units of cloth. The
gain in output can be distributed between the two countries through voluntary
exchange.

It is also clear from above that without any increase in productive resources
international division of labour and trade leads to the expansion in world output and
wealth. According to Adam Smith, given perfect competition in the industries and free
trade between the countries, it is the market forces that would ensure specialization and
trade on the lines of absolute advantage.
9.Comparative Advtg Theory?

Comparative Advantage Theory and Examples

Comparative advantage is when a country produces a good or service for a lower opportunity cost than

other countries. Opportunity cost measures a trade-off. A nation with a comparative advantage makes the
trade-off worth it. The benefits of buying their good or service outweigh the disadvantages. The country
may not be the best at producing something. But the good or service has a low opportunity cost for other
countries to import.

For example, oil-producing nations have a comparative advantage in chemicals. Their locally-produced oil
provides a cheap source of material for the chemicals when compared to countries without it. A lot of the
raw ingredients are produced in the oil distillery process. As a result, Saudi Arabia, Kuwait, and Mexico are
competitive with U.S. chemical production firms. Their chemicals are inexpensive, making their opportunity
cost low. 

Another example is India's call centers. U.S. companies buy this service because it is cheaper than locating
the call center in America. Indian call centers aren't better than U.S. call centers. Their workers don't always
speak English very clearly. But they provide the service cheaply enough to make the tradeoff worth it. 

In the past, comparative advantages occurred more in goods and rarely in services. That's because
products are easier to export. But telecommunication technology like the internet is making services easier
to export. Those services include call centers, banking, and entertainment.

Theory of Comparative Advantage

Eighteenth-century economist David Ricardo created the theory of comparative advantage. He argued that
a country boosts its economic growth the most by focusing on the industry in which it has the most
substantial comparative advantage. 

For example, England was able to manufacture cheap cloth. Portugal had the right conditions to make
cheap wine. Ricardo predicted that England would stop making wine and Portugal stop making cloth. He
was right. England made more money by trading its cloth for Portugal's wine, and vice versa. It would have
cost England a lot to make all the wine it needed because it lacked the climate. Portugal didn't have the
manufacturing ability to make cheap cloth. Therefore, they both benefited by trading what they produced
the most efficiently.

This theory of comparative advantage became the rationale for free trade agreements.

Ricardo developed his approach to combat trade restrictions on imported wheat in England. He argued that
it made no sense to restrict low-cost and high-quality wheat from countries with the right climate and soil
conditions. England would receive more value by exporting products that required skilled labor and
machinery. It could acquire more wheat in trade than it could grow on its own. 
The theory of comparative advantage explains why trade protectionism doesn't work in the long run.
Political leaders are always under pressure from their local constituents to protect jobs from international
competition by raising tariffs. But that’s only a temporary fix. In the long run, it hurts the nation's
competitiveness. It allows the country to waste resources on unsuccessful industries. It also forces
consumers to pay higher prices to buy domestic goods.

David Ricardo started out as a successful stockbroker, making $100 million in today's dollars. After reading
Adam Smith’s "The Wealth of Nations," he became an economist. He was the first person to point out that
significant increases in the money supply create inflation. This theory is known as monetarism. 

He also developed the law of diminishing marginal returns. That’s one of the essential concepts in
microeconomics. It states that there is a point in production where the increased output is no longer worth
the additional input in raw materials. 

Example

One of America's comparative advantages is its vast land mass bordered by two oceans. It also has lots of
fresh water, arable land, and available oil. U.S. businesses benefit from cheap natural
resources and protection from land invasion. 

Most important, it has a diverse population with a common language and national laws. The diverse
population provides an extensive test market for new products. It helped the United States excel at
producing consumer products

Diversity also helped the United States became a global leader in banking, aerospace, defense equipment,
and technology.  Silicon Valley harnessed the power of diversity to become a leader in innovative thinking.
Those combined advantages created the power of the U.S. economy. 

10.Heckscher–Ohlin model?

