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IBO-01

International Business Environment

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Attempt all the questions.

1. Critically examine the partial equilibrium theory of trade.

SOLUTION

Partial equilibrium is a condition of economic equilibrium which takes into consideration only a part of the
market, ceteris paribus, to attain equilibrium. As defined by Leroy lopes, "A partial equilibrium is one which is based on
only a restricted range of data, a standard example is price of a single product, the prices of all other products being held
fixed during the analysis. The supply and demand model is a partial equilibrium model where the clearance on
the market of some specific goods is obtained independently from prices and quantities in other markets. In other
words, the prices of all substitutes and complements, as well as income levels of consumers, are taken as given. This
makes analysis much simpler than in a general equilibrium model which includes an entire economy.

Here the dynamic process is that prices adjust until supply equals demand. It is a powerfully simple technique that
allows one to study equilibrium, efficiency and comparative statics. The stringency of the simplifying assumptions
inherent in this approach makes the model considerably more tractable, but may produce results which, while
seemingly precise, do not effectively model real-world economic phenomena. Partial equilibrium analysis examines the
effects of policy action in creating equilibrium only in that particular sector or market which is directly affected, ignoring
its effect in any other market or industry assuming that they being small will have little impact if any.

Hence this analysis is considered to be useful in constricted markets.

Léon Walras first formalized the idea of a one-period economic equilibrium of the general economic system, but it was
French economist Antoine Augustin Cournot and English political economist Alfred Marshall who developed tractable
models to analyze an economic system.

Even though the markets are generally inter-related sometimes it is useful to focus on one market provided its links with
other markets are not very strong. Then apartial equilibrium theory of trade is just an extension of what you have learnt
in microeconomics, Suppose that there are a large number of producers and consumers of a product competing in a
market where the price is determined by the interaction between the suppliers and the consumers.

Assumptions

1. Commodity price is given and constant for the consumers.

2. Consumers' taste and preferences, habits, incomes are also considered to be constant.

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3. Prices of prolific resources of a commodity and that of other related goods (substitute or complementary) are known
as well as constant.
4. Industry is easily availed with factors of production at a known and constant price compliant with the methods of
production in use.
5. Prices of the products that the factor of production helps in producing and the price and quantity of other factors are
known and constant.
6. There is perfect mobility of factors of production between occupation and places

2. Why do Firms become transnational? Discuss various theories explaining emergence of Transnational
Corporations in the world economy.
SOLUTION

The firms become transnational due to number of reasons. The .major reasons are discussed below:

i) To protect themselves: The firms are exposed to the risks and uncertainties of the domestic business
cycle. By setting up operations in another country, they can often diminish the negative effects of
economic swings in the home country.
ii) To tap the growing world market: As a result of globalization, the rapid growth of similar goods and
services are produced and distributed by TNCs on a world scale. The firms want to tap such a
growing world market for goods and services.
iii) Response to increased foreign competition: The Firms become transnational in response to
increased foreign competition and to protect world market shares. In order to follow the
competitor's strategy, the firm sets up operations in the home countries of competitors.
iv) To reduce costs: TNCs set up operations close to the foreign customer to reduce costs. By doing so,
they can eliminate transportation costs, avoid the expenses associated with having middlemen to
handle the product, respond more accurately and rapidly to customer needs and take advantage of
local resources.
v) To reduce tariff: The firms may overcome tariff walls by serving a foreign market from within. For
example firms producing the goods within the European community can transport them to any
other country in the bloc without paying tariffs.
vi) To take advantage of technological expertise: In order to take advantage of and Forces technological
expertise, the firms manufacture goods directly in the foreign market. The direct involvement in
foreign markets brings the company closer to increasing technological developments. They are
prepared to respond by acquiring new technology. Thus, they are able to protect their international
competitiveness.

FEATURES OF TNCs

The main features of TNCs are as follows:

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i) TNCs are normally very large in size as measured by the value of their total salw. The
average TNC has billions of US dollars as its total sales value which is often equivalent to
more than the national incomes of one, two or three large developing countries. In the
eighties, and nineties, however there has been a growth of smaller TNCs from Canada.
Japan and the UK. Even the USA has now some small TNCs.
ii) Many TNCs depend to a large extent on their foreign sales. There has been a steady
growth of the share of foreign sales in total sales. Sales of TNCs exceed the value of world
trade in goods and services.
iii) TNCs are multi product enterprises something that gives them tremendous market power.
iv) The main strength of TNCs is their command of technology and innovation. They spend
sizable amount on research and development (R & D). Most TNCs spend 5-6 percent of their
soles value on R & D which amounts to billions of collars. This is the reason for their
tremendous market power.
v) The affiliates of the TNCs arc responsive to a number of important environmental . forces,
including competitors, customer, suppliers, financial institutions and government.
vi) It draws on a common pool of resources including assets, patents trademarks, information
and human resources.
vii) The affiliates of the TNCs are linked by a common strategic vision. Each TNC formulates its
strategic plan so as to bring the affiliates together in a harmonious way.