Heckscher-Ohlin Model
What Is the Heckscher-Ohlin Model?
The Heckscher-Ohlin model is an economic theory that proposes that countries export what they
can most efficiently and plentifully produce. Also referred to as the H-O model or 2x2x2 model, it's
used to evaluate trade and, more specifically, the equilibrium of trade between two countries that
have varying specialties and natural resources.

The model emphasizes the export of goods requiring factors of production that a country has in
abundance. It also emphasizes the import of goods that a nation cannot produce as efficiently. It
takes the position that countries should ideally export materials and resources of which they have
an excess, while proportionately importing those resources they need.

 The Heckscher-Ohlin model evaluates the equilibrium of trade between two countries that have
varying specialties and natural resources.
  The model explains how a nation should operate and trade when resources are imbalanced
throughout the world.
 The model isn't limited to commodities, but also incorporates other production factors such as labor.

The Basics of the Heckscher-Ohlin Model

The primary work behind the Heckscher-Ohlin model was a 1919 Swedish paper written by Eli
Heckscher at the Stockholm School of Economics. His student, Bertil Ohlin, added to it in 1933.
Economist Paul Samuelson expanded the original model through articles written in 1949 and
1953. Some refer to it as the Heckscher-Ohlin-Samuelson model for this reason.

The Heckscher-Ohlin model explains mathematically how a country should operate

and trade when resources are imbalanced throughout the world. It pinpoints a preferred balance
between two countries, each with its resources.

The model isn't limited to tradable commodities. It also incorporates other production factors such
as labor. The costs of labor vary from one nation to another, so countries with cheap labor forces
should focus primarily on producing labor-intensive goods, according to the model.

Evidence Supporting the Heckscher-Ohlin Model
Although the Heckscher-Ohlin model appears reasonable, most economists have had difficulty
finding evidence to support it. A variety of other models have been used to explain why
industrialized and developed countries traditionally lean toward trading with one another and rely
less heavily on trade with developing markets.

The Linder hypothesis outlines and explains this theory. It states that countries with similar
incomes require similarly valued products and that this leads them to trade with each other.

Real-World Example of the Heckscher-Ohlin Model

Certain countries have extensive oil reserves but have very little iron ore. Meanwhile, other
countries can easily access and store precious metals, but they have little in the way of
agriculture.

For example, the Netherlands exported almost $506 million in U.S. dollars in 2017, compared to
imports that year of approximately $450 million. Its top import-export partner was Germany.
Importing on a close to equal basis allowed it to more efficiently and economically manufacture
and provide its exports.

The model emphasizes the benefits of international trade and the global benefits to everyone
when each country puts the most effort into exporting resources that are domestically
naturally abundant. All countries benefit when they import the resources they naturally lack.
Because a nation does not have to rely solely on internal markets, it can take advantage
of elastic demand. The cost of labor increases and marginal productivity declines as more
countries and emerging markets develop. Trading internationally allows countries to adjust to
capital-intensive goods production, which would not be possible if each country only sold goods
internally.

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11.Product Life cycle theory

12.David Ricardo’s contribution (to foreign trade)

13.Adam Smith’s contribution (to foreign trade)

14.Paradox of value?
Paradox of Value

The Paradox of Value is also known as the diamond-water paradox

Also known as the diamond-water paradox. 

We understand that water is necessary to our life and that ornaments such as diamonds are
not life-sustaining. But water typically has a low market price, while diamond jewellery has a
high market price. 

One reason is that, in most countries, water is abundant relative to demand whereas

diamonds are scarce relative to demand. 

The marginal utility of a diamond is often very high in part because it is used as a celebration
of a life-event and also as a signal from one person to another of their commitment to each
other.

 Value in use i.e. drinking water to satisfy your thirst

 Value in exchange – what a resource can be sold for in exchange for other products. Nothing is
more useful than water: but it will purchase scarce any thing. The reverse is usually true for
expensive jewellery

Changes in perceived utility from consuming different goods and services will have a direct
effect on demand and also platforms used to provide the product.

15.Free market?

Free Market
REVIEWED BY JIM CHAPPELOW

 Updated Jun 25, 2019

What is a Free Market?

The free market is an economic system based on supply and demand with little or no government
control. It is a summary description of all voluntary exchanges that take place in a given economic
environment. Free markets are characterized by a spontaneous and decentralized order of
arrangements through which individuals make economic decisions. Based on its political and legal
rules, a country’s free market economy may range between very large or entirely black market.
KEY TAKEAWAYS

 A free market is one where voluntary exchange and the laws of supply and demand provide the sole
basis for the economic system, without government intervention.
 A key feature of free markets is the absence of coerced (forced) transactions or conditions on
transactions.
 While no pure free market economies actually exist, and all markets are in some ways constrained,
economists who measure the degree of freedom in markets have found a generally positive
relationship between free markets and measures of economic well being.
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What are Free Market Economies?

Understanding Free Market
The term “free market” is sometimes used as a synonym for laissez-faire capitalism. When most
people discuss the “free market,” they mean an economy with unobstructed competition and only
private transactions between buyers and sellers. However, a more inclusive definition should
include any voluntary economic activity so long as it is not controlled by coercive central
authorities.

Using this description, laissez-faire capitalism and voluntary socialism are each examples of a free

market, even though the latter includes common ownership of the means of production. The
critical feature is the absence of coercive impositions or restrictions regarding economic activity.
Coercion may only take place in a free market by prior mutual agreement in a voluntary contract,
such as contractual remedies enforced by tort law.

The Free Market's Connection With Capitalism and Individual Liberty

No modern country operates with completely uninhibited free markets. That said, the most free
markets tend to coincide with countries that value private property, capitalism, and individual
rights. This makes sense since political systems that shy away from regulations or subsidies for
individual behavior necessarily interfere less with voluntary economic transactions. Additionally,
free markets are more likely to grow and thrive in a system where property rights are well
protected and capitalists have an incentive to pursue profits.

Free Markets and Financial Markets

In free markets, a financial market can develop to facilitate financing needs for those who cannot
or do not want to self-finance. For example, some individuals or businesses specialize in acquiring
savings by consistently not consuming all of their present wealth. Others specialize in deploying
savings in pursuit of entrepreneurial activity, such as starting or expanding a business. These
actors can benefit from trading financial securities such as stocks and bonds.

For example, savers can purchase bonds and trade their present savings to entrepreneurs for the
promise of future savings plus remuneration, or interest. With stocks, savings are traded for an
ownership claim on future earnings. There are no modern examples of purely free financial
markets.

16.IMF?
International Monetary Fund (IMF)
What Is the International Monetary Fund?
The International Monetary Fund (IMF) is an international organization that aims to promote
global economic growth and financial stability, encourage international trade, and reduce poverty.

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International Monetary Fund (IMF)

Understanding the International Monetary Fund
The International Monetary Fund (IMF) is based in Washington, D.C., and currently consists of
189 member countries, each of which has representation on the IMF's executive board in
proportion to its financial importance, so that the most powerful countries in the global economy
have the most voting power.

The IMF's website describes its mission as "to foster global monetary cooperation, secure financial
stability, facilitate international trade, promote high employment and sustainable economic growth,
and reduce poverty around the world."

IMF Activities
The IMF's primary methods for achieving these goals are monitoring, capacity building, and
lending.

The IMF makes loans to countries that are experiencing economic distress in order to prevent or
mitigate financial crises.
Surveillance
The IMF collects massive amounts of data on national economies, international trade, and the
global economy in aggregate, as well as providing regularly updated economic forecasts at the
national and international level. These forecasts, published in the World Economic Outlook, are
accompanied by lengthy discussions of the effect of fiscal, monetary, and trade policies on growth
prospects and financial stability.