3. What are the long-term factors affecting the demand for primary commodities? Discuss and explain major
International Commodity Agreements.

SOLUTION

LONG-TERM FACTORS AFFECTING THE DEMAND FOR PRIMARY COMMODITIES

While instability in prices and volume of exports of primary products of interest to developing countries has been
studied at length, the long-term factors have also been studied specially in the context of long-term movement of
prices of primary products below the level of their prices in the thirties, the depressed period for commodities.
These factors can be classified into three categories: (a) technology Driven, (b) changes in the structure of advanced
economies, and (c) international debt of developing countries.

Technological Factors: Tremendous advances made in technology have led to important effects on demand for
primary products. (i) Substitution effect: Due to fluctuations, uncertainty in war periods the industries depending on
primary products took recourse to substitution of these raw materials by synthetics. This further strengthened the
forces to develop substitute products, for example, plastics, synthetic rubber, etc. (ii) Technological innovations also
sought to reduce the import of raw materials required. Thus there is a steady decline in demand, For, instance,

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mica, due to miniaturization in electrical industry is less in demand. Similarly in the steel industry, the demand for
iron ore has declined. These developments are irreversible.

Changes in the structure of Advanced Economies: Economic structures of advanced I economies have radically got
altered. Services and high technology industries are dominating them. These industries and services are not raw
material intensive. Thus the demand for raw materials has declined. It is also known as 'decoupling' of industry and
raw materials.

International Debt of Developing Countries: Most of the primary products producing developing countries are
indebted. They have to repay the debt to the creditors. When I prices are not favourable, they are exporting more
and more to get similar value to repay their debt. Although this is not an irreversible trend, this is going to stay for a
reasonably long period. Further countries compete to gain an increasing share of the declining market by
depressing prices.

4. Comment on the following.

(i) Demographic environment does not influence the international business decisions.

SOLUTION

Demographic factors like the size, growth rate, age composition, sex composition, etc. of the population, family size,
economic stratification of the population, educational levels, languages, caste, religion etc. Are all factors that are
relevant to business? Demographic factors such as size of the population, population growth rate, age composition, life
expectancy, family size, spatial dispersal, occupational status, employment pattern etc, affect the demand for goods and
services. Markets with growing population and income are growth markets. But the decline in the birth rates in
countries like the United States have affected the demand for baby products. Johnson and Johnson have overcome this
problem by repositioning their products like baby shampoo and baby soap, promoting them also to the adult segment,
particularly to the females. A rapidly increasing population indicates a growing demand for many products. High
population growth rate also indicates an enormous increase in labour supply. When the Western countries experienced
the industrial revolution, they had the problem of labour supply, for the population growth rate was comparatively low.
Labour shortage and rising wages encouraged the growth of labour-saving technologies and automation. But most
developing countries of today are experiencing a population explosion and a situation of labour surplus. The
governments of developing countries, therefore, encourage labour intensive methods of production. Capital intensive
methods, automation and even rationalization are apposed by labour and many sociologists, politicians and economists
in these countries. The population growth rate, thus, is an important environmental factor which affects business. Cheap
labour and a growing market have encouraged many multinational corporations to invest in developing countries.

The occupational and spatial mobilities of population have implications for business. If labour is easily mobile between
different occupations and regions, its supply will be relatively smooth, and this will affect the wage rate. If labour is
highly heterogeneous in respect of language, caste and religion, ethnicity, etc., personnel management is likely to
become a more complex task. The heterogeneous population with its varied tastes, preferences, beliefs, temperaments,

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etc. gives rise to differing demand patterns and calls for different marketing strategies. References to a number of
demographic factors that have business implications have already been made under ―socio-cultural environment‖.

(ii) Technology market is not a seller’s market.

SOLUTION

Rapid developments in computer and telecommunications technologies during the last decade has moved the world
from manufacturing economy to information economy. Not that manufacturing will be unimportant hereafter, but
information will be the power house of global economy. The Internet and the popular World Wide Web have
dramatically changed the information exchange process all over the world. It is but a small world! The physical
boundaries separating the countries of the world are mostly man-made and are not the natural barriers to economic
activities of human beings. This reality has awakened businesses and governments all over the world. Economic growth
in an environment of intense global competition is feasible only through efficient trade, both national and international.
International trade is a necessity because no one region or country has all the resources to be a self sufficient and closed
economy. Invocation is a vital resource for , business transactions. International electronic commerce is managing this
resource with maximum efficiency using the Global Information Infrastructure. It will open new markets and create new
business opportunities to enterprises of all sizes and all nations. In this unit, you will learn the highlights of electronic
commerce, major business issues, important trade networks and Electronic Data Interchange System.