Capacity Building
The IMF provides technical assistance, training, and policy advice to member countries through its
capacity building programs. These programs include training in data collection and analysis, which
feed into the IMF's project of monitoring national and global economies.

Lending
The IMF makes loans to countries that are experiencing economic distress in order to prevent or
mitigate financial crises. Members contribute the funds for this lending to a pool based on a quota
system. These funds total around SDR 475 billion (US $645 billion) as of September 2017. (IMF
assets are denominated in special drawing rights or SDR, a kind of quasi-currency that is
comprised of set proportions of the world's reserve currencies.)

KEY TAKEAWAYS

 The mission of the IMF is to promote global economic growth and financial stability, encourage
international trade, and reduce poverty around the world.
  The IMF was originally created in 1945 as part of the Bretton Woods agreement, which attempted to
encourage international financial cooperation by introducing a system of convertible currencies at
fixed exchange rates.
IMF funds are often conditional on recipients making reforms to increase their growth potential and
financial stability. Structural adjustment programs, as these conditional loans are known, have
attracted criticism for exacerbating poverty and reproducing the structures of colonialism.

History of the IMF

The IMF was originally created in 1945 as part of the Bretton Woods Agreement, which attempted
to encourage international financial cooperation by introducing a system of convertible currencies
at fixed exchange rates, with the dollar redeemable for gold at $35 per ounce. The IMF oversaw
this system: for example, a country was free to readjust its exchange rate by up to 10% in either
direction, but larger changes required the IMF's permission.

The IMF also acted as a gatekeeper: Countries were not eligible for membership in the
International Bank for Reconstruction and Development (IBRD)—a World Bank forerunner that the
Bretton Woods agreement created in order to fund the reconstruction of Europe after World War II
—unless they were members of the IMF.

Since the Bretton Woods system collapsed in the 1970s, the IMF has promoted the system
of floating exchange rates, meaning that market forces determine the value of currencies relative
to one another. This system continues to be in place today.

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17.Intellectual Property Rights ?

What are intellectual property rights?

Intellectual property rights are the rights given to persons over the creations of
their minds. They usually give the creator an exclusive right over the use of his/her
creation for a certain period of time.
Intellectual property rights are customarily divided into two main areas:
(i) Copyright and rights related to copyright.back to top
The rights of authors of literary and artistic works (such as books and other writings, musical compositions,
paintings, sculpture, computer programs and films) are protected by copyright, for a minimum period of
50 years after the death of the author.
Also protected through copyright and related (sometimes referred to as “neighbouring”) rights are the rights
of performers (e.g. actors, singers and musicians), producers of phonograms (sound recordings) and
broadcasting organizations. The main social purpose of protection of copyright and related rights is to
encourage and reward creative work.
(ii) Industrial property.back to top
Industrial property can usefully be divided into two main areas:

One area can be characterized as the protection of distinctive signs, in particular trademarks (which
distinguish the goods or services of one undertaking from those of other undertakings) and
geographical indications (which identify a good as originating in a place where a given
characteristic of the good is essentially attributable to its geographical origin).
 The protection of such distinctive signs aims to stimulate and ensure fair competition and to
protect consumers, by enabling them to make informed choices between various goods and
services. The protection may last indefinitely, provided the sign in question continues to be
distinctive.

Other types of industrial property are protected primarily to stimulate innovation, design and the
creation of technology. In this category fall inventions (protected by patents), industrial designs
and trade secrets.

The social purpose is to provide protection for the results of investment in the development of new
technology, thus giving the incentive and means to finance research and development activities.

A functioning intellectual property regime should also facilitate the transfer of technology in the
form of foreign direct investment, joint ventures and licensing.

The protection is usually given for a finite term (typically 20 years in the case of patents).

While the basic social objectives of intellectual property protection are as outlined above, it should also be
noted that the exclusive rights given are generally subject to a number of limitations and exceptions, aimed
at fine-tuning the balance that has to be found between the legitimate interests of right holders and of users.

18.WTO

The WTO
The World Trade Organization (WTO) is the only global international organization
dealing with the rules of trade between nations. At its heart are the WTO
agreements, negotiated and signed by the bulk of the world’s trading nations and
ratified in their parliaments. The goal is to ensure that trade flows as smoothly,
predictably and freely as possible.

 The WTO
 What is the WTO? [+]
 Decision-making [+]
 Membership [+]
 WTO Secretariat [+]
 Budget
 Director-General
 Deputy Directors-General
 The WTO building [+]
 Procurement at the WTO
 The WTO and other organizations
 Annual report
 Jobs in the WTO [+]
 How to contact the WTO

What is the WTO?

Who we are
The WTO has many roles: it operates a global system of trade rules, it acts as a forum for
negotiating trade agreements, it settles trade disputes between its members and it supports the
needs of developing countries.
 
What we do
All major decisions are made by the WTO's member governments: either by ministers (who usually
meet at least every two years) or by their ambassadors or delegates (who meet regularly in
Geneva).
 
 What we stand for
A number of simple, fundamental principles form the foundation of the multilateral trading system.
 
Overview
The primary purpose of the WTO is to open trade for the benefit of all.

Decision-making
Organization chart
The WTO's top decision-making body is the Ministerial Conference. Below this is the General
Council and various other councils and committees.
Current WTO chairpersons 
  
Ministerial conferences
Ministerial conferences usually take place every two years.
  
General Council
The General Council is the top day-to-day decision-making body. It meets a number of times a
year in Geneva.

Membership 
Members and observers  
The WTO has over 160 members representing 98 per cent of world trade. Over 20 countries are
seeking to join the WTO.
Accessions  
To join the WTO, a government has to bring its economic and trade policies in line with WTO rules
and negotiate its terms of entry with the WTO membership.

WTO Secretariat
The WTO has approximately 650 staff on its regular budget.

Overview
Mandate
Work of Divisions

Budget
The WTO derives most of the income for its annual budget from contributions by its members. These
contributions are based on a formula that takes into account each member's share of international trade.

Director-General
Roberto Azevêdo is the sixth Director-General of the WTO. His appointment took effect on 1 September 2013
for a four-year term. In February 2017, WTO members agreed to appoint Mr Azevêdo for a second four-year
term, starting on 1 September 2017.

Deputy Directors-General
The four Deputy Directors-General are Yonov Frederick Agah of Nigeria, Karl Brauner of Germany, Alan Wolff
of the United States and Yi Xiaozhun of China.

The WTO building

The WTO is housed in the historic Centre William Rappard building. A new building was added in 2013.
Procurement at the WTO
The WTO Procurement Section is responsible for obtaining, in a timely and cost-effective manner, goods and
services which meet the needs of the organization.

19.Balance of trade, balance of payment?

Balance of Trade vs Balance of Payments Infographics

Balance of trade is just a smaller part of balance of payments. Let’s look at the differences

between balance of trade and balance of payments below –

20.Devaluation, and Depreciation of currency ?

Base Devaluation of currency Depreciation of currency

Meaning Devaluation means to lower
the value of country's
currency as compared to the
another country’s value
circumstances It is done by government
authority.
Rate It is done by using fixed
exchange rate.
Effect on It just for short term.
economy
Changes There is no fixed time for it
but it doesn’t occur in
regularly.
The meaning of
depreciation of the currency
is the same as the meaning
of devaluation of the
currency.
It is done by the force of
demand and supply in the
international market.
It is done by using floating
exchange rate
It affects the economy for a
longer term
It occurs on a daily basis.

21.International Logistics, International Supply Chain Management?

What is International Supply Chain Management and Logistics?

International supply chain management and logistics makes reference to the management or control
of both physical and information flow concerning a wide variety of goods, tracking them from the
point of their origin and until they reach the destination. This management is done with the help of a
number of tools, which provide support when it comes to planning and implementing the set plans for
the efficient flow of the supply chain.