EC broadly connotes business activities (with associated technical data) conducted electronically. Using electronic
channels based on computer and telecommunicntions technologies, a lot of business transactions and information
interchange can be automated without any constraints on the geographical dispersion of the trading partners. In the
emerging global electronic marketplace, all companies meet on equal terms. They have access to all information services
to communicate. They need not revert to paper-based transactions. Buyers' activities are supported by multimedia
catalogs, and other seller services, Sellers' activities are supported by automated order processing, production
scheduling, delivery scheduling, payment services and so on. Third parties offer value-added services such as specialized
directories, brokering, referral, vendor certification, credit ' handling, etc.

The electronic market has started to bloom. The number of companies, offering information , and Issues and services for
sale over the Internet and value-added networks (VANS) has been increasing very fast. Their number may increase to a
million by the year 2000. The electronic marketplace will be structured as a fully distributed network of product and
service providers. The majority of these providers will operate their own servers and locally control all information on
their servers. It should be possible to accommodate any number part pant.

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EC can lead to enterprise integration. It can mold the vast network of businesses, government agencies, and other trade
organizations. It can also lead to internal integration of all business activities. The important benefits of EC are:

ii) Competitive advantage through innovative marketing strategies

ii) Mass customization through online interaction with the customers

iii) Global reach for even small businesses

iv) Efficient market research

v) Cost reduction in business operations through efficient links with the suppliers and strategic allies

vi) Multimedia presentation of product, company and marketing information

A seller's market is a market condition characterized by a shortage of goods available for sale, resulting in pricing power
for the seller. A seller's market is a term commonly applied to the property market when low supply meets high
demand.

(iii) Arbitration is not preferred by the parties involved in international business.

SOLUTION

Even when two businesses at odds share the same language, culture and country, litigation can pose complex problems.
In addition to how time-consuming it can be to go to court, the process can easily chip away at a company’s revenue. As
far as international disputes are concerned, litigation in a foreign country often means comparing at least two different
sets of laws. Further, enforcing any subsequent judgments can be difficult.

Keeping that in mind, the American Bar Association points out that arbitrating a dispute is often the preferred method.
No matter the parties involved, arbitration provides the following:

 A quicker turnaround time

 More control for the parties involved
 Greater flexibility regarding where and when a hearing will take place
 Confidentiality, as everything is done in a private setting

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Arbitration will also tie up loose ends so that decisions are considered final.

A report from the Graziado Business Review notes that on an international level, arbitration is most widely accepted as
an alternative to litigation. In fact, many companies that do business globally make sure there is an arbitration clause
included in all contracts. The article notes that any such clauses should include which country’s laws will govern the
process, how many arbitrators may be involved, what language the process will take place in and how arbitrators will be
appointed.

International companies’ leadership should keep in mind that when arbitration clauses are not clear, the process can
quickly become muddied. For example, the laws of discovery may differ from arbitrator to arbitrator, which emphasizes
the importance of determining ahead of time which laws will be considered. Having an attorney-reviewed clause in any
international contract can provide a company with protection in the event a dispute arises.

(iv) Encryption does not convert data into an unintelligible form.

SOLUTION

Encryption

1. It is used for security purpose in which a text is converted in to unreadable format by using some
cryptographic technique. Learn more in: Auditing Defense against XSS Worms in Online Social Network-
Based Web Applications

2. The process of converting information or data into a code to prevent unauthorized access. Learn more
in: Global Wannacrypt Ransomware Attack: Tackling the Threat of Virtual Marauders

3. A procedure that renders the contents of a message or file unintelligible to anyone not authorized to
read it. Learn more in: A Taxonomy of Online Game Security

4. A process of encoding messages or data into a form, called a cipher text, which cannot be easily
understood by unauthorized people.Learn more in: Biometric Authentication for Cloud Computing

5. To convert plain text or data into unreadable form by means of a reversible mathematical
computation. Learn more in: An Overview of Wireless Network Concepts

6. The process of encoding a message into a form so that it can only be read by an authorized party is
known as encryption. Encryptionalgorithms can be classified into two categories, Symmetric
key encryption and Asymmetric key encryption. In symmetric key encryption same key is used

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