International Supply Chain Management Definition

The definition of the International Supply Chain Management is similar with the one of supply chain
management, which is the management of the flow involving goods or services, represented by
transportation and storage, by inventory and shipping schedules, beginning with the acquisition of raw
materials to providing the final product to the end consumer. In the case of International Supply Chain
Management, this flow assumes the involvement of at least one company from abroad, with the
purpose of creating a network composed out of trans-national companies.

International Logistics Management Definition

 International Logistics Management is a complex process that involves planning, implementing plans
and strategies, and controlling goods flow and storage, from the point of their origin to the point
where they will be consumed, which is in a foreign country, according to The Council of Logistics
Management.

Growing Demand of International Supply Chain Management?

The globalization phenomenon erased a lot of borders when it comes to moving goods, materials, and
services around the world. Today, anyone can purchase goods that come from countries they never
saw before, which may be at the other end of the globe, without a problem. Also, companies can
outsource a wide variety of tasks to companies across the seas and get their primary materials for the
manufacturing of their products from suppliers that are not from their home country. Having all these
aspects in mind, it is easy to understand that the demand for international supply chain management
increased in a considerable manner in the past years. This particular trend is not about to stop, as end
customers are learning that geographical borders are inexistent when it comes to getting the products
they need.

Its Significance for International Business

International Business has a lot of gain from International Supply Chain Management because it
stimulates the growth of various economies, it helps in the improvement of standards of living, it helps
with the creation of new jobs, it answers to the needs of people, and improves customer services. All of
these aspects grow and improve together with the development of local markets, which are boosted
by International Supply Chain Management.

Operational Issues with International Supply Chain

The International Supply Chain is not a perfect entity and issues can always emerge. The most
frequently meet operational issues can appear in sectors like inventory, transportation, sourcing,
marketing, green logistics (which aims to protect the environment and reduce consumption connected
to logistics), and the in the operations connected to consumers’ behavior. International supply chain
management is discussed in more details in supply chain management certification online and diploma
of supply chain management programs, which are offered by AIMS.

5 Key Characteristics of International Logistics and Supply Chain

Management

 The optimization of inventory, making sure that ideal amounts are available at all times;
 Flexibility, as the supply chain is capable of adapting to changes in the market and other factors
that may influence it;
 Fast fulfillment of customer needs, which became more and more important as people around the
world prefer using their mobile devices as a faster way to find and get what they need;
 Customization, which means that the supply chain will be adjusted so that it will be capable of
meeting the demands of the clients;
 Sustainability, a trend that is becoming increasingly prominent in the International Supply Chain
Management, having in mind that fossil fuels are a finite good and they have to be used in a smart
manner while considering the use of renewable fuels.

22.Outsourcing, Joint Venture, Export-Import, Licensing/Franchising, FDI/FPI, SEZ?

Outsourcing
What Is Outsourcing?
Outsourcing is the business practice of hiring a party outside a company to perform services and
create goods that traditionally were performed in-house by the company's own employees and
staff. Outsourcing is a practice usually undertaken by companies as a cost-cutting measure. As
such, it can affect a wide range of jobs, ranging from customer support to manufacturing to the
back office.

Outsourcing was first recognized as a business strategy in 1989 and became an integral part
of business economics throughout the 1990s. The practice of outsourcing is subject to
considerable controversy in many countries. Those opposed argue it has caused the loss of
domestic jobs, particularly in the manufacturing sector. Supporters say it creates an incentive for
businesses and companies to allocate resources where they are most effective, and that
outsourcing helps maintain the nature of free market economies on a global scale.

Outsourcing
Understanding Outsourcing
Outsourcing can help businesses reduce labor costs significantly. When a company uses
outsourcing, it enlists the help of outside organizations not affiliated with the company to complete
certain tasks. The outside organizations typically set up different compensation structures with
their employees than the outsourcing company, enabling them to complete the work for less
money. This ultimately enables the outsourcing money to lower its labor costs. Businesses can
also avoid expenses associated with overhead, equipment, and technology.

In addition to cost savings, companies can employ an outsourcing strategy to better focus on the
core aspects of the business. Outsourcing non-core activities can improve efficiency and
productivity because another entity performs these smaller tasks better than the firm itself. This
strategy may also lead to faster turnaround times, increased competitiveness within an industry
and the cutting of overall operational costs.

Joint Venture (JV)

What Is a Joint Venture (JV)?
A joint venture (JV) is a business arrangement in which two or more parties agree to pool their
resources for the purpose of accomplishing a specific task. This task can be a new project or any
other business activity.

In a joint venture (JV), each of the participants is responsible for profits, losses, and costs
associated with it. However, the venture is its own entity, separate from the participants' other
business interests.
 Joint Venture
How a Joint Venture (JV) Works
Joint ventures, although they are a partnership in the colloquial sense of the word, can take on any
legal structure. Corporations, partnerships, limited liability companies (LLCs), and other business
entities can all be used to form a JV. Despite the fact that the purpose of JVs is typically for
production or for research, they can also be formed for a continuing purpose. Joint ventures can
combine large and smaller companies to take on one or several big, or little, projects and deals.

Regardless of the legal structure used for the JV, the most important document will be the JV
agreement that sets out all of the partners' rights and obligations. The objectives of the JV, the
initial contributions of the partners, the day-to-day operations, and the right to the profits and/or the
responsibility for losses of the JV are all set out in this document. It is important to draft it with
care, to avoid litigation down the road.

Importing and Exporting

It is a good bet to claim that you have a decent idea of what Import and Export are about.
Importing and Exporting supports the development of national economies and extends
the global market. But are you aware of its advantages and disadvantages? Let’s have a
look at them.

Importing and Exporting

Importing and Exporting are means of Foreign Trade. Foreign trade is carried out in
goods and services – which includes imports, exports, and the balance of foreign trade –
is presented separately for goods and for services. The total imports, exports, and
balance of foreign trade are presented as summaries of goods and services.

Exporting refers to the selling of goods and services from the home country to a foreign
nation. Whereas, importing refers to the purchase of foreign products and bringing them
into one’s home country. Further, it is divided in two ways, which are,

i. Direct
ii. Indirect
Every nation is blessed with certain resources, assets, and abilities. For instance, a few
nations are rich in natural reserves, for example, petroleum products, timber,
fertile soil or valuable metals and minerals, while different nations have deficiencies of
these resources.
Advantages of Import and Export
 It is one of the simplest routes of entering into the global trade and import and
export generate huge employment opportunities.
 Requires less investment in terms of time and money when contrasted with other
methods of entering into the global trade.
 Is comparatively less risky when compared with different routes of entering in
international business.
 As no nation can be 100% self-sufficient, import and export are very crucial for the
functioning and growth of that nation.
 Can help Countries to access the best technologies available and best products and
services in the world.
 It gives better control over the trade than setting up a market and the risk is
considerably low.

Limitations of Import and Export

 It includes extra packaging, transportation and protection and insurance costs
which build up the total cost of items.
 Exporting isn’t doable in the event that the foreign nation prohibits imports.
 Domestic organizations which are closer to the client could serve them better than
firms outside their national borders.
 Merchandises are subject to quality standards any low-grade merchandise which is
exported will result in Country reputation and remarks on countries.
 Obtaining licenses and documentation for foreign trade is a difficult and frustrating
task.
 If you are not careful, you can lose grip on the domestic market and existing
customers.
 LICENSING & FRANCHISING

BASIS FOR
LICENSING FRANCHISING
COMPARISON

Meaning Licensing is an Franchising is an arrangement

arrangement in which a in which the franchisor
company (licensor) permits franchisee to use
sells the right to use business model or brand
intellectual property or name for a fee, to conduct
produce a company's business, as an independent
product to the licensee, branch of the parent company
for royalty. (franchisor).

Governed by Contract Law Franchising regulations or

Company Law as the case may
be.

Registration Not necessary Mandatory

Training and Not provided Provided

support

Degree of control The licensor has control Franchisor exerts

on the use of considerable control over
intellectual property by franchisee's business and
the licensee, but has no process.
control on the licensee's
business.

Process Involves one time Needs ongoing assistance of

transfer of property or franchiser.
rights.

Fee structure Negotiable Standard

FDI & FPI

 BASIS FOR
FDI FPI
COMPARISON

Meaning FDI refers to the When an international

investment made by the
foreign investors to
obtain a substantial
interest in the
enterprise located in a
different country.
investor, invests in the
passive holdings of an
enterprise of another
country, i.e. investment in
the financial asset, it is
known as FPI.

Role of investors Active Passive

Degree of control High Very less

Term Long term Short term

Management of Efficient Comparatively less efficient.

Projects

Investment in Physical assets Financial assets

Entry and exit Difficult Relatively easy.

Results in Transfer of funds, Capital inflows

technology and other
resources.

Special Economic Zone (SEZ)

What Is a Special Economic Zone (SEZ)?
A special economic zone is an area in a country that is subject to unique economic regulations
that differ from other regions of the same country. The SEZ regulations tend to be conducive
to foreign direct investment (FDI). Conducting business in an SEZ typically implies that
the company will receive tax incentives and the opportunity to pay lower tariffs.

KEY TAKEAWAYS

 SEZs are subject to unique economic regulations that differ from other areas in the same country.
 SEZs are supposed to facilitate rapid economic growth by leveraging tax incentives to attract foreign
investment and spark technological advancement.
 The first four SEZs in China were all based in the southeastern coastal region, including Shenzhen,
Zhuhai, Shantou, and Xiamen.
Understanding Special Economic Zones
SEZs are zones intended to facilitate rapid economic growth by leveraging tax incentives to attract
foreign dollars and technological advancement. While many countries have set up SEZs, China
has been the most successful in using SEZs to attract foreign capital. China has even declared an
entire province, Hainan, to be an SEZ.

The Appearance of Modern SEZs

The first modern SEZs appeared in the late 1950s in industrialized countries. They were designed
to attract foreign investment from multinational corporations. The first was in Shannon
Airport in Clare, Ireland. In the 1970s, zones were established in Latin America and East Asia. The
first one in China appeared in 1979, the Shenzhen Special Economic Zone. The first four Chinese
SEZs were all based in southeastern coastal China and included Shenzhen, Zhuhai, Shantou, and
Xiamen. China allowed, and continues to allow, these areas to offer tax incentives to foreign
investors and develop their infrastructure without approval. The SEZs essentially act as
liberal economic environments that promote innovation and advancement within China's borders.
The SEZs continue to exist with great success.

The success of Shenzhen and the other SEZs prompted the Chinese government to add 14 cities
plus Hainan Island to the list of SEZs in 1984. The 14 cities include Beihai, Dalian, Fuzhou,
Guangzhou, Lianyungang, Nantong, Ningbo, Qinhuangdao, Qingdao, Shanghai, Tianjin,
Wenzhou, Yantai, and Zhanjiang. New SEZs are continually being declared and include border
cities, provincial capital cities, and autonomous regions. 

Benefits of Implementing SEZs

The benefits of operating within an SEZ include tax breaks for business owners and
independence. However, the macroeconomic and socioeconomic benefits for a country using
an SEZ strategy are a subject of debate.

Real-World Example
In the case of China, mainstream economists agree that the country's SEZs helped liberalize the
once traditional state. China was able to use the SEZs as a way to slowly implement national
reform that would have been otherwise impossible. Studies have also found that SEZs elsewhere
increase export levels for the implementing country and other countries that supply it with
intermediate products. However, there is a risk that countries may abuse the system and use it to
retain protectionist barriers in the form of taxes and fees. SEZs also create an
excessive bureaucracy that funnels money away from the system, which makes it less efficient.

Case study is compulsory, 20M.